SBA Cooked Books on Katrina Loans to Help Bush Save Face

Early in the evening on Aug. 23, 2005, the National Weather Service spotted the gale force winds of a tropical depression gathering speed over Bermuda. Within 48 hours, a Category 1 hurricane known as Katrina was slicing through Florida. It was one of three hurricanes to strike the region in short order, spawning the most catastrophic natural disaster in the nation’s history. More than 1,400 people would die, $80 billion in property would lie in ruins, and the nation would be shocked into disbelief.

The Katrina loan program was “a cynical, contrived campaign to clear the backlog from the SBA books … at any cost.”

As the second anniversary of the storm nears, I’m sure most of us can still recall the heartrending pleas and shocking images of the storm’s victims. But the government’s bungled attempt to provide emergency aid afterward proved to be just as shocking. In September 2006, the Small Business Administration (SBA) finally responded to public outrage. It launched a major campaign to right the wrongs of its disaster-assistance programs. But according to a yet-to-be-released government report and new congressional testimony, the program was just as scandalous.

Far from a major humanitarian effort to finally aid Katrina victims (as it was billed), the program was a cynical, contrived campaign to clear the backlog of Katrina loans from the SBA books — at any cost — simply to help the Bush administration save political face.

Thousands of Katrina victims were summarily denied loans, often without even being told. SBA procedures were violated wholesale; employees were threatened or offered cash payments to clean up the backlog. In order to disburse billions of dollars in backlogged loan assistance, the SBA dished out money to thousands of unqualified recipients, often without the requisite collateral and documentation. More astonishingly, the SBA wrote checks to thousands of people who never finished a loan application and didn’t want the money. In some cases, the SBA hadn’t heard from the recipients in months.

“These numbers represent individuals and families who have faced a tragedy most of us cannot imagine,” said SBA Inspector General Eric M. Thorson in disturbing testimony. His office conducted two audits of the program. The reports are in draft form and have not been released to the public. But Thorson provided the details in testimony this week before the Senate small business committee.

Until now, it’s largely been an untold story. But the reports and congressional testimony this week from those who were there, and those who investigated the SBA’s efforts, provide a rare glimpse into how a government agency was subverted politically to stem one of the Bush administration’s worst political nightmares.

More important, the current debacle calls into question the judgment — and character — of current SBA Administrator Steven C. Preston, who was nominated by President Bush in April 2006 to fix the struggling agency. Preston was controversial because of his big business background and strong Republican Party ties. Little did we know that his mission also involved a political fix. In light of what happened you have to question his fitness to continue leading the troubled agency.

The clouds over official Washington first darkened as Katrina left Florida, hit the Gulf of Mexico’s warm waters, and surged in fury. By 7 a.m. on Aug. 28, she was a Category 5 monster with maximum sustained winds of 175 mph and lashing, 215-mph gusts. She would make landfall in Louisiana 24 hours later, at 6:10 a.m. Unprecedented destruction followed in her wake.

The monumental task of responding to the emergency and providing relief to thousands of homeowners and businesses fell to two government agencies: the Federal Emergency Management Agency (FEMA) and the SBA. Neither had faced anything like this before, and neither was remotely prepared to deal with the devastation.

In the days and weeks that followed, the nation looked on in stunned disbelief as the government hopelessly bungled relief efforts. Thousands were stranded, hundreds of thousands were displaced, and promised aid was snarled in virtually impenetrable red tape. On April 25, 2006 — nearly eight months after the storm — embattled SBA Director Hector Barretto resigned. At the time of his announcement, 90 percent of the money that had been approved for disaster loans to victims had yet to be disbursed.

As the scandal dragged on and public outrage grew, the Bush administration was desperate to break the logjam and get relief to the region. So, in the fall of 2006, the SBA launched a campaign to contact every borrower (some 90,000 in all) within 45 days “to properly and rapidly disburse funds” to the victims of Hurricanes Katrina, Rita, and Wilma, according to a Government Accountability Office (GAO) report. Hence, the program was called “Operation 90 in 45.”

“We were being forced by management to cancel, decline, and withdraw applications to make the numbers look good to the public.” -SBA loan officer

Gale B. Martin, at the time an SBA loan officer in the Office of Disaster Assistance, was part of the effort. She told lawmakers she was shocked and stunned by what happened next. Instead of a humanitarian effort to get aid to the region, SBA officials became hell-bent on clearing the books of unprocessed loans at all costs. “We were being forced by management to cancel, decline, and withdraw [loan] applications unnecessarily and unjustly in order to make the numbers look good to the public, the press, and Congress,” she testified.

“We were forced to rush through files at a ridiculously unreasonable rate, or be faced with losing our jobs,” she continued. “The bar of daily quota production was raised often, and directly correlated with the amount of ‘bad press’ the agency was receiving.”

Martin described a process that was apparently drawn from baseball’s three-strike rule. Loan officers were ordered to make three telephone calls to a loan applicant within 24 hours. If they failed to make contact, the loan was canceled. “That meant one call in the morning, one call in the afternoon, and a third call in the afternoon of the second day,” she testified. “By the close of business that second day that file could be withdrawn.”

If by some happenstance they made contact, the loan applicant was given 48 hours to fax in all their documents. If they failed to do so, the loan application could be declined or withdrawn, she said.

The SBA Inspector General’s report confirms Martin’s story and similar tales told by eight other loan officers. “These instructions were intended to get the loans off of SBA’s books, so that SBA did not have to report a backlog of undisbursed approved loans,” said Inspector General Thorson. “Our audit of SBA’s records disclosed that, in most cases, SBA made only one attempt to reach the borrower before canceling the loan.”

The Inspector General’s audit focused on 12,000 loans canceled during a two-week period in September 2006. Of those, about 8,000 were canceled without any prior notification to the borrowers, said Thorson. “I personally visited the New Orleans area and walked on the deserted streets of the worst hit areas, surrounded by total devastation. Just being there was a life-altering experience,” he told the committee.

To the SBA, however, Katrina victims were a political problem that had to be dealt with. The three-strike rule wasn’t the only high-pressure tactic that SBA officials used on their employees. Loan officers were also ordered to disburse loan proceeds “without contacting the borrowers, even when SBA had not heard from the borrower in several months, or had not received additional documents needed for disbursement.”

The directive was part of an effort to meet “production goals” to clear the books through loan disbursements during the 45-day period. “Temporary employees were fearful that if they did not disburse enough loans, they would be terminated,” Thorson said. To drive loan officers even harder, the SBA dangled a carrot by offering cash awards to teams that disbursed the most loans.

“We concluded that the goals and bonuses may have inappropriately influenced employees to make decisions or disburse funds that were disadvantageous to the borrower,” Thorson testified.

A second Inspector General’s audit discovered that more than 21,000 loans, totaling $1.5 billion, were awarded to high-risk applicants who had no visible means of repaying the money. The goal was simply to meet the disbursement quotas. The SBA also disbursed another $368 million in loan proceeds on more than 3,000 secured loans without obtaining the required collateral. That almost guarantees that taxpayers will be stuck with the bill if the loans default.

To date, the SBA proudly claims it has approved just fewer than 120,000 loans totaling $6.9 billion. About 58,000 of those loans went to small businesses. The agency triumphs the fact that all but 1,000 loans have been either fully or partially disbursed, but it’s a hollow achievement.

As the hearing testimony reveals, it’s likely just another bureaucratic smoke and mirrors show to cover up massive bungling in the wake of the Gulf disaster. And once again, it not only comes at the taxpayers’ expense, but also at the expense of all of those who suffered through that terrible tragedy.