It’s the disaster relief program few people have talked about, but that could change in the wake of Hurricanes Harvey, Irma and Maria, which wrought devastation in Houston, Florida, Puerto Rico and elsewhere.

The Small Business Administration, in the wake of past criticism and a 2008 law that overhauled its disaster-loan regimen, created the Immediate Disaster Assistance Program, or IDAP, which guarantees 85% of bridge loans made to small businesses hit by a disaster.

The SBA promises to provide guarantee decisions within 36 hours of receiving an application for loans that max out at $25,000.

With devastation from recent hurricanes on par with Sandy and Katrina, quick and easy funding would be a welcome lifeline for scores of small businesses. But IDAP has never been tested, and there’s a concern bankers might be hesitant to participate because of qualms with some of its terms.

Awareness gap

An even bigger problem is awareness; few lenders, apparently, even know the program exists.

“This program is not one I’ve heard much about from lenders,” James Ballentine, the American Bankers Association’s executive vice president for congressional and public affairs, said shortly after Hurricane Harvey hit. “I would hope something like this would be marketed in a way that business owners can take advantage of it.”

That appears to also be the case with credit unions. According to Carol Chastang, public affairs specialist at SBA, the agency has not received any queries from credit unions regarding the IDAP program, despite three major hurricanes this season.

"Credit unions may participate in all of SBA’s 7(a) loan programs," Chastang stated. "A lender has to request authority to participate in the various loan delivery methods through their local SBA district office."

She added that the credit unions with signed agreements with SBA may make small $25,000 loans to qualified businesses nationwide, including areas impacted by disasters.

While no credit unions have as yet expressed interest in IDAP, one factor that could play a role in boosting SBA lending at CUs is a recent partnership between the SBA and the National Association of Federally-Insured Credit Unions, which aims to increase small businesses’ access to small-dollar loans.

Questions about IDAP aside, the SBA has been revving up its disaster-lending team. Not long after Harvey, the SBA quickly received more than 900 loan applications, with thousands more expected. To prepare, the SBA mobilized “additional surge staff” to supplement its nearly 1,000 permanent disaster-assistance employees, Chastang said at the time.

IDAP, which could play a big role, will hopefully address a major complaint during other recent hurricane recovery efforts.

In the wake of Hurricane Katrina in 2005, the Louisiana Bankers Association asked that banks be allowed to process disaster loans due to the SBA’s slow pace, said Guy Williams, CEO of Gulf Coast Bank. Williams chaired the Louisiana Bankers Association at the time.

After Hurricane Sandy in 2012, it took the agency 45 days, on average, to process a physical damage loan and 38 days for an economic injury loan, according to the Government Accounting Office. Both were significantly longer than the SBA’s goal of a 21-day turnaround.

On its own, the SBA will continue to support business loans of up to $2 million under its regular disaster-relief framework, though approvals must pass a longer, more rigorous underwriting process. Historically, the agency has handled disaster relief loans directly, a far cry from conventional programs, where it guarantees deals originated by banks and other lenders.

Relief package

A $15.25 billion hurricane-relief package from the federal government includes $7.4 billion for the Federal Emergency Management Agency Disaster Relief Fund. According to an email from a FEMA spokesperson, that money “allowed FEMA to continue to fully focus on ongoing preparation, response and recovery needs at the time. On October 1, 2017 (i.e. beginning of the Fiscal Year); the DRF (Disaster Relief Fund) received its annual appropriation” of $9.25 billion.

The hurricane-relief package also included $450 million for the SBA’s disaster loan program, and $7.4 billion in Community Development Block Grants has also been made available through the Department of Housing and Urban Development.

According to John Fairbanks, a spokesman for NCUA, the SBA offers two forms of relief. For credit unions and all lenders the SBA is providing a deferment of principal and interest payments for 12 months on SBA 7(a) and 504 loans including micro loans. Interest will continue to accrue.

The SBA will also offer up to $2 million loans direct to borrowers. The law limits business loans to $2 million for the repair or replacement of real estate, inventories, machinery, equipment and all other physical losses. Subject to this maximum, loan amounts cannot exceed the verified uninsured disaster loss. The $2 million statutory limit for business loans applies to the combination of physical, economic injury, mitigation and refinancing, and applies to all disaster loans to a business and its affiliates for each disaster.

However, if a business is a major source of employment, SBA has the authority to waive the $2 million statutory limit.

In addition, applicants must have a credit history acceptable to SBA and must show the ability to repay all loans.

Getting better, but…

Though the agency has gotten “much better” at processing disaster relief loans since Sandy, the process isn’t simple, said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America.

IDAP, by contrast, is intended “to encourage and enable private lenders to make loans immediately following a disaster to small businesses in the affected areas ahead of permanent disaster financing,” Chastang said in an email.

Early estimates in the wake of Hurricane Harvey placed the cost of recovery upwards of $40 billion, and that price gets significantly higher once recovery needs from Irma and Maria are factored in. So those regions will need all the help they can get, including federal disaster aid.

Faster is better, clearly, so a program like IDAP could have real merit, Ballentine said. But nearly 10 years after Congress authorized the program, it remains unclear whether it will be widely used.

Beyond a lack of name recognition, IDAP’s other challenge could be its terms, industry observers said. Though few bankers commented as IDAP’s rules were being formulated, some raised objections over the potentially long repayment periods.

IDAP loans, in theory, are meant to be paid back quickly, using proceeds from a larger disaster loan or other funds received by the borrower. Absent that, the program’s rules allow for as long as 10 years for repayment.

SBA officials have voiced concerns that bankers’ reservations might make IDAP implementation difficult. At the same time, Chastang highlighted the agency’s “significantly improved” disaster assistance delivery channel, including an increase in the loan limit for unsecured physical damage loans from $14,000 to $25,000.

“These improvements … effectively provide the immediate disaster funds on a permanent basis rather than short and intermediate assistance contemplated in the guaranteed loan programs,” she said.