Report 10-13 - SBA’s Role in Addressing Duplication of Benefits between SBA Disaster and Community Development Block Grants

This report consolidates the results of findings from audits of the Small Business Administration’s (SBA) efforts to prevent duplication of benefits between SBA disaster loans and Community Development Block Grants (CDBG) for Iowa, Louisiana, and Mississippi. The objective of these audits was to determine whether SBA’s efforts to prevent duplicate disaster assistance were consistent with Federal Emergency Management (FEMA) guidance implementing the Stafford Act.

In conducting these audits, we reviewed entries in SBA’s Disaster Credit Management System (DCMS), information in the Agency’s Centralized Loan Chron System, and information obtained from state and local government offices or title companies responsible for distributing CDBG funds to disaster victims in the states of Louisiana, Mississippi, and Iowa. We compared the duplicate benefit requirements of the Stafford Act, Small Business Act, FEMA regulations, SBA regulations, and SBA’s standard operating procedures to SBA’s process for managing duplicate benefits. Further, we interviewed officials from SBA’s Office of Disaster Assistance (ODA) located in headquarters and the Fort Worth Processing and Disbursement Center. We also interviewed officials from the Department of Housing and Urban Development’s (HUD) Disaster Program Office. To obtain an understanding of the states’ grant payment processes in Louisiana and Mississippi, we held discussions with officials contracted by these states to administer their CDBG programs. Additionally, we interviewed officials from the Iowa Department of Economic Development, Iowa Finance Authority, and various local organizations responsible for administering the grant programs in Iowa. The audits were conducted between May 2009 and May 2010 in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States and included such tests considered necessary to provide reasonable assurance of detecting abuse or illegal acts. We found that to prevent duplicate benefits, SBA recovered $643.8 million of CDBG funds from the three states (Louisiana, Mississippi, and Iowa) and applied them to pay down 19,449 fully-disbursed SBA disaster loans, reducing SBA loan balances. Additionally, SBA applied $281.8 million of duplicate assistance from CDBG funds to pay down undisbursed loan balances. However, these practices were inconsistent with a FEMA regulation implementing the Stafford Act’s prohibition on duplicate disaster benefits.

Under the FEMA regulation, agencies that are assigned a higher order in the delivery sequence are expected to provide disaster assistance before assistance from lower level agencies. FEMA has also issued guidance indicating that CDBG grants have the lowest priority in the delivery sequence. Therefore, funds that HUD could have used for additional CDBG awards were instead used to pay down SBA loans to victims who had already received assistance and who SBA determined had sufficient resources to repay their loans. This shifted $925.6 million in primary assistance from SBA disaster loans that have to be repaid to CDBG grants, which are not repaid, placing the financial burden on taxpayers. It also reduced available grant money for disaster victims that did not qualify for SBA disaster loans.

We recommended that for future disasters, SBA coordinate with HUD and FEMA to formalize a memorandum of understanding, which defines the functions of each agency so that its disaster assistance procedures are consistent within applicable FEMA guidance. Additionally, SBA should coordinate with HUD to establish better procedures to prevent duplicate benefits, including the development of a duplication of benefits instructional guide to be incorporated into HUD’s Information Toolkit provided to grantees. Lastly, SBA should modify its regulations and the assignment of compensation section of the standard loan authorization and agreement to be consistent with FEMA’s delivery sequence of benefits, and cease using resources to perform duplicate benefit calculations involving CDBG funds. SBA management generally disagreed with the report findings and the OIG’s interpretation of the Small Business Act and Agency regulations, partially agreed with two recommendations, and disagreed with the remaining three recommendations.