New data: Why 800,000 applicants were denied federal disaster assistance loans

Introduction

It wasn’t the first time Josefa Mendoza’s home flooded, but it was the worst. When the 47-year-old event coordinator fled her South Texas property with her children and grandchildren in June 2018 during a severe storm, the water inside had risen to waist level. 

She didn’t qualify for aid from the Federal Emergency Management Agency. So, like more than a million Americans since 2001, she applied for a federal disaster assistance loan from the Small Business Administration.

But most applicants don’t get one. 

The low-interest loans are a major source of federal disaster assistance available to homeowners and renters as well as small businesses — if they’re eligible. The SBA has approved about 609,000 such loans from fiscal years 2001 to 2018 but denied roughly 860,000. That doesn’t include loan applications that were withdrawn, tens of thousands of which were closed by the SBA rather than at the request of the applicant.

As climate change increases the risk of more and worse disasters, the Center for Public Integrity wanted to find out what happens after these efforts to get aid. We acquired a dataset through a Freedom of Information Act request that details every approved, withdrawn and denied SBA disaster-loan application from the past 18 years. It provides the first public look at loan trends by disaster along with the reasons the SBA gave when it turned applicants down. We’re making the data available here. 

“People hear a lot about FEMA.  But the SBA is the primary source of homeowner assistance following most catastrophic disasters,” Kathleen Bergin, a lawyer who teaches disaster law at Cornell Law School as an adjunct professor, wrote in an email. “While FEMA grants are capped around $33,000, qualified homeowners could access more than $200,000 in loan assistance from the SBA.”

The most common reasons for rejection — not surprisingly — are financial. Ninety percent of SBA disaster loan denials since 2001 have been for “unsatisfactory credit history,” “lack of repayment ability” or both. 

Thousands of applicants, though, faced more unusual reasons for denial. More than 4,500 applicants since 2001, for instance, have been denied “due to character reasons.” The SBA uses government records and information from an applicant’s statement of personal history, among other sources, to “consider behavior, candor, integrity, and disposition of criminal actions.”

Last year was the biggest for the SBA’s disaster-loan program since the fiscal year that began about a month after Hurricane Katrina — still the most expensive U.S. storm on record — devastated New Orleans in late August 2005. In 2018, the agency both approved the most loans (110,000) and declined the most loans (117,000) since 2006. Grand total of SBA loans approved for recent Hurricanes Harvey, Irma, and Maria as of August 2019: more than $6.8 billion. 

That’s likely to grow over time. A climate adaptation plan the SBA produced in 2014, which focuses in part on its Office of Disaster Assistance, warned that “increased numbers of severe weather events may increase demand for ODA’s resources.”

Yu Xiao, an associate professor of urban studies and planning at Portland State University, said one challenge with a program like SBA’s is that it’s not always a good idea to rebuild after a disaster — as much as applicants may want to stay put. 

“If you were in their shoes, you would like to have some help from the federal government,” Xiao said. But rebuilding rather than relocating can sometimes lead to more damage in the future, she said. “It’s kind of subsidizing the households and the businesses in that disaster zone.”

SBA disaster loan recipients can use the money for relocation, but that’s rare — even after severe disasters. Following Hurricane Katrina in 2005, for instance, just 5 percent of loans were used in that way, the SBA said. 

Nationwide over the last 18 years, the SBA approved 42% of loan applications it finished processing, which doesn’t include those that were withdrawn. That’s varied a lot state by state. In North Dakota, for instance, about two thirds of loans were approved; in Illinois, less than one third were.

In an email, the SBA wrote that it works to “expedite loan processing so that applicants who do not qualify for disaster loan assistance can be referred back to FEMA to be considered for possible additional grant assistance as quickly as possible.”

Other reasons for ‘no’ — and the journey to ‘yes’

Following Hurricane Harvey in Texas and Hurricane Irma in Florida, both in 2017, more than 800 applicants were denied loans because they were “not a qualified alien.” Some noncitizens, including permanent residents and refugees, are eligible for an SBA loan. But undocumented immigrants and some immigrants with legal standing are not eligible, even if their children are U.S. citizens living in the same home struck by a disaster.

Brittanny Perrigue, an attorney with Texas RioGrande Legal Aid, which provides free legal aid to low-income residents, is a former case manager in the SBA’s Office of Disaster Recovery. She said some immigrants might apply to the SBA for assistance even if they know they are ineligible. You must be denied for a disaster loan before the Federal Emergency Management Agency will consider you for certain aid programs, and that assistance is available to families with U.S. citizen children whose parents are unqualified due to their immigration status. The reason: In most states minors cannot legally take on debt — including an SBA loan — but FEMA assistance doesn’t have to be paid back.

“You can’t have a one-year-old or a ten-year-old taking out a mortgage on a home,” Perrigue said, referring to the ages of some of Texas RioGrande Legal Aid’s youngest clients.

About 35,000 times since 2001, SBA closed an application without deciding whether to approve or deny it because “requested information was not furnished.” This can happen if an applicant doesn’t respond within seven days to a request for more details. That can be a challenge for disaster victims, experts say, not only because they’re dealing with chaotic disruptions but also because they might have lost important documents when their homes were damaged. They can apply again if they get replacement documents, but that increases the wait to get money to rebuild.

This type of withdrawal happened more often in 2018 than at any other time in the 18 years covered by the SBA data. Most of those nearly 8,000 loan applications were associated with the 2017 hurricanes Harvey, Irma and Maria. 

For Mendoza, the South Texas resident, documents were a nuisance not because she’d lost them in the flood but because the title to her home wasn’t in her name. She hadn’t updated it after she and her ex-husband got divorced.  

After being rejected by FEMA, Mendoza sought help from Texas RioGrande Legal Aid, which recommended she apply for an SBA loan. While she waited for assistance, Mendoza and her family moved often, staying with relatives and a friend. It was a stressful time that, to Mendoza, “felt like forever.” 

But one important thing went right for Mendoza’s family. SBA said yes. 

Mendoza used the loan to rebuild her home, this time elevated to prevent future flooding. 

“We’ve been blessed,” she said.