Valley Interview : Operations Wind Down in Disaster That Was the Big One for SBA

Since the nation’s costliest disaster struck Los Angeles in the early hours of Jan. 17, it has created a workload of unprecedented proportions for federal and local disaster officials. The U.S. Small Business Administration faced the task of screening the loan applications of hundreds of thousands of earthquake victims to decide who would get money to rebuild homes, businesses and apartment buildings. The agency’s disaster assistance program is headed by Bernard (Berky) Kulik, an administrator whose job requires him always to have a packed suitcase nearby so he can head out to the latest national disaster at a moment’s notice.

Question: When did you start your operation here?

Answer: In February. The numbers here are incredible. When we started out on this disaster, we had just slightly under 900 people, and that was a high number (to have in this location) because the Midwest floods were just winding down. By March we were at 3,000 employees. We peaked at 3,300 in March or April working on the Northridge disaster.

Q: When do you plan on winding down?

A: We are already winding down, but the applications are still coming in. The backlog, to all intents and purposes, has been wiped out. We have been able to process 98% of the applications we have in house. The less than 2% remaining are the ones that are coming in now. So we are back on our original time goal of seven to 20 days of processing time.

Q: To what do you attribute the number of applications still coming in?

A: What is happening now is we are getting people who started out saying, “I’m not going to bother with an SBA loan. I can handle this myself.” Then when they really get around to doing it, they start tearing out the walls and look behind and it turns out it’s a lot bigger job than they thought.

You’ve also had rain. So, all of a sudden people are saying, “Where is the water coming from?” It turns out the roof is leaking.

That, I think, is why we are getting a lot of applications now. Also, the insurance settlements are coming in, and people are realizing what the shortfall is. Plus, the announced deadline is coming up on Nov. 17.

Q: When do applicants start seeing money?

A: The money can start going out immediately, but we do not give full checks. If I give you a loan for $100,000, I do not give you a check for $100,000. For one thing, there is a little-known provision of the law that makes you liable to the federal government for 1 1/2 times the amount of the original loan if you use the funds some way other than specified.

For example, if you say, “Hey great, I’ve got $100,000, I need a new car,” zap, you are in trouble.

So, what we do is we give you the money out serially. We will give you an amount up front, usually $10,000 until the collateral is worked out. After that we’ll give you another $25,000. Show us how you use that $25,000 and we’ll give you more. If you have a construction contract, give us the contract, and if it calls for payment on some schedule, we’ll meet that schedule.

Q: Did this particular disaster prompt SBA to change the way it does its job?

A: Let me put it this way: This was a mega disaster. We’ve never had one this big before. In the last four years we’ve had a hell of a lot of disasters around the country. You start off with Hurricane Hugo that hit the islands of the Carolinas. You had the Loma Prieta earthquake in San Francisco. You had the Los Angeles civil disorders. You had Hurricane Andrew in southern Florida and Louisiana. You had Hurricane Iniki in Hawaii. And you had the nine-state Midwest floods last year. This single disaster was bigger than all of them combined.

As a result of getting involved in this disaster, we have taken a number of steps to make it simpler to apply for loans. We reduced the definition of major source of employment so more businesses can qualify. We doubled the cap for loans to individuals, from $100,000 to $200,000. We made landlords eligible for economic injuries for the first time. We loosened up on our affiliation rules within the limited partnership area.

As a result of the Midwest floods last year, we completely redid our business loan applications. Congress also tripled our lending cap to small businesses, so instead of $500,000 we can now loan up to $1.5 million.

Q: There have been many complaints from business owners and others that the SBA has not been flexible enough, that the loan program is a one-size-fits-all effort. What is your response?

A: We get that all the time. The trouble is that the same people who now complain that we’re too tough at making our loans, that we should have a higher approval rate, are the same people who three years from now are going to ask, “Why is your loss rate so high?”

We play a balancing act. We are aware of the need for speed and compassion, but we are talking about taxpayer money. These are loans, and we do try to get them back. I’ll tell you, we are more liberal than any other lending institution anywhere.

Remember, we are lenders, and this is taxpayer money even though it’s going out to disaster victims and it’s subsidized funds. In fact, because it’s subsidized funds, every dollar we lend out adds to the federal deficit. If I lend it out here at 3 5/8% and the federal government is paying 7% for the money, right away that adds to the federal deficit.

Q: The SBA made applications for landlords in the ghost towns a top priority for processing but offered no special loan rates. Why?

A: The ghost towns, so far as we are concerned, are the same as any other business or any other home.

The problem is we can’t require you to take a loan. If you have some people who say they would rather walk away, unfortunately California probably has the most liberal mortgage walk-away laws in the country. Some people say, “The hell with it. I’m so far in debt now, if I rebuild this place I’ve got to borrow more money and put myself more in debt. It’s easier for me to just walk away from my equity.” I can’t tell those people that they are wrong. I can’t tell those people that I wouldn’t do the same in their positions.

Q: How are you dealing with fraud attempts?

A: Unfortunately, wherever there is money, there is fraud. We are very much aware of it, and we have been working very closely with the inspector general on fraud cases. We encourage the inspector general to immediately move in and catch as many fraud cases as possible and make a splash with it and get the media interested in it, because that is how you are going to stop it.

When a disaster hits, everybody on a block talks to each other and then you get people saying, “Listen, I’ve got these 14 checks. Why don’t you do what I did?” Well, if we can indict that guy, the guy who is guilty of fraud and is now spreading the word, that stops it right there.

Q: What do you do about it?

A: We have a number of safeguards. For example, we pull a credit check by name and Social Security number for every applicant. We don’t take your statement as to what your damage was. We do our own independent verification. We require tax returns. In other words, don’t tell me how much you make, show me your returns.

In this disaster, for the first time we tell people they don’t have to give us a tax return. All they have to do is sign a release, and we will get the information from the Internal Revenue Service.

Q: Are there any ideas being floated for making it easier on future disaster victims?

A: Right now Congress is very seriously discussing the concept of catastrophic insurance. As a concept, I have to tell you that we are very much in favor of it. The fact is, it would be a whole lot easier if victims could rely on insurance for their homes. I mean, let’s face it, when people buy a home, they buy to the limit of their credit, particularly in an area of high-priced real estate like Southern California.

If two or three years after buying a home you get hit by a disaster and we come along and say, “We’ll give you a 30-year loan at 3 5/8%,” the fact is, it’s still a loan. If you are living up to your limit, we can’t even offer it, because you can’t repay it. So if there was some form of catastrophic insurance, a lot of people would be better off.