Auditing The Storm: Dilemma For Storm Victims: Accept Or Reject Disaster Loans?

Jul 28, 2014

Auditing The Storm: Disaster 4117 is a series of investigative reports tracking federal disaster aid following the Spring 2013 Oklahoma tornado outbreak. This series represents a collaborative effort between The Oklahoma Tornado Project and Oklahoma Watch.
Credit Oklahoma Watch

The tornadoes, flooding and hail that struck Oklahoma last year left hundreds of millions of dollars in property damage, causing many home and business owners to seek help in the form of low-interest federal loans.

The U.S. Small Business Administration approved 929 applications for about $50 million in low-interest disaster loans for people, businesses and nonprofits, according to SBA data acquired for Oklahoma Watch by the nonprofit group, Investigative Reporters and Editors.

Most applicants, 599, took out the loans, but often for much less than what was offered, SBA figures show.

The total amount loaned by the SBA was $21 million, or 42 percent of the approved total amount. All but 52 of the 929 applications were from individuals. About half of the total amount approved was for applicants in Oklahoma City and Moore, which took the brunt of the damage from the May 20 and May 31, 2013, storms.

See a list of approved disaster loans for each city in Oklahoma, of which only 42% were actually used.

The purpose of the disaster-loan program is help owners recover from physical damage and, in the case of businesses, from economic harm.

Scott Burkhart of Moore obtained an SBA disaster loan of more than $30,000 to pay for lost belongings and damage not covered by property insurance. The family just moved back into their house.
Credit Nate Robson / Oklahoma Watch

Some took loans less than approved

Scott Burkhart, who first saw the shattered remains of his home in Moore during a TV newscast, took out an SBA loan of more than $30,000 after finding out he was underinsured.

SBA records show he was approved for up to $107,400. Burkhart said insurance covered his house, but not the belongings inside. He declined to say how much insurance covered.

Burkhart, whose family just moved back into their house last month, said he tried to reduce costs of rebuilding in order to take out a smaller SBA loan. His interest rate is less than 2 percent.

“Nobody wants to take out a loan on top of already paying a mortgage,” he said.

Others rejected the SBA loan offer to make repairs and relied instead on insurance, their own money or other assistance or charity.

Some rejected SBA loans

“We filed for one (disaster loan), it was approved, and in the end we didn’t need it,” said Rob Harris, senior pastor at the First United Methodist Church in Moore, which sustained about $830,000 in damage to its roof and air conditioning units in the severe storms of May 31.

The SBA had approved a loan in September for the church that was third largest amount for the Oklahoma disaster — about $360,000. But the United Methodist Committee on Relief, which also assisted victims from the May 20 tornado in Moore, helped cover the church’s costs, Harris said.

Businesses eligible for disaster loans included a jewelry store, a limousine service, a hotel, investment companies and a blind-cleaning firm, the data show.

Lewis Jewelers of Moore lost a factory near Interstate 35 in the tornado. “It had all kinds of expensive jewelry-making equipment for us to do production work and it was very underinsured,” Tim Lewis, vice president of Lewis Jewelers, told KGOU Radio.

The company was approved for a disaster loan of up to $500,000. It ended up rejecting the loan because the 6-percent interest rate offered by the SBA was higher than what some banks were offering. The firm ended up not borrowing money and using its own cash to expand its nearby retail location, which will accommodate upgraded jewelry-making equipment.

The Process

Mark Randall, a spokesman for the SBA Office of Disaster Assistance, said the agency often encourages victims in declared disasters to apply for loans early even if they may not want the loan. Applying before the deadline ensures funds are available if they change their minds.

 “A lot of times people don’t know what their insurance (payout) or exposure is going to be until after that (application) window,” Randall said, “so it’s better having to file and have it but not need it, rather than need it and not have it.”

Unlike other SBA loans made by private institutions and guaranteed by the federal government, disaster loans come directly from the U.S. Treasury.

“In times of disaster, SBA is the primary source of federal funds to help property owners replace or repair damaged property,” Randall said.

Most individuals who apply for a disaster loan are referred to the program by the Federal Emergency Management Agency, said Earl Armstrong, spokesman for FEMA’s Region 6 office.

When FEMA workers arrive at a disaster site, they begin recording victims’ names, whether they are insured, the type of property damage they sustained, and their financial situation. That allows FEMA to determine whether someone is eligible for FEMA’s individual-assistance program, which makes grants. Depending on the information gathered, individuals might be referred to the SBA disaster loan program, he said.

“If it appears they can repay a loan, they are referred to the Small Business Administration,” Armstrong said.

Much of that determination is based on a family’s or person’s cash flow and credit history, Randall said.

The maximum SBA disaster home loan is $200,000 for repairing or rebuilding real estate and $40,000 for loss of personal property. The maximum for businesses and nonprofit groups, which are eligible for loans to cover both physical and economic damage, is $2 million.

Interest rates on disaster loans range from about 2 percent to 6 percent, with a maximum term of three or 30 years, depending on whether the recipient can get credit elsewhere. The loan cannot be used to pay for damage that insurance or other forms of assistance are already paying for, Randall said.

The borrower’s damage must be directly related to the disaster, and the funds cannot be used by a business to expand or meet capital needs unrelated to the disaster.

“We’ve heard a lot of accounts from businesses, that they might not be in business without a (disaster) loan,” Randall said.

In the past, the SBA has faced criticism for the length of time it took to get disaster-loan funds to victims. Such criticism arose after Hurricane Katrina in 2005. In a 2013 report by a Congressional committee, Democrats chastised the SBA for its low rate of disbursements and long application-processing time in response to Hurricane Sandy. However, many individuals and businesses approved for a loan chose not to take one out, the report said.

More Stories

Robert Miley, of Moore, said he did not take out a loan after learning insurance covered everything.

Robert Miley, of Moore, was approved for a disaster loan after his home received $80,000 damage in the May 20 tornado. As it turned out, insurance covered the costs so he didn't need the loan.
Credit Nate Robson / Oklahoma Watch

Miley, who was granted up to $45,000 in disaster-loan funds, said his home received up to $80,000 in damage when the tornado ripped through his neighborhood.

“In those first days and weeks, that was our biggest concern — whether or not we were going to be financially ruined by this,” he said. “Our primary investment was our home.”

Others say that while they would prefer not to get a loan, the money was needed to cover all expenses.

Thomas Adair of Midwest City turned to an SBA loan to cover flood damage to his home from the May 31 storms. Insurance did not cover the damage because his home is not in a designated flood zone.

A FEMA grant paid for about $4,500 in damages, and the SBA loan the rest. Adair declined to say how much he borrowed. SBA records show he was approved for up to $28,400.

Adair said his loan term is 24 years but he intends to pay off the loan sooner. He added that the loan won’t be a financial burden on his family and he doubts he will face a similar situation again.

“That was an incredible amount of water in a short amount of time we saw,” he said.  “That was probably a once-in-a-lifetime event.”

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Credit Oklahoma Watch

Oklahoma Watch is a nonprofit, nonpartisan media service that produces in-depth and investigative journalism on public-policy issues facing the state. For more Oklahoma Watch content, go to www.oklahomawatch.org. The data team for Investigative Reporters and Editors and the Investigative News Network assisted with the project.

The Oklahoma Tornado Project is made possible by a grant from the Corporation for Public Broadcasting.