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32 Regulation 6 (2009-2010)
Disaster Loan Reform Waiting to Happen

handle is hein.journals/rcatorbg32 and id is 8 raw text is: BRIEFLY NOTED - Disaster Loan Reform Waiting to Happen BY VERONIQUE DE RUGY Mercatus Center Administration's Disaster Assistance loans are, collectively, the federal government's primary disaster-reliefprogram. The government- financed loans help not just small busi- nesses, but also individuals, businesses of all sizes, and nonprofits to reestablish after a disaster. Unfortunately, the pro- gram's performance has been mediocre, to say the least. Congress is now consid- ering possible reforms, however they are modest in scope and the program will likely continue to underperform for dis- aster victims. AIDING CITIES, NOT PEOPLE Con- gress authorizes the SBA to provide low- interest loans to disaster victims contin- gent upon a disaster declaration from the president or the SBA administrator, and a cAmonstrable ability for the recip- ients to repay the loans. The loans can be used to repair or replace real estate (up to $200,000) and personal property (up to $40,000), as well as to reestablish busi- nesses and nonprofit organizations regardless of size (up to $1.5 million). Loans can be for a period of up to 30 years. The SBA has more relaxed under- writing standards than private-sector lenders, which allow it to lend money to riskier borrowers. What restrictions should be placed on the loaned funds? Private insurers provide clients with checks after the destruction of an insured asset like a house or car, and it is left to the recipi- ent to decide whether to purchase anoth- er car or house, or do something else with the money. In contrast, public dis- aster assistance mandates that the loan be used to rebuild in the same location. For example, in the wake of the devas- Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and an adjunct scholar of the Cato Institute. tating 2005 Gulf Coast hurricanes Kat- rina and Rita, policymakers momentar- ily considered dispensing financial aid directly to victims, to be used at their discretion. However, the possibility that many recipients would use the money to move out of the long-impoverished and hurricane-prone area resulted in the idea's quick abandonment. The federal government's relief effort was instead geared toward rebuilding New Orleans and encouraging its residents to stay. Because politicians gain reelection from specific places, they oppose disas- ter-relief policies that allow geographic mobility. They want individuals to stay and rebuild in the same area, and feel gratitude to their local representatives. 6 REGULATION SPRING 2009

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