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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