FEMA's Community Disaster Loan Program

Publication Date: December 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Areas struck by disasters, both natural and man-made, often experience a destruction of property and decline in economic activity. Tax collections for affected local governments may fall substantially as a consequence. At the same time, the financial and public service obligations of local governments persist and may actually increase. The unexpected loss of revenue coupled with the increased financial needs for responding to a natural disaster or terrorist act may lead local governments to seek assistance from the federal government.

This report examines the federal Community Disaster Loan (CDL) program, authorized by Section 417 of the Stafford Act and administered by the Federal Emergency Management Agency (FEMA).

The CDL program is intended to assist local governments that experience revenue losses and/or increased municipal operating expenses as the result of a presidentially declared major disaster. The CDL program provides for loan forgiveness (cancellation) when it is determined for three fiscal years following a disaster that the affected government will not be able to repay the loan. A total of 55 CDLs were made from the initiation of the program in August 1976 through September 30, 2005, a period of 29 years. No new loans were made from FY1999 through FY2005. Of the 55 loans made, 36, or 65.4%, were paid back in part or in full. However, because many of these repaid loans were for small amounts, they accounted for only 2.3% of the principal amount advanced. Of the total of $233.5 million in principal advanced, $225.7 million, or 96.6%, was for loan amounts that were cancelled. Five loans in excess of $5 million accounted for 90% of cancelled principal. In 2000, a $5 million limit was placed on the loan amount any one jurisdiction can receive through the traditional CDL program for a single disaster.

On October 7, 2005, both houses of Congress approved and President Bush signed the Community Disaster Loan Act of 2005 (CDLA), P.L. 109-88. Previously, P.L. 109-62, the second emergency supplemental bill enacted following Hurricane Katrina, had appropriated $50 billion in disaster assistance. CDLA provides for up to $750 million of those funds to be used to support "special" community disaster loans, up to a total of $1 billion in principal amount, to local governments so that they can continue to provide essential services. For purposes of these special loans, the new law removes the $5 million per loan limit but prohibits their cancellation. As of November 4, 2005, eight special CDL applications had been approved for local governments in Louisiana. These loans totaled $182 million. This included $120 million for New Orleans and four other loans for a total of more than $5 million. FEMA expects more loan applications.

Congress may be called upon to revisit the issues of whether these loans could be cancelled and whether there should be requirements to report to Congress on the use of these loans. This report will be updated when legislative events warrant or when new information about use of the CDL program is available.