clared major disasters by the President and smaller disasters declared solely by the SBA Administrator. In the last 10 years there have been 510 SBA disaster declarations of which only 191 were also Presidential declarations. It is important that disaster loan applicants not be treated fundamentally differently solely on the basis of a distinction between major disasters declared by the President and similar but less extensive disasters declared by the SBA Administrator.

Specifically, the administration's legislation provides the following for SBA loans in both SBA and Presidentially declared areas, except six:

(1) Loans may be made without regard to whether the applicant can obtain the necessary funds from private resources;

(2) Loans shall be made without regard to the age of the applicant; (3) Loan amounts for repair, rehabilitation, or replacement of property shall not exceed the amount of repair or replacement cost except that additional amounts may be approved, if necessary, to comply with current building codes and specifications;

(4) Loans made under sections 7(b) (1) (natural), (2) (agricultural and economic), or (4) (product) of the Small Business Act, as amended, will bear interest at a rate based on the Government's cost of money on obligations bearing maturities comparable to our present average disaster loan maturities (currently 12 years maturity), less a maximum of 1 percent, the present 3-percent interest rate will be abolished. Under the proposed formula, the current rate on such loans would b 634 percent.

(5) Loans may be made to refinance mortgages or other liens against homes or businesses that have been totally or substantially destroyed if the property is to be repaired, rehabilitated, or replaced

Mr. JONES. Before your proceed, let me ask you a question. In item No. 4 of your presentation, you say that under the proposed formula. the current rate of such loans will be 634 percent?

Mr. EACHON. Yes, sir.

Mr. JONES. Then, in your next section, you provide for refinancing. Suppose the loan was 3 percent, and you are refinancing at 634 percent, what would be wrong with taking the accepted interest on the existing indebtedness that you are making the loan on?

Mr. EACHON. Mr. Chairman, I think what we are referring to here is refinancing, we are talking primarily about an existing loan against property that has been given by banks, savings and loans, and et

cetera.

Mr. JONES. That is what I am talking about. Suppose I had a business out here, and I owe $100,000 at 3 percent interest, and it is wiped out by a hurricane. I come to SBA, and you are going to charge me 634 percent, and I am just paying 3 percent. Why would you want to charge me 634 percent?

Mr. EACHON. I think basically, Mr. Chairman, it is that the 3 percent interest rate was one that was established at the time when the rate was much less.

Mr. JONE. I am not talking about that. Suppose I have a loan outstanding at 4 percent. You are jumping my interest rate up to 634 percent, or the amount that can be computed at a current rateI imagine you would compute it at the beginning of the fiscal period on Government marketable issues, and determine the rate as all

other agencies, so suppose it comes up at 72 percent next August 1, then that is the rate you would go at.

Mr. EACHON. Of course, obviously there could be a condition where we would not have to refinance. We could continue to have his existing loan as it is, and then of course supplement it with this additional financing. I think the key to it, however, sir, is the fact that by tieing the interest rate to the actual cost of money that it would over the long period change with the economics of the country itself.

Mr. JONES. No; it does not do that. Now, suppose that you make a loan at 634 percent and the interest rate goes down after he has committed himself to the repayment of a loan based on three-quarters of a percent. You are not going to reduce his rate to 4 percent, even though the next fiscal period

Mr. EACHON. No; we do not. This would continue for the term of the loan similar to what any other long-term loan would be under the same circumstances.

Mr. JONES. Why do you not have an escalation in the obligation that would give him the advantage of a lesser interest rate if it were to occur?

Mr. EACHON. Well, this particular aspect has not been under consideration. This is something we can certainly make a study on to see how it would affect this in the overall.

Mr. JONES. Well, we are just paying an enormous amount of interest, Government agencies themselves, because taking into account the average current rate of borrowing-the interest rate on borrowing, and taking long-term obligations, it seems to me that if you are going to fix it for a certain period of time, there ought to be a reduction if the interest rate goes down, because the Government would not lose anything.

Mr. EACHON. Well, this is an area that probably is certainly worthy of consideration. The key to it, I believe, sir, is trying to relate it in a reasonable way to the cost of money to the Government at the time of the disaster.

Mr. JONES. You have an advantage that the borrower does not have. You can call in your obligations, he cannot call his in, unless he goes out and borrows money, you know he is not going to get in the private financial sector a loan equal to 634 percent, but this has a different purpose. This is a disaster.

Mr. EACHON. Yes; I believe, sir, this is why in the legislation that they have decided they would be 1 percent less than the actual cost of money to the Government, which brings the rate, as of now, to 634 percent.

Mr. JONES. That is about the present rate.

Mr. EACHON. The present rate is 734, sir, based on the 12-year maturities which is the

Mr. JONES. It has gone up within the last 3 weeks then, has it not? Mr. EACHON. This was the rate established as of the fiscal

year end, as the cost of money based on 12-year maturities of Government obligations.

Mr. CLAUSEN. Was that 634

Mr. EACHON. Seven and three-quarters, less 1 percent, which would apply to disaster loans.

Mr. JONES. You may proceed.

Mr. EACHON. Loans may be made to refinance mortgages or other liens against homes or businesses that have been totally or substantially destroyed if the property is to be repaired, rehabilitated, or replaced, but the loan for refinancing may not exceed the amount of the physical property loss.

(6) In Presidentially declared major disasters where repayment of the disaster would create a hardship on the borrower, we may forgive the principal balance of the loan after the first $500, but not to exceed $2,500. This provision is applicable in major disasters and the maximum amount of forgiveness has been increased from the $1,800 maximum provided by the 1969 legislation.

(7) We may defer initial payments of principal or interest or both, in whole or in part, during the first 3 years of the loan. The provision is contained in the Disaster Relief Act of 1969 and Small Business Act, as amended, and is continued in the administration's bill.

(8) Working capital loans may be made to small businesses suffering substantial economic injury as a result of the disaster, a type loan that is now available only in areas declared major disasters by the President.

These provisions affecting the SBA disaster loan program, we feel, represent a marked improvemer.t in our ability to effectively help victims of all natural disasters. Our experience in administering the provisions of the Disaster Relief Act of 1969, has further convinced us of the soundness of these proposals. If enacted, a comprehensive and balanced program would result, to the benefit of all, and the shifting ground of disaster loan authority and implementation which has characterized the program over the past several years would be stabilized by permanent legislation.

We urge favorable consideration of the administration bill, H.R. 17518 and H.R. 17824, which extends and improves upon the provisions of the Disaster Relief Act of 1969, and of the SBA disaster program in general.

Thank you for the opportunity of appearing before this committee. We would be pleased to try to answer any questions you may have. Mr. JONES. Thank you very much.

Are there any questions? Mr. Clausen?

Mr. CLAUSEN. No; I do not have any questions.

Mr. JONES. Mr. Miller?

Mr. MILLER. Yes, Mr. Chairman.

Pursuing the question we had a little while ago on the individuals that should have insurance or could have insurance on their homes, and I see in the Texas disaster you list that 1,516 loans, or $12.3 million, as I see this, it would amount to about 234 business loans apparently, with an average of about $30,000 each, where the home loans were about $4,000 each. Now, those private individuals that had the business and also the homes, could they have purchased insurance for this protection?

Mr. EACHON. Yes, sir. My understanding is that they could in this

area.

Mr. MILLER. Is there some encouragement by a bill such as this for those private individuals not to purchase insurance because the Fed

eral Government could be a gigantic insurance company and the possibility also that we could borrow money at 1 percent less than if we did have a disaster? Would you elaborate on that, please?

Mr. EACHON. My understanding of this particular problem is that under Housing and Urban Development they have a national insurance-flood insurance, with a 1-year moratorium to acquire this insurance in these designated areas. Should they fail to procure this insurance, after the 1-year period of time should there be a flood, SBA assistance would only apply to that portion of their loss that would be above what they could have acquired under thei nsurance program. Does this answer your question?

Mr. MILLER. This is interesting, but not directly, because I am aware of the flood insurance problem, and now some of the damage would have been done by flooding, some would have been done by hurricane, I would have to assume-do you have a breakdown? Because we are speaking there of the wind damage where it is easier to buy insurance than flood damage, and I am wondering would the individual feel that it is not necessary for them to have insurance because the Federal Government will be looking after me and even at a lower rate of interest if a disaster does occur.

Mr. EACHON. Of course he would have to pay the loan in any case. This is a tough one to answer, of course, as to what his thinking may be. From a practical standpoint, under these circumstances, a man that has insurance under these circumstances, we go ahead and make the loan, and the insurance proceeds when he gets them applies back against the loan. In other words, he has less to pay back after this has been completed. We do not delay until he goes through all of the necessary paperwork to get his insurance claim paid.

Mr. MILLER. I am not exactly working for the insurance company, I am not thinking of that, I am just thinking of the man taking care of himself as much as possible and not relying on the taxpayers to help support him in some way.

Mr. EACHON. Mr. Shoemaker has been involved on a firsthand basis in his instances in most of our major disasters in the last few years, and may have run into specific cases like this. May I ask him to elaborate, if he would, please?

Mr. SHOEMAKER. Sir, I did not think that we are encouraging people not to buy insurance in these cases. We have to remember that the individual, even though the interest rate is subsidized, when he borrows money from us to replace that that he lost in a disaster is still sustaining a loss, he is not negating the loss in any way, and I think anyone who would put off buying insurance or just not buy insurance in order to save, oh, as much as $100 or $150 a year for $25,000 or $30,000 piece of property, it would be somewhat less than prudent if he were not to buy the insurance if he knows he would have to take the risk of loss in major disasters. I do not think we would be encouraging this sort of thing by making our loans.

Our loans do have to be repaid and under the subsidized interest rate the individual himself does sustain the loss.

Mr. MILLER. I can see myself having a business and depending, of course, upon the insurance rate, having considering whether it would be advisable to take a policy to protect myself or wait for the Govern

ment to help me even at that lower rate, that is why I had the question as to whether you had given consideration as to anyway you could write into the legislation some restriction so that one person would be protecting himself, the other relying on the taxpayers to protect him.

Mr. SHOEMAKER. I do not know that we could write it into legislation before the disaster occurred. We do encourage people in our normal operations to take out whatever hazard insurance they can on their business and what have you, and we do after a disaster encourage them, and in many cases require them to buy hazard insurance on the properties on which we have a mortgage, providing that they can buy it at a reasonable rate and that they can afford this rate themselves.

Mr. MILLER. I wanted to make it clear that I am not trying to protect the insurance company, but to protect the taxpayer.

Mr. CLAUSEN. Would the gentleman yield? The thought occurs to me that we certainly need to coordinate the lending program that you have under disaster relief, along with the insurance program. Now, I would like to know how closely you have been inventorying the insurance experiences with the Department of HUD. I see Mr. Bernstein is in the room now. Have you been coordinating this so that SBA knows what HUD is doing in this field of disaster relief and the interrelationship between loans and the insurance coverage?

Mr. SHOEMAKER. We have been coordinating it. The Flood Insurance Act is a fairly new act, and I think the first area delineated as flood prone areas was delineated in June of 1969. So, we have had very little experience with it. We have had meetings with HUD though, and we will continue to have discussions with them in trying to determine what the areas are and what our observations will be in the future. Mr. CLAUSEN. There is one point I would like to make also, and I am just going to state this so that all agencies that are present in the room now can hear it at once. As you know, our ultimate objective certainly must be to direct most programs toward the kind of relief, yes, but that includes the permanent protective works. A lot of this assistance would not be necessary if we had permanent-particularly in the area of flood control, if we had permanent protective works, why a lot of this anguish can be relieved, and I think the economic and tax base can be enhanced.

I think the one thing we have to be very careful of is we do not provide so much in the way of relief assistance that we lose sight of what has actually occurred in the way of flood control measures of a permanent nature that will guarantee protection in the future.

I wonder if you are taking this into account in your planning, or are you just doing the work within the confines of your own shop without a working relationship. Are you coordinating what you can do in this direction with other agencies?

Mr. EACHON. We are working to coordinate primarily after the fact, however. I think there is a lot to be done in the areas of coordination that you have talked about. I think in more recent days here, with the work being done by General Lincoln and his group and the formation of the Disaster Council that I participate in, I think much can be done in this area of better coordination. Certainly after the fact we are on board as soon as any of the other agencies and in some in

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