When a hurricane or wildfire hits it can turn people’s lives completely upside down. That stark reality motivated a faculty member from the Naveen Jindal School of Management and his fellow researchers to examine whether government disaster loans truly serve those in need.
“Rebuilding takes money,” said Dr. Umit Gurun, Stan Liebowitz Professor in the Jindal School’s Accounting Area. “What caught our attention was whether everyone has a fair shot at getting help through government loans. We’ve seen for years that getting loans from regular banks can be harder for some communities than others, so we wanted to check if government disaster programs were doing a better job at being fair to everyone. It wasn’t a simple yes or no question, which is why we dug into the data to find out what was really happening.”
The study — “Disaster Lending: “Fair” Prices but “Unfair” Access” — was published in the Dec. 2024 issue of Management Science, a peer-reviewed academic journal. The team consisted of Gurun; Dr. Daniel Weagley, who at the time was a professor in the Georgia Institute of Technology and has since joined the faculty in the University of Tennessee; Dr. Taylor A. Begley from the University of Kentucky; and Dr. Amiyatosh Purnanandam from the University of Michigan at Ann Arbor.
The team investigated disaster loans from the Small Business Administration, which provides relief to small businesses and entrepreneurs. Their findings shine a harsh spotlight on the agency’s approach: a one-size-fits-all approach doesn’t always work.
“It all comes down to how the SBA’s rules work,” Gurun said. “Imagine you’re at a store where everything has to be sold at exactly $10, no more, no less. Some items might be worth that price, but others might be too risky to sell at that price, so the store just won’t stock them at all. The SBA works similarly with their loans. Unlike regular banks, who can charge higher interest rates to people they see as riskier borrowers, the SBA can’t do that. They offer the same rate to everyone. So instead of being able to offer a higher rate to someone they see as a riskier borrower, they have to just say “no” completely. It’s like being told you can’t buy the item at all, rather than being offered it at a different price.”
Gurun compared the SBA’s fixed-rate policy in which everyone gets the same interest rate, no matter their financial situation, to a gym membership.
“Imagine a gym that sets one very high bar for everyone to jump over,” he said. “While it seems fair that everyone faces the same challenge, it means people who could do well with a lower bar never get a chance to participate at all.”
Similarly, Gurun said, when the SBA offers just one interest rate, they have to be very selective about which loans it approves.
“They do this to protect themselves from losing money on risky loans,” he said. “A regular bank would simply charge higher rates for riskier borrowers, like setting different jump heights for different skill levels. But since the SBA can’t adjust their rates, they end up turning away people who could have managed loan payments at a higher interest rate.”
According to the study’s findings this approach hits especially hard in communities that have historically faced credit challenges. Instead of getting a more expensive loan that they still could handle, these borrowers get no loan at all.
“A policy meant to treat everyone equally actually ends up shutting out the very communities it should be helping,” Gurun said. “Risk-insensitive pricing — charging the same interest rate to all approved loans — can unintentionally create and worsen inequities in access to credit. For disaster loan programs to be both more equitable and efficient, they should consider a balanced approach that incorporates some elements of risk-sensitive pricing while maintaining affordability.”
Gurun said that for areas with lower-risk borrowers, approval rates for SBA loans are about 4 percentage points higher than comparable private market lending such as Federal Housing Administration home improvement loans. However, communities in the top quartile of minority share of the population — which statistically have higher credit risk and have been traditionally underserved — have approval rates that are about 6 percentage points lower than the comparable private market benchmark.
What changes to the SBA’s loan program would help more people in disaster-hit areas get approved?
First, Gurun said, the agency could create a tiered system for interest rates.
“This is kind of like how concert venues offer different ticket prices for different seats,” he said. “Instead of having just one rate that either works for you or doesn’t, they could offer a few different rates. This way, if someone doesn’t qualify for the lowest rate, they might still get approved at a slightly higher rate instead of being turned away completely.”
Second, he said, they could create special support for higher-risk borrowers who really need help.
“Think of it like having a co-signer on a loan, but in this case, it’s the government providing extra backing,” he said. “This would let the SBA help more people while still keeping the program financially stable – like having a safety net that lets you help more people without risking the whole program.”
The team was not surprised about the findings of the study, having begun their research expecting the data to reveal that higher-risk borrowers had a harder time getting loans.
“This wasn’t shocking because we’ve seen similar patterns before when studying price controls in other markets,” Gurun said. “It’s like when rent control sometimes leads to fewer available apartments. But what really caught us off guard was just how big the differences were. It’s one thing to predict a gap in approval rates but seeing just how many people were being left out of the program was eye-opening. The size of these differences suggests that what might look like a small quirk in how the program is designed can have huge real-world impacts on who gets help after a disaster and who doesn’t.”
The study reveals that the loan-denial patterns found in the study create a domino effect that impacts everyone in communities whose businesses cannot access disaster loans.
“Think of it like a neighborhood where some houses can’t get repaired after a hurricane,” Gurun said. “Families that can’t get loans might have to leave their homes for longer periods — or permanently — because they can’t afford repairs. They might have to crash with relatives or move to different cities entirely.”
As the dominoes continue to fall, they start affecting the entire community.
“When several houses stay damaged, it’s harder for nearby businesses to reopen because their customer base has scattered,” Gurun said. “Property values might drop. The local tax base shrinks, making it harder for the city to fund basic services. And here’s the really tough part: this often hits hardest in communities that were already struggling before the disaster. So instead of a disaster loan program helping communities bounce back, the way loans are approved — or denied — can actually make some neighborhoods take longer to recover than others. It’s like having a life raft, but not everyone who needs it can reach it.”
Gurun said that the SB can benefit from partnering with the private sector and adopting some of its practices, such as risk-sensitive pricing, to broaden its approval base.
“Notably, other SBA programs such as regular small business lending and the Paycheck Protection Program are administered by private lenders,” he said. “Leveraging their expertise and established networks could potentially enhance both the speed and effectiveness of disaster response efforts. A collaborative approach between private lenders and the SBA could pave the way for hybrid models that balance fairness with financial sustainability.”
For potential applicants, a key takeaway from the study is that the current SBA disaster loan program may be more challenging to access in certain communities, particularly those with higher minority populations or more subprime borrowers.
“Applicants should be aware of these potential challenges and consider casting a broader net to secure funding for rebuilding and recovery,” Gurun said.
