S afe and affordable financial services are an important tool for most American households to avoid financial hardship, build assets, and achieve financial security over the course of their lives. In the United States, robust consumer credit markets allow most consumers to access financial services and credit products to meet their needs in traditional financial markets. The vast majority of consumers have, for example, a bank account, a credit score, a credit card, and other types of credit products. However, some consumersâwho tend to be younger adults, low- and moderate-income (LMI) consumers or possess imperfect credit repayment historyâcan find gaining access to these prod ucts and services difficult. For those excluded, consumers may find managing their financial lives expensive and difficult. This report provides an overview on financial inclusion. It then focuses on three areas: (1) access to bank and other payment accounts; (2) inclusion in the credit reporting system; and (3) access to affordable short-term credit. These areas are generally considered foundational for households to successfully manage their financial affairs and graduate to wealth building activities in the future. Wealth building activitiesâsuch as access to homeownership, education, and other financial investmentsâare outside the scope of this report. Financial Inclusion Overview Financial inclusion refers to the idea that individuals "have access to useful and affordable financial products and services that meet their needsâtransactions, payments, savings, credit, and insuranceâdelivered in a responsible and sustainable way." Access to financial products allows households to better manage their financial lives, such as storing funds safely, making payments in exchange for goods and services, and coping with unforeseen financial emergencies, such as medical expenses or car or home repairs. In the United States, most households rely on financial products found at traditional depository intuitionsâcommercial banks or credit unions. Some households also use financial products and services outside of the banking system, either by choice or due to a lack of access to traditional institutions. While products outside the banking sector may better suit some households' needs, these products might also lack consumer protections or other benefits that traditional financial institutions tend to provide. Different barriers affect different populations. For some younger consumers, a lack of a co-signer might make it more difficult to build a credit report history or a lack of knowledge or familiarity with financial institutions may be a barrier to obtaining a bank account. For consumers living paycheck to paycheck, a bad credit history or a lack of money could serve as barriers to obtaining affordable credit or a bank account. For immigrants, the absence of a credit history in the United States or language differences could be critical access barriers. For consumers who do not have familiarity or access to the internet or mobile phones, a group in which older Americans may be overrepresented, technology can be a barrier to accessing financial products and services. Financial Product Access and Financial Well-Being Some consumers face barriers that make it more difficult for them to access traditional bank products, such as a bank account, enter the credit system, and gain access to financial product and service offerings in traditional financial markets. These barriers can be significant because they may disadvantage these consumers from effectively managing their financial lives and achieving financial well-being, which the Bureau of Consumer Financial Protection (CFPB) defines as 1. having control over day-to-day, month-to-month finances; 2. having the ability to absorb a financial shock; 3. being on track to meet financial goals; and 4. being able to make choices that allow a person to enjoy life. Research has examined the factors involved in achieving financial well-being. For example, a CFPB study found thatâafter controlling for certain economic factorsâmoney management is strongly associated with financial well-being. In addition, the CFPB has found that not having a bank account and nonbank transaction product use (e.g., check cashing or money orders) is correlated with lower financial well-being. Although nonbank short-term credit is also correlated with lower financial well-being, the effect is not as large as the financial products previously mentioned. Lastly, holding liquid savings is highly correlated with the CFPB's financial well-being scale. Academic research conducted abroad also suggests the importance of access to financial products to improve financial well-being. For example, some studies suggest that access to bank accounts can lead to more savings. In particular, debit accounts seem to have strong effects, by helping consumers save more by reducing money spent on financial services and monitoring costs. Moreover, access to faster and more secure payment services has also been shown to provide significant benefits to consumers, including helping lower-income consumers better handle financial shocks. Likewise, inclusion in credit bureaus also have positive effects on consumers by reducing market information asymmetry and allowing some consumers to obtain better terms of credit. In contrast, the evidence on the effect of small-dollar short-term credit on individuals' financial well-being is mixed. Many Americans have low financial well-being and live paycheck to paycheck. National surveys suggest that about 40% of Americans find "covering expenses and bills in a typical month is somewhat or very difficult," and they could not pay all of their bills on time in the past year. In addition, more than 40% of households did not set aside any money in the past year for emergency expenses. Therefore, a sizable portion of the adult population report they would have difficulty meeting an unexpected expense. If faced with a $400 unexpected expense, 39% of adults say they would borrow, sell something, or not be able to cover the expense. These financial struggles lead to real impacts on the health and wellness of these families; those with low financial well-being are more likely to face material hardship. Access to Checking and Other Banking Accounts The banking sector provides valuable financial services for households that allow them to save, make payments, and access credit. Most U.S. consumers choose to open a bank account because it is a safe and secure way to store money. For example, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per depositor against an institution's failure. In addition, consumers gain access to payment services through checking accounts, such as bill pay and paper checks. Frequently, a checking account includes access to a debit card, which increases a consumer's ability to make payment transactions through the account. For most consumers, a checking or savings account is less expensive than alternative ways to access these types of services. Some studies suggest that affordable access to payment transactions may be particularly important for consumers to manage their financial lives. For most consumers, opening a bank account is relatively easy. Consumers undergo an account verification process and sometimes provide a small initial opening deposit of money into the account. Many consumers open their first depository account when they get their first job or start post-secondary education. Checking and savings accounts are often the first relationship that a consumer has with a financial institution, which can later progress into other types of financial products and services, such as loan products or financial investments. Safe and affordable financial services, especially for families with unpredictable income or expenses, have the potential to help households avoid financial hardship. However, many U.S. householdsâoften those with low incomes, lack of credit histories, or credit histories marked with missed debt paymentsâdo not use banking services. The Unbanked and Underbanked According to the FDIC's 2017 National Survey of Unbanked and Underbanked Households, 6.5% of households in the United States were unbanked , meaning that these households do not have a bank account (see Figure 1 ). In addition, another 18.7% of households were underbanked , meaning that although these households had a bank account, they still obtained one or more of certain financial products and services outside of the banking system in the past year. These specified nonbank financial products, called alternative financial services , include check cashing, money orders, payday loans, auto title loans, pawn shop loans, refund anticipation loans, and rent-to-own services. Unbanked consumers tend to be lower-income, younger, have less formal education, of a racial or ethnic minority, disabled, and have incomes that varied substantially from month to month compared with the general U.S. population. Unbanked persons may be electing not to open a bank account due to costs, a lack of trust, or other barriers. According to the survey, these households report that they do not have a bank account because they do not have enough money, do not trust banks, and to avoid high and unpredictable bank fees. In addition, for immigrants, the account verification process may be more challenging to complete, and the consumer's country of origin may influence their trust of banks. In the past decade or so, the availability of free or low-cost checking accounts has reportedly diminished, and fees associated with checking accounts have grown. Some bank accounts require minimum account balances to avoid certain maintenance or service fees. The most common fees that checking account consumers incur are overdraft and nonsufficient fund fees. Overdraft services can help consumers pay bills on time, but fees can be costly particularly if used repeatedly. For consumers living paycheck to paycheck, maintaining bank account minimums and avoiding account overdrafts might be difficult, leading to unaffordable account fees. In addition, unpaid fees can lead to involuntary account closures, making it more difficult to obtain a bank account in the future. Checking and Savings Accounts: Banking Economics Depository institutions incur expenses to provide checking and savings accounts to consumers. In addition to specific account maintenance costs, physical banking branches incur costs to hire staff and maintain retail locations. To recoup these costs, depository institutions make money from interest rate spreads (i.e., loaning out funds in checking and savings accounts) and account fees. Historically, some banks were willing to lose money on these types of accounts to begin a relationship with a client and later get more profitable business from the client, such as a credit card or mortgage loan. In fact, checking and savings accounts data might allow a bank to better underwrite and price loans to a consumer. In this way, banks with a checking account relationship with a consumer might be able to provide more attractive loan terms than other banks without this relationship. Given these dynamics, lower-balance or less credit-worthy consumers may generally be less profitable for banks to serve. Consumers with low checking or savings account balances provide banks minimal funds to lend out and make a profit with. Moreover, less credit-worthy consumers may be less likely to develop into a profitable relationship for the banks if the consumer is not in a position to obtain loans from the bank in the near future. Therefore, bank fees may be seen as the best way for banks to recoup their account costs for these consumers. Because of the way bank fees are structured, consumers with lower balances using checking and savings accounts tend to incur more fees than consumers with higher balances. Bank access may also have a geographic component, as some observers are concerned that banking des erts â areas without a bank branch nearby â exist in certain communities. Branch offices are still important to many consumers, even as mobile and online banking has become more popular. For example, most banked households visit a bank branch regularly, and one-third of banked households visit 10 or more times in a year. However, in the past 10 years, the number of bank branch offices has declined in the United States due to many causes, such as bank consolidations and the rise of online banking. Some argue that this has left some communities without any nearby bank branches, making it more difficult to access quality banking services, particularly in lower-income, non-urban areas. Yet others argue that banking deserts are not a major issue in the United States because they have been stable over time, and minority areas are less likely to be affected than other areas of the country. Banking Account Alternatives Unbanked households rely on nonbank alternative financial products and services. Both unbanked and underbanked households are more likely to use transaction alternative financial products than credit alternative financial products. Transaction alternative financial products include check cashing, money orders, and other nonbank transaction products. In a typical month, unbanked consumers are more likely to use cash, nonbank money orders, and prepaid cards to pay bills and receive income, in contrast to banked consumers, who are most likely to use direct deposit, electronic bank payments, personal checks, debit cards, and credit cards. Alternative financial products can sometimes be less expensive, faster, and more convenient for some consumers. For example, although check cashing, money orders, and other nonbank transaction products might charge high fees, some consumers may incur higher or less predictable fees with a checking account. In addition, such alternative financial products might allow consumers to access cash more quickly, which might be valuable for consumers with tight budgets and little liquid savings or credit to manage financial shocks or other expenses. Lastly, nonbank stores often are open longer hours including evenings and weekends than banks, which might be more convenient for working households. Moreover, these nonbank stores might also be more likely to cater to a local ethnic or racial community, for example, by hiring staff who speak a native language and live in the local community. Although consumers may find benefits in using alternative financial products substitutes, these products may not always have all of the benefits of bank accounts, such as FDIC insurance or other consumer protections. General-purpose prepaid cards are another popular alternative to a traditional checking account. Use of prepaid cards is more prevalent among unbanked householdsâ26.9% of unbanked and 14.5% of underbanked households used a prepaid card in the past year. These cards can be obtained through a bank, at a retail store, or online, and they can be used in payment networks, such as Visa and MasterCard. General-purpose reloadable prepaid cards generally have features similar to debit and checking accounts, such as the ability to pay bills electronically, get cash at an ATM, make purchases at stores or online, and receive direct deposits. However, unlike checking accounts, prepaid card funds are not always federally insured against an institution's failure. Prepaid cards often have a monthly maintenance fee and other particular service fees, such as using an ATM or reloading cash. Some banks offer prepaid cards, yet unbanked consumers are much more likely to use a prepaid card from a store or website that is not a bank. Nonbank private-sector innovation could also provide more affordable financial products to unbanked and underbanked consumers. Whereas bank products may be expensive to provide to lower-income or less credit-worthy consumers, technology may be able to reduce the cost. For example, internet-based mobile wallets may provide access to payment services for unbanked consumers. Alternatives to a banking-based payment system have been proposed or pursued in other countries. For example, the M-pesa, a mobile payment system that does not use banks, has achieved a relatively high level of usage in parts of Africa. In addition, new mobile products aim to help consumers manage their money better and save by automating savings behavior. Yet, concerns continue to exist for internet-based products around data privacy and cybersecurity issues. Policymakers debate whether existing regulation can accommodate financial innovation or whether a new regulatory framework is needed. Access to Emergency Savings and Savings Accounts Some research suggests that emergency savings is crucial for a household's financial stability. The ability to meet unexpected expenses is particularly important, because within any given year, most households face an unexpected financial shock. For example, one study found that families with even a relatively small amount of non-retirement savings (e.g., $250-$750) are less likely in a financial shock to be evicted, miss a housing or utility payment, or receive means-tested public benefits. These findings are consistent throughout the income spectrum, not only for lower-income families. One barrier for building emergency savings may include not having a separate account dedicated to saving. For example, money in a transaction account intended for emergencies can be vulnerable to unintentional overspending. Although almost all banked households report having a checking account, roughly a quarter do not have a savings account. These households tend to be lower-income and living in rural areas and are more likely to be an ethnic or racial minority or working-age disabled compared with the U.S. population. Moreover, unbanked households are much less likely to report saving for unexpected expenses and emergencies (17.4%) than banked households (61.6%). Whereas most households save using a checking or savings account, most unbanked households save at home or with family or friends. In addition, saving with a prepaid card is much more common for unbanked households. Some recent research suggests that saving, not only through a savings account, but also through savings wallets on prepaid cards, can help consumers avoid high-cost credit and alternative financial services. Possible Policy Responses In regard to accessing financial products and services that help consumers manage their finances and achieve financial success, some research suggests that consumers may particularly benefit from (1) access to affordable electronic payment system services, for example, through a traditional bank account; and (2) a safe way to accumulate and hold emergency savings. The government, the private sector, and the nonprofit sector all may be in a position to help increase access to these types of financial products for the underserved. Some propose changes to bank regulation to try to increase access to bank accounts. For example, the Community Reinvestment Act (CRA) encourages banking institutions to meet the credit needs of the areas they serve, particularly in LMI neighborhoods. Banks receive "CRA credits" for qualifying activities, such as mortgage, consumer, and business loans. Currently, providing bank accounts to LMI consumers or neighborhoods is not included in the calculation. Bank regulators are considering updating the CRA, and they recently received public comments on reforming implementation of the law. The Federal Reserve indicated that it is considering, due to public feedback, expanding the list of products and services that are eligible for CRA credits, including "financial services and products aimed at helping consumers get on a healthier financial path," such as affordable checking and savings accounts for LMI consumers. Bank regulators may need to balance expanding CRA credit for these products with the CRA's statutory purpose, which was focused on encouraging bank lending activities to meet local communities' credit needs. Payment system improvements, either by the government or the private sector, may also have the potential to improve welfare for unbanked or underbanked consumers. Many of these consumers choose alternative financial payment products such as check cashers to access their funds quickly. These consumers might not require such alternative services if bank payment systems operated faster than they normally do. Both the private sector and the government are currently working on initiatives to make the bank payment system faster. For example, the Federal Reserve plans to introduce a real time payment system called FedNow in 2023 or 2024, which would allow consumers access to funds quickly after initiating the transfer. Faster payments may help some consumers avoid overdraft fees on checking accounts. However, some payments that households make would also be cleared fasterâdebiting their accounts more quicklyâwhich could be disadvantageous to some of these households compared with the current system. Other policy proposals include the government directly providing accounts to retail customers. For example, offering banking services through postal offices or providing banking services online to the public through the Federal Reserve, which already provides accounts to banks. Opposition to these proposals often centers on the appropriate role for the government. Some argue that the government should not be competing with the private sector to provide these services to consumers, especially in the competitive banking market. Moreover, government bank accounts may not attract consumer demand. For example, the Treasury Department's myRA account programâwhich provided workers without a work retirement account a vehicle for retirement savingsâclosed after about three years, in part due to lack of participation. Financial education programs or outreach initiatives coordinated by the government, nonprofit organizations, and financial institutions could support financial inclusion as well. Given the importance of emergency savings, in 2019, CFPB Director Kraninger announced that the CFPB wants to focus on increasing consumer savings, through financial education initiatives and joint research projects with the financial industry. In addition, the "Bank On" movementâa coalition between city, state, and federal government agencies, community organizations, financial institutions, and othersâaims to encourage unbanked consumers to open and use bank accounts. Bank accounts associated with the movement must have no overdraft fees, charge a minimal amount of monthly fees, have deposits that are federally insured, and offer traditional banking services, such as direct deposit, debit or prepaid cards, and online banking. Nearly 3 million accounts have been opened through the movement, generally to new bank customers, and consumers tend to actively use these accounts. This topic may continue to be the subject of congressional interest and legislative proposals. In the 116 th Congress, the House Financial Services Committee marked up and ordered reported H.R. 4067 , directing the CFPB to report to Congress on unbanked, underbanked, and underserved consumers. In addition, other legislation introduced proposes establishing an office within the CFPB to work on unbanked and underbanked issues ( H.R. 1285 ) and proposes developing short-term non-retirement savings accounts for consumers with their employers automatically deducting from their paychecks ( S. 1019 , H.R. 2120 , S. 1053 ) or using their tax refund to save ( H.R. 2112 , S. 1018 ). Access to the Credit Reporting System The credit reporting industry collects information on consumers and uses it to estimate the probability of future financial behaviors, such as successfully repaying a loan or defaulting on it. The information collected has largely related to consumers' past financial performance and repayment history on traditional credit products. Consumer files generally do not contain information on consumer income or assets or on alternative financial services. Credit bureaus collect and store payment data reported to them by financial firms, and they or other credit scoring companies use this data to estimate individual consumers' creditworthiness, generally expressed as a numerical "score." The three largest credit bureausâEquifax, Experian, and TransUnionâprovide credit reports nationwide that include repayment histories. Credit reports generally may not include information on items such as race or ethnicity, religious or political preference, or medical history. This industry significantly affects consumer access to financial products, because lenders and other financial firms use consumer data when deciding whether to provide credit or other products to an individual and under what terms. Consumers who find it challenging to enter the traditional credit reporting system face challenges accessing many consumer credit products, such as mortgages or credit cards, because creditors are unable to assess the consumer's credit worthiness. This section examines some consumer credit reporting issues and related developments and policy issues. Credit Invisibles and Unscorables According to the CFPB, credit scores cannot be generated for approximately 20% of the U.S. population due to their limited credit histories. The CFPB categorizes consumers with limited credit histories into several groups. One category of consumers, referred to as credit invisibles , have no credit record at the three nationwide credit reporting agencies and, thus, do not exist for the purposes of credit reporting. Credit invisibles represents 11% of the U.S. adult population, or 26 million consumers (see Figure 2 ). Another category of consumers have a credit record and thus exist, but they cannot be scored or are considered un scorable . Unscorable consumers either have insufficient (short) histories or stale (outdated) histories. The insufficient and stale unscored groups, each containing more than 9 million individuals, collectively represent 8.3% of the U.S. adult population, or approximately 19 million consumers. Limited credit history is correlated with age, income, race, and ethnicity. Many consumers that are credit invisible or unscorable are young. For example, 40% of credit invisibles are under 25 years old. Moreover, consumers who live in lower-income neighborhoods or are black or Hispanic are also disproportionately credit invisible or unscorable compared with the U.S. population. Barriers to Entering the Credit System Most young adults transition into the credit reporting system in their early twentiesâ80% of consumers transition out of credit invisibility before age 25 and 90% before age 30. For young consumers, the most common ways to become credit visible is through credit cards, student loans, and piggybacking (i.e., becoming a joint account holder or authorized user on another person's account, such as a parent's account). Young adults in LMI neighborhoods tend to make the transition to credit visibility at older ages than young adults in higher-income neighborhoods. In urban areas, consumers over 25 years old from LMI neighborhoods have higher rates of credit invisibility than those in middle and upper income areas. In addition, the highest rates of credit invisibility for consumers over 25 years old are in rural areas, and these rates do not vary much based on neighborhood income. Credit invisible consumers in LMI and rural areas are less likely to enter the credit bureaus through a credit card than credit invisible consumers in other parts of the country, possibly because piggybacking is notably less common in LMI communities. Moreover, using student loans to become credit visible is also less common in LMI areas. Recent immigrants also have trouble entering the credit system when they come to the United States. Existing credit history from other countries does not transfer to the U.S. system. In addition, immigrants' alternative forms of identification, such as the Individual Taxpayer Identification Numbers (ITINs) might not be accepted by some financial services providers. Expanding Credit Visibility Policy Issues Consumers without a credit record have trouble accessing credit, but without access to credit, a consumer cannot establish a credit record. In general, there are two ways that policymakers tend to approach this issue, either by (1) expanding uptake of financial products reported in the current system or (2) expanding the types of information in the credit reporting system using alternative data. Expanding Use of Currently Reported Products The first approach often focuses on financial education and entry-level products. Financial education and partnerships between financial services providers and nonprofit groups may help consumers learn how credit reporting works, develop a credit history, and become scorable. For example, financial wellness programs at workplaces are a growing way to deliver these types of programs. Yet financial education, coaching, and counseling can be expensive and difficult to provide to consumers. On the financial product side, tensions exist between expanding credit access to build a credit history and upholding consumer protection. For example, credit cards are the most common first product reported to credit bureaus, yet consumer protection regulations, such as the CARD Act of 2009, reduce young consumers' access to credit cards. Stakeholders believe that large financial services providers should develop entry-level credit products that are profitable and sustainable, without sacrificing consumer protections. For example, secured credit cardsâwhich are "secured" by a consumer deposit, so the issuer faces little risk of defaultâcan help establish a credit history, but currently, are less likely to move consumers to credit visibility than unsecured (regular) credit cards. Some consumer advocates believe that the security deposit is an obstacle for lower-income consumers. This issue epitomizes the difficulty in developing credit-building financial products for unscorable consumers that are safe, accessible, and prudent for the financial institution. Using Alternative Data in Credit Reports Alternative data generally refers to data that the national consumer reporting agencies do not traditionally use (e.g., information other than traditional financial institution credit repayments) to calculate a credit score. It can include both financial and nonfinancial data. In a 2017 Request for Information, the CFPB included examples of alternative data, such as payments on telecommunications; rent or utilities; checking account transaction information; educational or occupational attainment; how consumers shop, browse, or use devices; and social media information. Alternative data could potentially be used to expand access to credit for current credit invisible or unscorable consumers, but it also could create data security risks or consumer protection violations. Alternative data used in credit scoring could increase accuracy, visibility, and scorability in credit reporting by including additional information beyond that which is traditionally used. The ability to calculate scores for the credit invisible or unscoreable consumer groups could allow lenders using these scores to better determine the creditworthiness of people in these groups. Arguably, this would increase access toâand lower the cost ofâcredit for some credit invisible or unscorable individuals, as lenders using alternative data are able to find new creditworthy consumers. However, in cases where the alternative data includes negative or derogatory information, it has the potential to harm some consumers' existing credit scores. Some prospective borrowers may be unaware that alternative data has been used in credit decisions, raising privacy and consumer protection concerns. Moreover, alternative data may pose fair lending risks if the data used are correlated with characteristics, such as race or ethnicity. Using alternative data for credit reporting raises regulatory compliance questions, which may be why adaption of alternative data in the credit reporting system is currently limited. The main statute regulating the credit reporting industry is the Fair Credit Reporting Act (FCRA), which establishes consumers' rights in relation to their credit reports, as well as permissible uses of credit reports. It also imposes certain responsibilities on those who collect, furnish, and use the information contained in consumers' credit reports. Alternative data providers outside of the traditional consumer credit industry may find FCRA data furnishing requirements burdensome. Some alternative data may have accuracy issues, and managing consumer disputes requires time and resources. These regulations may discourage some organizations from furnishing alternative data, even if the data could help some consumers become scorable or increase their credit scores. In an effort to address such concerns, many consumer data industry firms use alternative data only when consumers' opt-in. Using alternative data for credit reporting may continue to be the subject of congressional interest and legislative proposals. In the 116 th Congress, the House Financial Services Committee marked up and ordered reported H.R. 3629 , which among other things directs the CFPB to report to Congress on the impact of using nontraditional data on credit scoring. In addition, other legislation introduced allows types of alternative data to be furnished to the credit bureaus ( S. 1828 , H.R. 4231 ). Access to Affordable Small-Dollar Credit Short-term, small-dollar loans are consumer loans with relatively low initial principal amounts, often less than $1,000, with relatively short repayment periods, generally for a small number of weeks or months. Small-dollar loans can be offered in various forms and by both traditional financial institutions (e.g., banks) and alternative financial services providers (e.g., payday lenders). Many U.S. consumers do not have access to affordable small-dollar credit; often for these consumers, small-dollar credit is either expensive or difficult to access. The extent to which borrowers' financial situations would be harmed by using expensive credit or having limited access to credit is widely debated. Credit is an important way households pay for unexpected expenses and compensate for emergencies, such as a car or home repair, a medical expense, or a pay cut. Credit that can be paid back flexibly is particularly valued by consumers, especially those living paycheck to paycheck. Research suggests that access to this type of short-term credit can help households during short-term emergencies, yet unsustainable debt can harm households. Consumer groups often raise concerns regarding the affordability of small-dollar loans. Some borrowers may fall into debt traps , situations where borrowers repeatedly roll over existing loans into new loans and find it difficult to repay outstanding balances. Regulations aimed at reducing costs for borrowers may result in higher costs for lenders, possibly limiting or reducing credit availability for financially distressed individuals. This section focuses on expanding access to affordable small-dollar credit. Policymakers continue to be interested in ways to increase access to affordable credit because it is an important step in achieving financial stability. Access to Traditional Bank Credit Products About 80% of U.S. households have access to bank or traditional financial institution credit products, such as a general or store credit card, a mortgage, an auto loan, a student loan, or a bank personal loan. Credit cards are the most common form of credit, and they are what most households use for small-dollar credit needs. In general, banks require a credit score or other information about the consumer to prudently underwrite a loan. Scorable and credit-worthy consumers are in a position to gain access to credit from traditional sources. Financial institutions also sometimes provide consumer loans to existing customers, even if the borrower lacks a credit score (e.g., a consumer with a checking account who is a student or young worker). Some institutions make these loans to build long-term relationships. The remaining 20% of households do not have access to any traditional bank credit products, generally because they are either unscorable or have a blemished credit history. They are more likely to be unbanked, low-income, and minority households. Not having access to traditional bank credit is also correlated with age, formal education, disability status, and being a foreign-born noncitizen. According to an FDIC estimate, 12.9% of households had unmet demand for bank small-dollar credit. Of these households interested in bank credit, over three-quarters were current on bills in the last year, suggesting these households might be creditworthy. Policymakers often face a trade-off between consumer protection and access to credit when regulating the banking sector. Consumer protection laws at the state and federal levels often limit the profitability of small-dollar, short-term loans. For example, legislation such as the CARD Act of 2009 placed restrictions on subprime credit card lending. Small-dollar, short-term loans can be expensive for banks to provide. Although many of the underwriting and servicing costs are somewhat fixed regardless of size, smaller loans earn less total interest income, making them more likely to be unprofitable. Moreover, excluded consumers often are either unscorable or have a blemished credit history, making it difficult for banks to prudently underwrite loans for these consumers. In addition, banks face various regulatory restrictions on their permissible activities, in contrast to nonbanks. For these reasons, many banks choose not to offer credit products to some consumers. Nevertheless, banks have demonstrated interest in providing certain small-dollar financial services such as direct deposit advances, subprime credit cards, and overdraft protection services. In these cases, banks may face regulatory disincentives to providing these services, because bank regulators and legislators have sometimes demonstrated concerns about banks providing these products. For example, before 2013, some banks offered deposit advance products to consumers with bank accounts, which were short-term loans paid back automatically out of the borrower's next qualifying electronic deposit. Research findings from the CFPB suggest that although deposit advance was designed to be a short-term product, many consumers used it intensively. In the CFPB's sample, the median user was in debt for 31% of the year. Because of this sustained use and concerns about consumer default risk, in 2013, the Office of the Comptroller of the Currency (OCC), FDIC, and Federal Reserve issued supervisory guidance, advising banks to make sure deposit advance products complied with consumer protection and safety and soundness regulations. Many banks subsequently discontinued offering deposit advances. At the same time, regulators and policymakers have implemented policies aimed at increasing credit availability. Regulation implemented pursuant to the CRA (the 1977 law discussed in the "Access to Checking and Other Banking Accounts" section above) encourages banking institutions to meet the credit needs of consumers in the areas they serve, particularly in LMI neighborhoods that tend to include these excluded consumers. However, the CRA applies only to individuals with an established relationship with a bank, excluding unbanked consumers in an area. Likewise, many small-dollar loan products may not be considered qualifying activities. Moreover, the CRA does not encourage banks from engaging in unprofitable activities, so the incentives it creates might be limited. Credit Alternative Financial Products Credit alternative financial products include payday loans, pawn shop loans, auto title loans, and other types of loan products from nonbank providers. According to the FDIC, 6.9% of American households used a credit alternative financial service in 2017. Households that rely on credit alternative financial services are more likely to be lower-income, younger, and a racial or ethnic minority compared with the general U.S. population. Some argue that credit alternative financial products are expensive and are more likely than bank products to lead to debt traps. Bank small-dollar credit may be less expensive for prime borrowers with credit histories or relationships with banks. For other consumers, credit alternative financial products might better serve their needs due to fee structure or less stringent underwriting. Yet, some of these consumers may not have access to bank products and thus rely on credit alternative financial products for their credit needs. New Technology and Market Developments New technology may have the potential to help expand access to affordable credit to underserved consumers. For example, new nonbank digital or mobile-based financial products may lower the cost to provide small-dollar loans, making it easier to expand credit access to the underserved. Other nonbank products try to reduce default risk, for example, through employer-based lending models, to expand access to credit for more consumers. In addition, some lenders choose not to rely solely on the credit reporting system, and instead use alternative data directly to make credit decisions. New products that use alternative data on prospective borrowersâeither publicly or with the borrower's permissionâmay be able to better price lenders' default risk, which could expand credit access or make credit cheaper for some consumers. Recent findings suggest that some types of alternative dataâsuch as education, employment, and cash-flow informationâmight be promising ways to expand access to credit. For example, initial results from the Upstart Network's credit model, which uses alternative data to make credit and pricing decisions, shows that the model expands the number of consumers approved for credit, lowers the rate consumers pay for credit on average, and does not increase disparities based on race, ethnicity, gender, or age. Moreover, another recent study suggests that cash-flow data may more accurately predict creditworthiness, and its use would expand credit access to more borrowers, while meeting fair lending rules. One market segment is particularly illustrative of this practice. With the proliferation of internet access and data availability, some new lendersâoften referred to as marketplace lenders or fintech lendersârely on online platforms and frequently underwrite loans using alternative data. Although fintech lending remains a small part of the consumer lending market, it has grown rapidly in recent years. According to the Government Accountability Office (GAO), "in 2017, personal loans provided by these lenders totaled about $17.7 billion, up from about $2.5 billion in 2013." In addition, incumbent bank and nonbank lenders have adopted certain of these technologies and practices to varying degrees, and in some cases have partnered or contracted with fintech companies to build or run online, algorithmic platforms. Yet, despite the potential of new technology in small-dollar lending markets, these technologies also create risks for consumers. For example, new digital technology exposes consumers to data security risks. In addition, lenders' alternative data used to make credit decisions could result in disparate impacts or other consumer protection violations. Possible Policy Responses Policymakers and observers will likely continue to explore ways to make affordable and safe credit accessible to a greater portion of the population (in addition to including more people in the credit reporting system, as discussed in a previous section of the report). Changes to bank regulation could encourage more banking institutions to increase access to credit to underserved consumers. For example, some question the effectiveness of how the CRA is currently implemented, particularly with regard to short-term, small-dollar loans. As bank regulators consider updating the CRA, the Federal Reserve said that another area they are considering changing, due to public feedback, is expanding CRA-eligible products and services, such as payday loan alternatives and other small-dollar short-term loans for LMI consumers. Yet, as stated earlier in the report, bank regulators need to balance new CRA criteria with federal prudential regulations for safety and soundness , which requires banks to prudently undertake CRA-qualified activities and not engage in activities that are likely unprofitable to the bank. Reducing regulatory barriers may also allow more banking institutions to increase access to credit to underserved consumers. Financial regulators have taken recent steps to encourage banks to re-enter the small-dollar lending market. In October 2017, the OCC rescinded the 2013 guidance, and in May 2018 issued a new bulletin to encourage their banks to enter this market. In November 2018, the FDIC solicited advice about how to encourage more banks to offer small-dollar credit products. It is unclear whether these efforts will encourage banks to enter the small-dollar market with a product similar to deposit advance. In terms of using new technology and alternative data in consumer lending, questions exist about how to comply with fair lending and other consumer protection regulations. Currently, the federal financial regulators are monitoring these new technologies, but they have not provided detailed guidance. In February 2017, the CFPB requested information from the public about the use of alternative data and modeling techniques in the credit process. Information from this request led the CFPB to outline principles for consumer-authorized financial data sharing and aggregation in October 2017. These nine principles include, among other things, consumer access and usability, consumer control and informed consent, and data security and accuracy. According to the GAO, both fintech lenders and federally regulated banks that work with fintech lenders reported that additional regulatory clarification would be helpful. Therefore, the GAO recommended "that the CFPB and the federal banking regulators communicate in writing to fintech lenders and banks that partner with fintech lenders, respectively, on the appropriate use of alternative data in the underwriting process." Lastly, some advocate for the federal government providing small-dollar short-term loans to consumers directly if the private sector leaves some underserved, for example, through postal offices. Yet, providing credit to consumers is more risky than providing bank accounts or other banking services because some consumers will default on their loans. Opponents of the government directly providing consumer loans often centers on concerns about the federal government managing the credit risks it would undertake. These opponents generally argue that the private sector is in a more appropriate position to take these risks. Conclusion Access to bank and other payment accounts, the credit reporting system, and affordable short-term small-dollar credit are generally considered foundational for households to manage their financial affairs, improve their financial well-being, and graduate to wealth building activities in the future. In the United States, robust consumer credit markets allow most consumers to access financial services and credit products to meet their needs in traditional financial markets. Yet currently, consumers tend to rely on family or community connections to get their first bank account, establish a credit history, and gain access to affordable and safe credit. Given the importance of financial inclusion to financial well-being, and the challenges facing certain segments of the population, this topic is likely to continue to be the subject of congressional interest and legislative proposals. As markets develop and technology continues to change, new financial products have the potential to lower costs and expand access. Yet, as this report described, relevant laws and regulations may need to be reconsidered or updated in response to these technological developments. Moreover, policymakers may consider whether other policy changes could help expand consumers' affordable access to these financial products and services. Disagreements will continue to exist around whether government programs or regulation should be used to directly support financial inclusion or whether laws and regulations make it more difficult for the private sector to create new or existing products targeted at underserved consumers.


Background Corrosion is defined in section 2228 of Title 10, U.S. Code, as the deterioration of a material or its properties due to a reaction of that material with its chemical environment. Corrosion can take varied forms, such as rusting, pitting, galvanic reaction, calcium or other mineral build- up, degradation due to ultraviolet light exposure, and mold, mildew, or other organic decay. Corrosion can be either readily visible or microscopic. To provide leadership on corrosion matters, including the development of policy guidance and oversight, consistent with section 2228, DOD has established an organizational structure that includes the Corrosion Office and Corrosion Executives. The Director of the Corrosion Office is to provide oversight and coordination of corrosion control and prevention efforts for the department. The military departments have each assigned officials to serve as Corrosion Executives. The Corrosion Executives operate within the chain of command of their respective military departments, while also coordinating with the Corrosion Office. DOD Has Relocated the Corrosion Office, but It Continues to Perform Its Statutory Roles and Responsibilities and Is Making Plans for Future Operations DOD Relocated the Corrosion Office within the Restructured Acquisition and Sustainment Organization in Fiscal Year 2018 Prior to August 2018, the Corrosion Office reported directly to the Under Secretary of Defense for Acquisition, Technology, and Logistics. In 2018 the Corrosion Office was relocated within DOD, after section 901 of the National Defense Authorization Act for Fiscal Year 2017 (Pub. L. No. 114- 328, hereinafter referred to as the Act) required DOD to restructure parts of the Office of the Secretary of Defense. Among other things, the Act eliminated the Under Secretary of Defense for Acquisition, Technology, and Logistics, and it created: The Under Secretary of Defense for Research and Engineering, who, among other things, serves as the principal advisor to the Secretary of Defense on all research, engineering, and technology development activities and programs in DOD. The Under Secretary of Defense for Acquisition and Sustainment, who, among other things, serves as the principal advisor to the Secretary of Defense on acquisition and sustainment in DOD. In addition, the Under Secretary establishes policies on and supervises all elements of DOD relating to acquisition and sustainment. As part of this restructure, effective August 1, 2018, DOD relocated the Corrosion Office within the department’s restructured acquisition and sustainment organization, as shown in figure 1. The Corrosion Office is now located within the department’s Office of the Under Secretary of Defense for Acquisition and Sustainment. Within this office, the Deputy Assistant Secretary of Defense for Materiel Readiness oversees the Corrosion Office. The Deputy Assistant Secretary of Defense for Materiel Readiness is a principal advisor to the Assistant Secretary of Defense for Sustainment; provides integration and oversight of DOD’s maintenance program; and develops policies and procedures for materiel readiness and maintenance support of DOD’s major weapon systems and military equipment. The Deputy Assistant Secretary of Defense for Materiel Readiness stated that he is supportive of the Corrosion Office’s mission and views its move to the Materiel Readiness organization as fitting in with the other areas under his oversight. Officials representing the military departments’ Corrosion Executives also stated that they support DOD’s organizational movement of the Corrosion Office. They stated that they continue to find the Corrosion Office to be helpful in establishing corrosion prevention standards and in providing opportunities for networking and information sharing by means of triannual corrosion forums. In addition, they stated that they have found the Deputy Assistant Secretary of Defense for Materiel Readiness to be supportive of corrosion oversight and prevention in their meetings with him. Since August 1, 2018, the Corrosion Office has had an acting director. According to a Corrosion Office official, the Deputy Assistant Secretary of Defense for Materiel Readiness is involved in the ongoing hiring process for a permanent director. According to a Corrosion Office official, the time frame in which a permanent director is projected to be in place is Spring 2019. The Relocated Corrosion Office Continues to Perform Its Statutory Roles and Responsibilities Section 2228 of Title 10, U.S. Code, contains provisions regarding the duties and responsibilities of the Director of the Corrosion Office. Specifically, these duties and responsibilities include the following: overseeing and coordinating efforts throughout DOD to prevent and mitigate corrosion of military equipment and infrastructure, and developing and recommending corrosion policy guidance to be issued by the Secretary of Defense; developing and implementing, on behalf of the Secretary of Defense, a long-term strategy to reduce corrosion and the effects of corrosion on military equipment and infrastructure; reviewing corrosion programs and funding levels proposed by the military departments during the annual internal DOD budget review process as those programs and funding proposals relate to programs and funding for the prevention and mitigation of corrosion, and submitting recommendations regarding those programs and proposed funding levels to the Secretary of Defense; providing oversight and coordination of efforts within DOD to prevent or mitigate corrosion during the design, acquisition, and maintenance of military equipment, as well as the design, construction, and maintenance of infrastructure; monitoring DOD acquisition practices to ensure that the use of corrosion prevention technologies and the application of corrosion prevention treatments are fully considered during research and development in the acquisition process; and ensuring that, to the extent determined appropriate for each acquisition program, such technologies and treatments are incorporated into that program, particularly during the engineering and design phases of the acquisition process. The Corrosion Office continues to perform the duties outlined in section 2228, as evidenced below. Specifically, the Corrosion Office is taking the following actions: Developing and recommending corrosion policy guidance. DOD previously developed and issued an instruction that establishes policy, assigns responsibilities, and provides guidance for corrosion prevention and mitigation. The Corrosion Office, via a working group in a working integrated product team, plans to update this DOD instruction. The working group intends for the updated DOD instruction to reflect the Corrosion Office’s movement within DOD’s restructured acquisition and sustainment organization; any statutory changes made to section 2228 since it was last issued; direction from the new acquisition and sustainment leadership; and any changes made to address the findings and recommendations in our 2018 report. Additionally, the Corrosion Office plans to create a new DOD manual on corrosion that, according to Corrosion Office officials, will contain operating procedural details on, among other items, conducting and recording the Corrosion Office’s review and evaluation processes. According to Corrosion Office officials, the Corrosion Office’s target time frame for updating this DOD instruction and creating this new manual is by the end of calendar year 2020. Also, since July 2018 the Corrosion Office has been reviewing other DOD policy guidance to identify relevant documents in which corrosion content should be added or updated. Corrosion Office officials stated that the new director will update existing corrosion prevention and mitigation policy guidance, directives, and instructions in coordination with the military departments’ Corrosion Executives, under the guidance of the Deputy Assistant Secretary of Defense for Materiel Readiness. Developing and implementing a long-term strategy to reduce corrosion and its effects. In 2015 DOD issued a long-term strategy for preventing and mitigating corrosion that calls for implementing DOD- wide standards and improving strategies and processes to prevent, detect, and treat corrosion. According to Corrosion Office officials, there was a planning meeting for the working integrated product teams’ leads and co-leads in mid-March 2019. At this meeting, the team leads and co-leads prepared a draft update to the long-term strategy, which had last been updated in 2015. These officials told us that examples of changes included in the draft update are revised goals, objectives, and metrics. In addition, these officials told us that the draft update was aligned to reflect the DOD sustainment and materiel readiness mission statements and objectives articulated by the Assistant Secretary of Defense for Sustainment and the Deputy Assistant Secretary of Defense for Materiel Readiness. According to Corrosion Office officials, this draft plan is being reviewed internally, and the Corrosion Office’s target time frame is to update it by the end of calendar year 2020. Reviewing corrosion programs and funding levels proposed by the military departments and submitting related recommendations to the Secretary of Defense. As it did prior to the restructure, the Corrosion Office continues to review the military departments’ proposed corrosion-related programs and funding levels during the annual internal DOD budget review process. In addition, it continues to annually submit a report to Congress on corrosion funding with the defense budget materials. As part of this process, the Corrosion Office collected information from the Corrosion Executives on the corrosion control and prevention programs within the respective military departments. The Corrosion Office in Autumn 2018 included the information provided by each Corrosion Executive as appendixes in its annual report on corrosion funding. The fiscal year 2020 report was submitted to Congress on February 15, 2019. Monitoring and ensuring that corrosion prevention and mitigation are incorporated into acquisition and maintenance programs. As we reported in November 2018, Corrosion Office officials told us that they continue to perform the Corrosion Office’s acquisition and maintenance-related duties. For instance, the Corrosion Office continues to review acquisition documentation, such as Systems Engineering Plans, and to maintain information on hundreds of technologies for preventing and mitigating corrosion. In November 2018 we recommended that the Corrosion Office develop a process to maintain documentation of its reviews of corrosion planning for major weapon system programs. Further, we stated that these records, at a minimum, should show what comments were made by the Corrosion Office in its reviews and evaluations, and should track the actions taken to resolve those comments. DOD concurred with this recommendation and stated that the Corrosion Office would develop and maintain such a process. More specifically, Corrosion Office officials stated that they plan to describe this process in a new DOD manual on corrosion. According to Corrosion Office officials, the DOD manual will also include information on considering corrosion during the weapon system program-planning evaluation process. In addition, the Corrosion Office plans to develop an internal data system that these officials told us will track its reviews and evaluations along with the weapon system programs’ responding actions. According to Corrosion Office officials, their target time frame is to create this new manual and internal data system by the end of calendar year 2020. Corrosion Office officials told us that they have not changed the way in which they carry out additional authorities identified in section 2228. For example, the Corrosion Office continues to develop and deliver corrosion training with the Defense Acquisition University. In addition, it continues to interact with industry, trade associations, other government corrosion prevention agencies, academic research and educational institutions, and a scientific organization engaged in corrosion prevention. DOD Is Making or Planning Changes for Some of the Ways in Which the Corrosion Office Operates According to the Deputy Assistant Secretary of Defense for Materiel Readiness, he is working to change some of the ways in which the Corrosion Office operates. Specifically, he is working to increase the following: corrosion advocacy throughout DOD; oversight of the Corrosion Office; the accountability of the military departments and the Corrosion Office to mitigate corrosion; and the transparency of corrosion and its alignment with materiel readiness. One of the efforts made by the Corrosion Office for achieving these objectives is by providing funding for corrosion technology demonstration projects proposed and implemented by the military departments. According to Corrosion Office officials, the Deputy Assistant Secretary of Defense for Materiel Readiness changed the process for awarding fiscal year 2019 funding by obtaining feedback from the military departments’ Corrosion Executives as to which project proposals should receive funds. Officials representing the military departments’ Corrosion Executives confirmed that they were able to provide such feedback. Corrosion Office officials told us that, as of April 2019, they had selected and funded demonstration projects for fiscal year 2019 in part based on the information provided by the military departments. In addition, the Deputy Assistant Secretary of Defense for Materiel Readiness stated that he wanted to have more of an emphasis on funding demonstration projects that would be beneficial to all of the military services. According to Corrosion Office officials, another effort they undertook at the direction of the Deputy Assistant is that of working to make the Corrosion Office more cost-efficient by streamlining the number of professional services and other support contracts it awards. For example, Corrosion Office officials stated that by consolidating five contracts for professional services and reporting on the cost of corrosion into a single contract by a target date of mid-July 2019, they estimate achieving savings of approximately $2 million. In another effort, the Deputy Assistant Secretary of Defense for Materiel Readiness provided written feedback to each of the military departments’ Corrosion Executives in March 2019 on their respective departments’ corrosion control and prevention programs. Specifically, the feedback concerned whether each military department’s calendar year 2018 corrosion report complied with statutory requirements; each department’s strengths and weaknesses related to its corrosion efforts; and recommendations each department had identified for itself to implement. DOD’s Corrosion Office Has Taken Action or Plans to Take Action to Implement Most of GAO’s Recommendations In calendar years 2003 through 2018, we made 35 recommendations to the Corrosion Office in 11 corrosion-related products on topics such as strategic planning, performance management, and mandatory oversight reports. In responding to these products, DOD initially concurred with 16 of those recommendations, partially concurred with eight, and non- concurred with 11. As of March 2019 DOD’s Corrosion Office had taken action or had plans to take action on most of our recommendations. Specifically, out of 35 recommendations, DOD’s Corrosion Office had taken action on 18 recommendations, including sufficient action for us to close those recommendations as implemented; planned to take action to implement 12 additional recommendations. These planned actions include, among other actions, updating existing guidance and developing new policy or processes; and did not plan to take action on the remaining five recommendations. Corrosion Office officials stated that they did not plan to take action on these recommendations for a variety of reasons. For instance these officials stated that the Corrosion Office did not have the authority over the military departments to take the recommended actions. We continue to believe our recommendations are valid. Appendix I summarizes all 35 recommendations and DOD’s response to each recommendation at the time of our report and provides information, as of March 2019, on DOD’s actions or planned actions to address each recommendation. In some instances DOD had taken action or planned to take action on recommendations with which it had not concurred at the time of our report. Agency Comments We provided a draft of this report to DOD for review and comment. DOD concurred with the draft and had no technical comments. We are sending copies of this report to the appropriate congressional committees and to the Acting Secretary of Defense and the Under Secretary of Defense for Acquisition and Sustainment. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or our staff have any questions about this report, please contact me, Diana Maurer, at (202) 512-9627 or maurerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs are listed on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. Appendix I: GAO Recommendations to the Department of Defense (DOD) Corrosion Office and DOD’s Response and Actions Appendix II: GAO Contact and Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Marilyn Wasleski (Assistant Director), Dawn Godfrey, Shvetal Khanna, Amie Lesser, Edward Malone, Nathan J. Napolitano, Carter Stevens, and Cheryl Weissman made key contributions to this report.


S ince the U.S. Small Business Administration's (SBA's) creation in 1953, the SBA Disaster Loan Program has provided low-interest disaster loans to businesses to help them repair, rebuild, and recover from federally declared disasters. SBA business disaster loans fall into two categories: (1) Economic Injury Disaster Loans (EIDL), and (2) business physical disaster loans. EIDLs provide up to $2 million for working capital to help small businesses meet financial obligations and operating expenses that could have been met had the disaster not occurred. Loan amounts for EIDLs are based on actual economic injury and financial needs, regardless of whether the business suffered any property damage. Business physical disaster loans provide up to $2 million to businesses of all sizes to repair or replace damaged physical property, including machinery, equipment, fixtures, inventory, and leasehold improvements that are not covered by insurance. In addition to repairing and replacing damaged physical property, a portion of the loans can also be applied toward mitigation measures, including grading or contouring land, installing sewer backflow valves, relocating or elevating utilities or mechanical equipment, building retaining walls, and building safe rooms or similar structures designed to protect occupants from natural disasters. The limits on post-disaster mitigation loans are the lesser of either the measure or 20% of the verified loss. An important aspect of the SBA Disaster Loan Program is that a business must already be damaged and be located in a federally declared disaster area to apply a portion of its disaster loan toward mitigation measures. As will be discussed in this report, Congress experimented with business pre-disaster mitigation (PDM) through a pilot program operated by the SBA from FY2000 to FY2006. Providing mitigation assistance to businesses after a disaster is arguably consistent with the mitigation policies of other federal programs. For example, the Federal Emergency Management Agency (FEMA) provides both pre-disaster and post-disaster mitigation grants to states and localities, but post-disaster mitigation grants are substantially larger than pre-disaster grants. For example, from FY2014 to FY2018, $3.35 billion was spent on post-disaster mitigation grants through FEMA's Hazard Mitigation Grant Program (HMGP) and Fire Management Assistance Grants (FMAGs). In contrast, during the same period, $430 million was spent on FEMA's Pre-Disaster Mitigation (PDM) program (see Figure 1 ). Figure 1. FEMA Pre-Disaster Mitigation Funding and Post-Disaster MitigationÂ FundingFY2014-FY2018Source: Data obtained from FEMA, Data Feeds, https://www.fema.gov/data-feeds. Notes: PDM denotes FEMA's Pre-Disaster Mitigation Program. HMGP denotes FEMA's Hazard Mitigation Grant Program. FMA denotes fire management assistance provided by FEMA's Fire Management Assistance Grants. Funding for pre-disaster mitigation, however, may increase with the enactment of the Disaster Recovery Reform Act of 2018 (DRRA, Division D of P.L. 115-254 ). Section 1234 of DRRA authorized the National Public Infrastructure Pre-Disaster Mitigation Fund (NPIPDM), which allows the President to set aside 6% from the Disaster Relief F und (DRF) with respect to each declared major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act, P.L. 93-288 , as amended; 42 U.S.C. Â§Â§5121 et seq.). This 6% "set aside" is the aggregate amount funded by the following sections of the Stafford Act: 403 (essential assistance); 406 (repair, restoration, and replacement of damaged facilities); 407 (debris removal); 408 (federal assistance to individuals and households); 410 (unemployment assistance); 416 (crisis counseling assistance and training); and 428 (public assistance program alternative procedures). Although post-disaster and pre-disaster mitigation are not mutually exclusive, there are reasons why one may be favored over the other. The following section provides the underlying rationale for the two approaches to mitigation. Rationale for Post-Disaster vs. Pre-Disaster Mitigation Over the years, scholars, researchers, and policymakers have debated whether mitigation is more effective before or after an incident. The following sections list the rationales for each approach. Post-Disaster Mitigation The underlying rationales for providing post-disaster mitigation include incidents such as floods and hurricanes are known to recur in the same areas. Post-disaster mitigation targets those areas to protect them from future disasters; post-disaster mitigation helps ensure that the opportunity to take mitigation measures to reduce the loss of life and property from disasters is not lost during the reconstruction process following a disaster; the recovery phase of an incident may be the most ideal time to introduce new structural changes because damaged structures are already in the process of being replaced and rebuilt; post-disaster mitigation can be used to support a "build back better" approach to avoid or reduce future disaster damages; providing mitigation funding after an incident is programmatically easier to administer because the grants are concomitant with a federally declared incident. In contrast, pre-disaster projects have generally been awarded on a competitive basisâeach application must be scrutinized and prioritized over other applications; and policymakers may find it difficult to justify or defend expenditures for incidents that may not occur for long periods of time (or never occur). This may be particularly true during periods of heightened concern over the federal budget. Pre-Disaster Mitigation Others may argue that mitigation is more effective when implemented before rather than after an incident. The rationales for pre-disaster mitigation include post-disaster mitigation may fail to address vulnerable areas that have not had a major disaster declaration; and studies indicate that mitigation can significantly reduce recovery costs. For example, a study published by the National Institute of Building Sciences found that for every $1 that FEMA spent on mitigation grants, there is a $6 dollar return of avoided losses in the future. Those savings, however, cannot be calculated until there are subsequent disasters. SBA Pre-Disaster Mitigation Loan Pilot Program Based on findings similar to the one issued by the National Institute of Building Sciences, Congress in 1999 passed P.L. 106-24 which amended the Small Business Act to include a Pre-Disaster Mitigation (PDM) pilot program. The program authorized SBA to make low-interest (4% or less) fixed-rate loans of no more than $50,000 per year to small businesses to implement mitigation measures designed to protect small businesses from future disaster-related damage. Section 1(a) of P.L. 106-24 authorized the SBA during fiscal years 2000 through 2004, to establish a predisaster mitigation program to make such loans (either directly or in cooperation with banks or other lending institutions through agreements to participate on an immediate or deferred (guaranteed) basis), as the Administrator may determine to be necessary or appropriate, to enable small businesses to use mitigation techniques in support of a formal mitigation program established by the Federal Emergency Management Agency, except that no loan or guarantee may be extended to a small business under this subparagraph unless the Administration finds that the small business is otherwise unable to obtain credit for the purposes described in this subparagraph. The SBA PDM pilot program was developed in support of "Project Impact," a new FEMA mitigation program that emphasized disaster prevention rather than solely relying on response and recovery activities. Similarly, SBA PDM loans were intended to lessen or prevent future damages to businesses. According to the House report on H.R. 818 (the companion bill to S. 388 , which became P.L. 106-24 ) The cost of disaster assistance has risen over the past several years due to increases in construction and other costs. By implementing a program to help small businesses use techniques that would lessen damage in the event of natural disasters the possibility exists to save millions of dollars in potential losses. The report also stated that the Administrator of the Small Business Administration, testified concerning the SBA's request for $934 million dollars in disaster loans for anticipated damage in the coming year. She also discussed FEMA and SBA's current efforts at mitigation and stated that FEMA estimates a $2 saving for every $1 spent on mitigation. The Administrator expressed strong support for H.R. 818 . Section 1(c) of P.L. 106-24 required the SBA Administrator to submit a report to Congress on the effectiveness of the pilot program. The report required information and analysis on the areas served under the pilot program; the number and dollar value of loans made under the pilot program; the estimated savings to the federal government resulting from the pilot program; and other relevant information as the Administrator determines to be appropriate for evaluating the pilot program. Congress initially authorized appropriations of $15 million each fiscal year to carry out the PDM pilot program for FY2000 through FY2004. Congress later extended the program until the end of FY2006 and authorized an additional $15 million for the program in FY2005 and $15 million in FY2006. Since its expiration at the end of FY2006, many Members have discussed the possibility of reauthorizing the PDM pilot program. SBA PDM Pilot Program Performance According to SBA, four loans were approved during the SBA PDM pilot program, with a total gross approval amount of $101,400 (a small fraction compared to the $105 million Congress authorized to be appropriated to the program over the seven-year period of its existence). Two of the loans defaulted and the other two loans (amounting to $52,400) were repaid in full. As mentioned previously, Section 1(c) of P.L. 106-24 required the SBA Administrator to submit a report to Congress on the effectiveness of the pilot program, including the areas served and dollar amounts provided under the program, estimated savings resulting from the SBA PDM pilot program, and other relevant information. A CRS search of databases could not locate the required report on the effectiveness of the pilot program and the SBA could not verify whether the report was ever submitted. The following sections describe the possible reasons for the lack of participation in the SBA PDM pilot program. Challenges to the Success of the SBA PDM Pilot Program The limited number of businesses that participated in the SBA PDM pilot program may be attributable to its alignment with FEMA programs . Aligning the two programs m ay have (1) limited the time frame to obtain a PDM loan, and (2) limited the number of businesses eligible for PDM loans . Additionally, businesses may not have been aware that pre-disaster loans were being made available through the SBA PDM pilot program. Limited Time Frame The SBA PDM pilot loan program was created in conjunction with FEMA's pre-disaster mitigation program, dubbed Project Impact. Because the two programs were aligned, the time frame in which businesses could apply for PDM loans was limited by a series of delays in the implementation of the FEMA program. That may help explain, in part, why so few businesses obtained SBA PDM loans. According to SBA, the PDM program rules were effective as of October 1, 1999. However, communities could not apply to be accepted as a pre-disaster mitigation eligible community because FEMA had not yet implemented Project Impact. Project Impact's implementation was further delayed "pending appropriations in the FY2002 Departments of Veterans Affairs, Housing and Urban Development and Independent Agencies Appropriations Act." On November 26, 2001, the appropriations act provided $25 million to FEMA for its pre-disaster mitigation grant program. Upon receiving the appropriation, FEMA decided to reevaluate and revamp Project Impact before its full implementationâfurther delaying the program. Once Project Impact was implemented, SBA revised rules (some in response to FEMA comments) concerning the SBA PDM pilot program before it was put into effect (see Appendix for additional information on both Project Impact and the SBA PDM pilot program). The sequence of events described above shortened the timeframe for applying for PDM loans. A CRS search of the Federal Register indicates that PDM loans first became available July 16, 2003. Limited Number of Eligible Applicants The Project Impact requirement significantly reduced the number of businesses eligible for the SBA PDM pilot program. The SBA PDM pilot program was intended to complement Project Impact by participating in the "whole of community approach" to disaster mitigation; SBA PDM loan eligibility was contingent on whether the business was located in a Project Impact community. The Project Impact requirement may have unintentionally limited the number of businesses eligible for PDM disaster loans. As demonstrated in Figure 2 , few communities participated in the Project Impact program. There may have been businesses in "non-Project Impact" areas that wanted SBA PDM loans but were ineligible because of the Project Impact requirement. Further limiting participation, businesses that were in Project Impact communities but not in a Special Flood Hazard Area (SFHA) were not eligible for an SBA PDM loan if it was for flood prevention measures. Finally, though the SBA PDM loan pilot program continued until FY2006, Project Impact was replaced by the Pre-Disaster Mitigation (PDM) program in FY2002. According to then-FEMA Director Joe M. Allbaugh: I want to take the "concept" of Project Impact and fold it in to the program of mitigation. Project Impact is not mitigation. It is an initiative to get "consumer buy-in." In many communities it became the catch-phrase to get local leaders together to look at ways to do mitigation. The PDM program does not designate participating communities. Rather, state and local governments submit mitigation planning and project applications to FEMA. Once FEMA reviews the application for eligibility and completeness, FEMA makes funding decisions "based on the agency's priorities for the most effective use of grant funds and the availability of funds posted in the Notice of Funds Opportunity announcement." Eligibility requirements for the SBA PDM loan pilot program were not changed to reflect the new FEMA PDM program. It is unclear what effect this may have had on the SBA PDM loan pilot program. Outreach and Notifications As mentioned previously, SBA published notices in the Federal Register announcing the availability of pre-disaster mitigation loans. The notice designated a 30-day application filing period with a specific opening date and filing deadline, as well as the locations for obtaining and filling applications. In addition to the Federal Register notification, SBA coordinated with FEMA to issue press releases to inform potential applicants of the loan program. It is unclear, however, how effective these efforts were at letting businesses know PDM loans were available. Considerations for Congress and Policy Options Reauthorizing the SBA PDM Pilot Program The following considerations may help increase business participation should Congress decide to reauthorize the SBA PDM pilot program. First, implementation delays and eligibility restrictions, such as the ones described above, may not be an issue if Congress reauthorized the SBA PDM pilot program, because the pilot would no longer need to be tied to Project Impact. If Congress should desire that the program align with or support FEMA mitigation efforts, Congress may consider tying a reauthorized SBA PDM loan program to FEMA's Pre-Disaster Mitigation program, or, instead, making them available to all small U.S. domestic businesses. Second, if the SBA PDM pilot program were to be reauthorized, one option available to address outreach would be to require SBA to spend a portion of the PDM loan appropriation money on outreach, including advertising to educate businesses on the importance of mitigation to protect their investment from being damaged or destroyed by a disaster, and to help businesses become aware that PDM loans are available. Additionally, SBA could be required to provide information to Congress concerning its efforts to make businesses aware of the program, including where they could apply for a PDM loan. Further, as mentioned previously, Section 1(c) of P.L. 106-24 required the SBA Administrator to submit a report to Congress on the effectiveness of the pilot program. The report required information and analysis on: the areas served under the pilot program; the number and dollar value of loans made under the pilot program; the estimated savings to the federal government resulting from the pilot program; and other relevant information as the Administrator determines to be appropriate for evaluating the pilot program. If Congress reauthorized the SBA PDM pilot program, it could consider requiring SBA to provide similar information. Additionally, Congress could tie the report to appropriations to communicate legislative intent to carry out the reporting measure once it becomes law. Although report language itself is not law and thus not binding in the same manner as language in statute, agencies usually seek to comply with the directives contained therein. According to one congressional scholar, "the criticisms and suggestions carried in the reports accompanying each bill are expected to influence the subsequent behavior of the agency. Committee reports are not the law, but it is expected that they be regarded almost as seriously." Restructuring Existing Business Physical Disaster Loans As mentioned previously, the limits on post-disaster mitigation loans are the lesser of either the measure or 20% of the verified loss. If Congress wanted to encourage mitigation, one option would be to consider increasing this percentage to a higher amount in addition to, or instead of, reauthorizing the SBA PDM loan program. Congress could also consider doing the same for home physical disaster loans. Assistance with Continuity and Disaster Response Plans Research indicates that many businesses do not have contingency or disaster recovery plans. For example, a survey of Certified Public Accounting (CPA) firms located on Staten Island, NY, indicated that 7% of the respondents had a formal continuity or disaster recovery plan in place prior to Hurricane Sandy. The survey found that nearly 42% of those firms that had a formal continuity or disaster recovery plan admitted that they never tested their plan. Approximately 40% had an informal plan that had been discussed but not documented. More than half of the responding firms did not have a contingency or disaster recovery plan. Of those that did not have any type of a plan, 60% thought the plans were unnecessary and 20% said that establishing a plan was too time-consuming. Congress could investigate methods that would incentivize businesses to develop contingency and disaster recovery plans. This could be done through new programs or through existing ones, such as FEMA's Ready Business Program or through SBA's emergency preparedness efforts. The Ready Business Program is designed to help businesses plan and prepare for disasters by providing businesses various online toolkits that can help them identify their risks and develop a plan to address those risks. The SBA provides a range of resources to help businesses develop plans to protect employees, reduce the financial impact of a disaster, and reopen the business more quickly. Pre-Disaster Mitigation Loans for Homeowners In addition to disaster loans for businesses, SBA also provides disaster loans to homeowners. In fact, roughly 80% of SBA disaster assistance goes to individuals and households rather than businesses. Homeowners located in a declared disaster area (and in contiguous counties) may apply to SBA for loans up to $200,000 to help repair and rebuild their primary residence. Similar to businesses, only damaged homes in declared disaster areas are eligible for disaster loans. According to regulations 20% "of the verified loss (not including refinancing or malfeasance), before deduction of compensation from other sources, up to a maximum of $200,000 for post-disaster mitigation." Homeowners seeking mitigation assistance before a disaster strikes, however, must look to other sources for the assistance. In addition to mitigation measures, such as retrofitting structures, contouring land, and relocating utilities, Section 4 of the Recovery Improvements for Small Entities After Disaster Act of 2015 (RISE Act, P.L. 115-88 ) allows homeowners to use a portion of their physical damage disaster loans for the construction of safe rooms or similar storm shelters designed to protect property and occupants from tornadoes or other natural disasters. Some homeowners may wish to build a safe room or storm shelter before a disaster. If that is the case, they may be interested in a pre-disaster mitigation loan to fund its construction. Homeowners may also be interested in other pre-disaster mitigation measures. The SBA PDM pilot program, however, only provided pre-disaster loans to businesses. If reauthorized, Congress could consider expanding the program by making pre-disaster loans available to homeowners. In addition to making the program available to homeowners, Congress could consider making home pre-disaster mitigation loans contingent on homeowners insurance. This could help protect the home from future disasters and have the additional benefit of making sure that the homeowner has adequate insurance to repair and rebuild their home without additional federal assistance. Concluding Observations For nearly a century, Congress has contemplated how to help businesses repair and rebuild after a disaster and protect their investments from future incidents. Though businesses can use a portion of their SBA disaster loans for mitigation measures, critics might question why only damaged businesses are eligible for disaster loans. The SBA's PDM pilot program addressed this criticism, but the program had few participants. As described in this report, the lack of participation could have been a result of its alignment with FEMA programs related to delays in the implementation of FEMA's Project Impact, eligibility limitations, and the number of businesses that were aware that the program was available. If Congress were to reauthorize the SBA PDM pilot program, among the policy options available are decoupling the PDM loan program from FEMA programs and requiring enhanced advertising and outreach efforts. Another option would be to restructure business physical disaster loans so that a greater portion of the loan can be used for mitigation. Finally, Congress could examine methods that would help businesses develop business continuity and disaster response plans. Businesses may be more receptive to pre-disaster mitigation loans as a result of the large-scale disasters that have occurred since 2005. Prior to Hurricane Katrina, the salience of disaster issues generally, and mitigation specifically, may have been on the periphery of business concerns. While there were some large-scale disasters, the scope of those disasters tended to be regional rather than national. Furthermore, the focus of emergency management during that time was arguably more oriented toward terrorism concerns resulting from the 9/11 attacks. Consequently, the need to mitigate against future disasters may have been just one concern coequal with other, competing concerns. The policy environment may have changed as a result of hurricanes Katrina, Harvey, Irma, Maria, and Michael. These disasters, in addition to increasing concerns about the impact of climate change on the frequency and severity of disasters, may make businesses more amenable to the idea of pre-disaster mitigation loans to protect their investment from future disasters. Appendix. Project Impact and SBA PDM Pilot Loan Program Information Project Impact P.L. 104-204 established a mitigation program (which FEMA named Project Impact) to help communities make mitigation investments prior to disasters to reduce their vulnerability to future disasters. The program was based on a "whole of community" approach involving all sectors of the nation. According to the House report on the bill: The conferees agree that up to $5,000,000 of the amount provided for pre-disaster mitigation is available immediately to fund up to seven pilot projects approved by the Director of FEMA. Prior to the expenditure of the remaining funds for any specific pre-disaster mitigation program or project, the conferees direct that the appropriate level of funding be used by the Agency to conduct a formal needs-based analysis and cost/benefit study of all of the various mitigation alternatives. The results of these analyses and studies, along with any relevant information learned from the aforementioned seven pilot projects, shall be incorporated into a comprehensive, long-term National Pre-disaster Mitigation Plan. The plan should be developed, independently peer-reviewed, and submitted to the Committees on Appropriations not later than March 31, 1998. FEMA is directed to involve in this planning effort participants which shall include, but are not limited to, representatives of FEMA and other federal agencies, state and local governments, industry, universities, professional societies, the National Academy of Sciences, The Partnership for Natural Disaster Reduction, and [Centers for Protection Against Natural Disasters] CPAND. The conferees intend that none of the remaining funds provided herein be obligated until the plan has been completed and submitted as outlined above. The conferees note that this approach is intended to be the foundation for providing the best and most cost-effective solution to reduce the tremendous human and financial costs associated with natural disasters. Project Impact was designed to serve as a model for promoting mainstream emergency management and mitigation practices into every community in America. The program asked communities to identify risks and establish plans to reduce those risks. It also asked communities to establish partnerships with community stakeholders, including the business sector. Primary Tenets of Project Impact mitigation is a local issue that is best addressed through local partnerships involving the government, business, and citizens; the participation of the private sector is essential because disasters threaten the economic and commercial growth of communities; and mitigation consists of long-term efforts and requires long-investments. Methodology members of the community, including elected officials, local, state, and federal disaster personnel, business representatives, environmental groups, and citizens, joined together to form a Disaster Resistant Community Planning Committee that (1) examined risks hazards and identified vulnerabilities to them; (2) prioritized risk reduction actions based on the hazard identification and vulnerability assessment; and (3) communicated its findings and mitigation plan to other community leaders and residents. Project Impact Grants Project Impact grants were largely used to fund planning and outreach activities. The Project Impact grants could be used to fund costs associated with logistics and meetings, staff support, and travel to meetings with the community or to FEMA Project Impact meetings; training including costs to train state officials supporting Project Impact and to develop training packages for state and local officials; travel of local community officials to other communities, state meetings, or national conferences at state request to share Project Impact information; state costs in information development and dissemination to support Project Impact; and expert, short-term technical assistance support to Project Impact communities. According to a Government Accountability Office (GAO) report, state and local officials said that Project Impact has been successful in increasing awareness of and community support for mitigation efforts due to its funding of these types of activities. The same GAO report stated During fiscal years 1997 through 2001, Project Impact provided a total of $77 million to communities within every state and certain U.S. territories. Unlike the HMGP, the amount of Project Impact funding available to communities within a state was not predicated upon the occurrence of a disaster; in fact, the program was structured so that under its funding formula, communities in every state participated in the program. By 2001, there were nearly 250 communities participating in the program, with Project Impact communities receiving grants between $60,000 and $1,000,000. Appendix III lists Project Impact grants by year and community. While states selected which communities received Project Impact grants, communities were responsible for selecting the mitigation measures to fund with these grants. Similar to the HMGP, however, communities were required to provide 25 percent of the costs for the mitigation measures. The George W. Bush Administration eliminated Project Impact from the FY2002 budget and FEMA rebranded Project Impact as the Pre-Disaster Mitigation (PDM) program. The PDM program retained some of Project Impact's themes, but placed the responsibility on the governor of each state to suggest up to five communities to be considered for pre-disaster mitigation assistance. While the governor nominated potential grantees, FEMA made the final selections. In addition, under the statute, FEMA had the discretion under "extraordinary circumstances" to award a grant to a local government that had not been recommended by a governor. SBA PDM Pilot Loan Program Loan Application SBA published notices in the Federal Register announcing the availability of pre-disaster mitigation loans in 2003. The notice designated a 30-day application filing period with specific opening dates and filing deadlines, as well as the locations for obtaining and filing applications. In additional to the Federal Register notification, SBA coordinated with FEMA to issue press releases to inform potential applicants of the loan program. Businesses were required to submit a Pre-Disaster Mitigation Small Business Loan Application to SBA during the filing period. Applications had to include a written statement from the state or local coordinator confirming that the mitigation project was (1) located in a Project Impact community, and (2) in accordance with the specific priorities and goals of the community participating in the pre-disaster mitigation community. The completed application served as the loan request. Loans were provided on a first-come, first-served basis until SBA allocated all program funds. If SBA declined a loan request, SBA notified the business in writing with the rationale for the denial. SBA also advised the business of the procedures to request reconsideration of the decision. Loan Terms The SBA PDM pilot program provided businesses up to $50,000 per fiscal year to finance mitigation measures to protect commercial property, leasehold improvements, or contents from disaster-related damages that could occur in the future. Mitigation loans could also be used to relocate the business. Interest rates for the loans had a statutory ceiling set at 4% per annum. Loan Eligibility Businesses applying for SBA PDM loans had to meet certain criteria to be eligible for mitigation loans. Two, in particular, were designed to tie the SBA PDM pilot program to FEMA programs. First, as already noted, the business had to be located in a participating Project Impact community; and, second, if the mitigation measures were designed specifically to protect against flooding, the business had to be located in a Special Flood Hazard Area (SFHA). Additional criteria for loan eligibility required that the business and its affiliates lack the financial resources to fund the mitigation measures without undue hardship; the business be a small business as defined by SBA regulations; the business be in operation in the same location for at least one year; and the mitigation loan had to be used for the protection of a building leased primarily for commercial rather than residential purposes, if the business leased out real property. Businesses were not eligible for the SBA PDM Loan Program if the business: was primarily engaged in political or lobbying activities; derived more than one-third of its revenues from legal gambling activities; or owners were incarcerated, on parole, or on probation.