Evaluation of H.R. 3042—the Disaster Loan Fairness Act of 2012 The proposed legislation provides that in any major disaster declared under Section 401 of the Stafford Act, the interest rates for any SBA loan programs will be 1 percent for eligible applicants in the disaster area, with or without credit available elsewhere. The provision appears to cover all SBA loans, not just loans for repairing or replacing losses from disasters. There are several points to note about this provision. It creates a moral hazard problem by encouraging people to locate their homes and business in hazard-prone areas while at the same time reducing their economic incentive to purchase insurance and invest in mitigation measures prior to a disaster. These residents now know that they will be bailed out should they suffer losses from the next flood or hurricane, so, therefore, have much less incentive to take protective actions. The proposed program has the potential of creating a situation in which homeowners and businesses in hazard-prone areas are financially better off after a disaster than they were before the event occurred, by being able to obtain a 1 percent loan to cover their uninsured losses as well as existing debt financed by SBA loans. A hypothetical but illuminating example illustrates this point. Suppose an uninsured business has an existing 20-year $300,000 SBA loan at a 5 percent annual interest rate and then suffers a loss of $100,000 to its property and contents from a disaster. Prior to the disaster, the business’s annual payment for its SBA loan is $23,759. Under the proposed legislation, the SBA would provide this business with a $400,000 loan at an annual rate of 1 percent to cover its damages and existing SBA loans. The total monthly payment for this loan would be $22,075, which amounts to $1,684 less per year than what it is currently paying.