June 6, 2022
FEMA’s Community Disaster Loan Program: Loan Forgiveness
Local governments often need financial assistance
TCDLs must be used on a local government’s regular
following major disasters. Such incidents can cause
operating expenses or to expand operations in response to
businesses to close, people to lose jobs, and other events
the disaster. They may not be used for capital expenditures.
that decrease tax revenue, making it difficult for local
governments to perform critical functions, sometimes for
In 2005 and 2006, after Hurricanes Katrina and Rita,
years after the event. To assist in these scenarios, the
Congress passed legislation (P.L. 109-88 and P.L. 109-234)
Federal Emergency Management Agency (FEMA) has for
to create “special CDLs” (SCDLs) and set aside $1 billion
several decades offered Community Disaster Loans (CDLs)
for loans. SCDLs were subject to the same rules as TCDLs,
to help local governments with disaster-related revenue
except for (1) an increased dollar cap (up to 50% of the
shortfalls. The loans are available to local governments that
local government’s budget if revenue fell by at least 25%),
have experienced a presidentially declared major disaster
(2) allowing use only for “essential services,” primarily
and apply through their state governor’s office. CDLs are
schools, police and fire, and sanitation, as opposed to all
one component of the federal government’s suite of
operating expenses, and (3) allowing local governments to
emergency relief programs.
apply for more than one loan at a time (local governments
are limited to one TCDL). These provisions enabled the
CDLs are typically capped by Congress at $5 million and
many impacted local governments to take out loans
are conditioned on five-year terms, with FEMA able to
sufficient to meet greater financial needs.
extend the term to 10 years based on the local government’s
financial condition. In some cases, FEMA may offer partial
In 2017, following Hurricanes Harvey, Irma, and Maria,
or full CDL forgiveness without legislative action.
Congress passed supplemental appropriations that
Congress may also choose to forgive the loans. Most
transferred $4.9 billion to the CDL program (P.L. 115-72).
recently, on September 30, 2021, Congress forgave all
Although originating from the CDL program, the loans
outstanding CDLs (totaling about $860 million) in a
made with the transferred funds differed in key ways. The
continuing resolution (P.L. 117-43). This action extended
law made U.S. territories eligible for the loans and lifted the
debate about the structure of the CDL program, which has
$5 million cap, basing the loan amount on projected
continued disbursing funds since the forgiveness.
revenue losses for 180 days after the disaster. Congress
included a similar provision in a consolidated
Types and Uses of CDLs
appropriations act in 2020 (P.L. 116-260) after Typhoon
CDLs were originally authorized by the Disaster Relief Act
Yutu hit the Northern Mariana Islands. The Yutu loans
of 1974 (P.L. 93-288). The program’s authorizing language
could be made up to three fiscal years later and were based
was amended in the Robert T. Stafford Disaster Relief and
on projected revenue losses up to a year after the event.
Emergency Assistance Act (P.L. 100-707), for example by
adding the $5 million cap. In the years since, Congress has
CDL Forgiveness
authorized different types of CDLs, increasing the dollar
cap, adding eligible entities, and refining allowable uses.
Forgiveness Eligibility
All types of CDLs are or have been forgivable.
Traditional CDLs (TCDLs) are five-year loans (which may
be extended to 10 years) for either up to 25% of a local
FEMA determines TCDL forgiveness after a two-part
government’s operating budget or $5 million, whichever is
analysis. First, independent auditors hired by FEMA look at
less. If a local government’s revenue declines by at least
a local government’s financial statements for three fiscal
75%, it may receive 50% of its operating budget, up to $5
years following the disaster. If the budget data shows
million. To qualify, local governments must:
revenues not matching expenditures over that time, auditors
analyze whether existing revenue suffices to pay for the
be in a presidentially declared disaster area;
local government’s operating expenses. If not, and if the
auditors determine that the shortfall is due to the disaster,
show a loss of greater than 5% of tax and other (such as
the local government may be eligible for partial or full
administrative) revenues;
forgiveness. FEMA includes unreimbursed disaster-related
expenses (UDREs) in the total amount eligible for
not owe money on previous CDLs; and
forgiveness. UDREs are general government services, such
as garbage pickup, revenue collection, and police and fire
be permitted to take federal loans under state law.
services; they do not include spending on capital projects or
large projects involving public facilities.
https://crsreports.congress.gov
FEMA’s Community Disaster Loan Program: Loan Forgiveness
Regulations governing CDLs state that they are not to be
Policy Considerations
used for pre-disaster budget shortfalls—a relatively
CDL forgiveness has periodically drawn Congress’s
common occurrence among local governments. For this
attention. By design, CDLs are loans, not grants, meaning
reason, auditors adjust budget conditions during the three-
borrowers must demonstrate their ability to repay, despite
year examination period by the amount of any pre-existing
the possibility of forgiveness. This has raised concerns from
deficit. They also use actual revenues, rather than
some Members, as borrowers may be subject to terms that
projections. Therefore, the earliest FEMA can grant loan
are ultimately unnecessary, or must develop time-
forgiveness is three years after a disaster.
consuming, potentially superfluous repayment plans during
periods of intense duress, hampering disaster recovery.
As opposed to TCDLs, SCDLs were initially ineligible for
Conversely, such requirements may help FEMA and
forgiveness. Some Members of Congress said making the
Congress make determinations about forgiveness in terms
loans ineligible for forgiveness was necessary to address
of its impact on total federal disaster spending.
legislative and executive concerns related to federal disaster
spending. Others argued the lack of forgiveness amounted
Interest rates on CDLs fluctuate, sometimes daily, which
to unequal treatment, since TCDL recipients were eligible.
can make it difficult for a local government to predict the
ultimate cost of the loan, which may impact program uptake
Congress amended the SCDL program in 2007 (P.L. 110-
and local government fiscal stability. FEMA sets the
28) to make SCDLs forgivable. The basic conditions for
interest rate for CDLs based on five-year Treasury rates.
SCDL forgiveness remained similar to TCDLs, but FEMA
Those rates are volatile; for instance, the rate was 1.552%
issued a rule with some clarifications and changes. For
on March 1, 2022, and 2.947% on April 22, 2022. But if
SCDLs, FEMA altered how auditors assessed property tax
CDLs may be likely to be forgiven, especially with little or
revenue loss after a disaster, allowing a broader scope of
no money repaid, the interest rate becomes less of a factor
losses to be included in forgiveness determinations. This
in a local government’s decision to apply for a CDL. An
change potentially expanded the number of loan recipients
alternative could be a standard interest rate for a period of
eligible for forgiveness. FEMA also stated that different
time, such as a month or calendar year, with all loans
agency officials would rule on appeals of forgiveness denial
approved during that time receiving that rate. That could
than those who made the initial determination. Relatedly,
provide an added measure of stability for local governments
FEMA imposed a 60-day deadline on itself to decide on
that are uncertain whether and when their loan will be
forgiveness. The rule (44 C.F.R. §206) also allowed local
forgiven.
governments, many of whom start their fiscal year on July 1
as opposed to the federal government’s October 1, to
Congress could discuss if CDLs may be better suited as
submit financial information for a period of either three full
grants. As mentioned in a 1996 Government Accountability
fiscal years or 36 months following the disaster.
Office report, FEMA itself noted the high forgiveness rate
of CDLs and suggested converting them to grants. Such a
Congress made forgiveness of the loans made in 2017
change might structure the program closer to the way it is
subject to additional review, primarily a requirement that
practically administered and potentially reduce some
forgiveness could be granted only by the Secretary of
administrative requirements and costs of making loans,
Homeland Security, in consultation with the Secretary of
including determining an interest rate and evaluating
the Treasury. Loans to the Northern Mariana Islands, which
forgiveness qualifications.
were issued in 2020 and 2021, were subject to the same
forgiveness requirements as TCDLs.
Conversion to a grant program would create new
considerations for the CDL program. Recipients may risk
Forgiveness History
duplication of benefits, as some allowable uses may
On September 30, 2021, P.L. 117-43 forgave approximately
duplicate relief provided by other federal programs. Grant
$860 million of CDLs. That included about $311 million
programs also typically require more oversight than loan
owed by the U.S. Virgin Islands from loans issued in 2017
programs. Federal grants must be used for a specific
and 2018 and nearly $372 million of loans issued to Puerto
purpose (unlike CDLs, which can be used more broadly on
Rico between 2018 and 2021. Of all the loans forgiven,
operating expenses) and are subject to financial audits.
governments had cumulatively made repayments equal to
Some grant recipients may be uncomfortable with such
1.8% of disbursed funds and interest accrued as of
federal involvement. Federal grants’ non-supplanting
September 20, 2021.
restrictions may also restrict local governments from using
grant funds for operating expenses, absent a change in law.
Such forgiveness aligned with previous congressional
Transforming CDLs into grants could also increase federal
action related to CDLs. For example, P.L. 113-6 forgave all
spending by guaranteeing non-repayment.
existing SCDL balances.
Adam G. Levin, Analyst in Economic Development Policy
News reports suggest that some local governments may rely
upon the eventual forgiveness of CDLs. However, the
IF12128
recurring practice of loan forgiveness may not reflect the
program’s original intent, which seemed to make clear that
forgiveness is not mandatory.
https://crsreports.congress.gov
FEMA’s Community Disaster Loan Program: Loan Forgiveness
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https://crsreports.congress.gov | IF12128 · VERSION 1 · NEW