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United States Government Accountability Office: 
GAO: 

Testimony:

Before the Subcommittee on Federal Financial Management, Government 
Information, Federal Services, and International Security, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT: 
Thursday, November 1, 2007: 

Small Business Administration:

7(a) Loan Program Needs Additional Performance Measures:

Statement of William B. Shear: 
Director: 
Financial Markets and Community Investment: 

GAO-08-226T: 

GAO Highlights:

Highlights of GAO-08-226T, a testimony before the Subcommittee on 
Federal Financial Management, Government Information, Federal Services 
and International Security, Committee on Homeland Security and 
Governmental Affairs, U.S. Senate. 

Why GAO Did This Study:

The Small Business Administrationís (SBA) 7(a) program, initially 
established in 1953, provides loan guarantees to small businesses that 
cannot obtain credit in the conventional lending market. In fiscal year 
2006, the program assisted more than 80,000 businesses with loan 
guarantees of nearly $14 billion. This testimony, based on a 2007 
report, discusses (1) the 7(a) programís purpose and the performance 
measures SBA uses to assess the programís results; (2) evidence of any 
market constraints that may affect small businessesí access to credit 
in the conventional lending market; (3) the segments of the small 
business lending market that were served by 7(a) loans and the segments 
that were served by conventional loans; and (4) 7(a) programís credit 
subsidy costs and the factors that may cause uncertainty about these 
costs. 

What GAO Found:

As the 7(a) programís underlying statutes and legislative history 
suggest, the loan programís purpose is intended to help small 
businesses obtain credit. The 7(a) programís design reflects this 
legislative history, but the programís performance measures provide 
limited information about the impact of the loans on participating 
small businesses. As a result, the current performance measures do not 
indicate how well SBA is meeting its strategic goal of helping small 
businesses succeed. The agency is currently undertaking efforts to 
develop additional, outcome-based performance measures for the 7(a) 
program, but agency officials said that it was not clear when they 
might be introduced or what they might measure. 

Limited evidence from economic studies suggests that some small 
businesses may face constraints in accessing credit because of 
imperfections such as credit rationing, in the conventional lending 
market. Several studies GAO reviewed generally concluded that credit 
rationing was more likely to affect small businesses because lenders 
could face challenges in obtaining enough information on these 
businesses to assess their risk. However, the studies on credit 
rationing were limited, in part, because the literature relies on data 
from the early 1970s through the early 1990s, which do not account for 
recent trends in the small business lending market, such as the 
increasing use of credit scores. Though researchers have noted 
disparities in lending options among different races and genders, 
inconclusive evidence exists as to whether discrimination explains 
these differences. 

7(a) loans went to certain segments of the small business lending 
market in higher proportions than conventional loans. For example, from 
2001 to 2004 25 percent of 7(a) loans went to small business start-ups 
compared to an estimated 5 percent of conventional loan. More similar 
percentages of 7(a) and conventional loans went to other market 
segments; 22 percent of 7(a) loans went to women-owned firms in 
comparison to an estimated 16 percent of conventional loans. The 
characteristics of 7(a) and conventional loans differed in several key 
respects: 7(a) loans typically were larger and more likely to have 
variable rates, longer maturities, and higher interest rates.   

SBAís most recent reestimates of the credit subsidy costs for 7(a) 
loans made during fiscal years 1992 through 2004 indicate that, in 
general, the long-term costs of these loans would be lower than 
initially estimated. SBA makes its best initial estimate of the 7(a) 
programís credit subsidy costs and revises the estimate annually as new 
information becomes available. In fiscal years 2005 and 2006, SBA 
estimated that the credit subsidy cost of the 7(a) program would be 
equal to zeroóthat is, the program would no longer require annual 
appropriations of budget authorityóby, in part, adjusting fees paid by 
lenders. However, the most recent reestimates, including those made 
since 2005, may change because of the inherent uncertainties of 
forecasting subsidy costs and the influence of economic conditions such 
as interest rates on several factors, including loan defaults and 
prepayment rates. 

What GAO Recommends:

In the report discussed in this testimony, GAO recommended that SBA 
complete and expand its work on evaluating 7(a)ís performance measures 
and that SBA use the loan performance information it collected, such as 
defaults rates, to better report how small businesses fare after they 
participate in the program. SBA concurred with the recommendation but 
disagreed with one comparison in a section of the report on credit 
scores of small businesses with 7(a) and conventional loans. GAO 
believes that its analysis provides a reasonable basis for comparing 
these credit scores. 

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-226T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William B. Shear at (202) 
512-8678 or shearw@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee:

I am pleased to have the opportunity to be here today to discuss the 
Small Business Administration's (SBA) 7(a) loan program. Initially 
established in 1953, the 7(a) program guarantees loans made by 
commercial lenders--mostly banks--to small businesses for working 
capital and other general business purposes.[Footnote 1] As the 
agency's largest loan program for small businesses, the 7(a) program is 
intended to help these businesses obtain credit that they cannot secure 
in the conventional lending market. For example, because they may lack 
the financial and other information that larger, more established firms 
can provide, some small businesses may be unable to obtain credit from 
conventional lenders. The guarantee provided through the 7(a) program 
assures lenders that they will receive an agreed-upon portion 
(generally between 50 percent and 85 percent) of the outstanding 
balance if a borrower defaults on a loan. Because the guarantee covers 
a portion of the outstanding amount, lenders and SBA share some of the 
risk associated with a potential default, decreasing the lender's risk 
and potentially making make more credit available to small businesses. 
In fiscal year 2006, the 7(a) program assisted slightly more than 
80,000 businesses by guaranteeing loans valued at nearly $14 billion.

In my testimony, I will discuss the findings from our recent report on 
the SBA's 7(a) loan program.[Footnote 2] Specifically, my testimony 
addresses (1) the 7(a) program's purpose and the performance measures 
SBA uses to assess the program's results; (2) evidence of any market 
constraints that may affect small businesses' access to credit in the 
conventional lending market; (3) the segments of the small business 
lending market that are served by 7(a) loans and the segments that are 
served by conventional loans; and (4) the 7(a) program's credit subsidy 
costs and the factors that may cause uncertainty about the 7(a) 
program's cost to the federal government.

In conducting this work, we reviewed the program's underlying statutes 
and legislative history. We compared the measures that SBA uses to 
assess the performance of the 7(a) program to criteria that we 
developed for successful performance measures and interviewed SBA 
officials on the agency's efforts to improve its performance measures. 
In addition, we summarized peer-reviewed studies on market 
imperfections in the lending market. Relying on SBA data from 2001 
through 2004 and on the Federal Reserve's 2003 Survey of Small Business 
Finances (SSBF), we compared characteristics and loan terms of 7(a) 
borrowers to those of small business borrowers.[Footnote 3] Finally, we 
compared SBA's original credit subsidy cost estimates for fiscal years 
1992 through 2006 to SBA's current reestimates, (as reported in the 
fiscal year 2008 Federal Credit Supplement) and interviewed SBA 
officials about the differences.[Footnote 4] We conducted our work in 
Washington, D.C., and Chicago between May 2006 and July 2007 in 
accordance with generally accepted government auditing standards.

In summary:

* As the 7(a) program's underlying statutes and legislative history 
suggest, the loan program's purpose is to help small businesses obtain 
credit. The 7(a) program's design reflects this legislative history, 
but the performance measures provide limited information about the 
impact of the loans on participating small businesses. The underlying 
statutes and legislative history of the 7(a) program help establish the 
federal government's role in assisting and protecting the interests of 
small businesses, especially those with minority ownership. The 
program's performance measures focus on indicators that are primarily 
output measures--for instance, they report on the number of loans 
approved and funded. But none of the measures looks at how well firms 
do after receiving 7(a) loans, so no information is available on 
outcomes. As a result, the current measures do not indicate how well 
the agency is meeting its strategic goal of helping small businesses 
succeed. The agency is currently undertaking efforts to develop 
additional, outcome-based performance measures for the 7(a) program, 
but agency officials said that it was not clear when these measures 
might be introduced or what they might measure.

* Limited evidence from economic studies suggests that some small 
businesses may face constraints in accessing credit because of 
imperfections such as credit rationing in the conventional lending 
market. Some studies showed, for example, that lenders might lack the 
information needed to distinguish between creditworthy and 
noncreditworthy borrowers and thus could "ration" credit by not 
providing loans to all creditworthy borrowers. Several studies we 
reviewed generally concluded that credit rationing was more likely to 
affect small businesses, because lenders could face challenges 
obtaining enough information on these businesses to assess their risk. 
However, the studies on credit rationing were limited because the 
researchers used different definitions of credit rationing and the 
literature relied on data from the early 1970s through the early 1990s. 
Data from this period does not account for recent trends in the small 
business lending market, such as the increasing use of credit scores, 
which may provide needed information and thus reduce credit rationing. 
Though studies we reviewed noted some disparities among borrowers with 
respect to race and gender in the conventional lending market, the 
studies did not offer conclusive evidence on the reasons for those 
differences.

* 7(a) loans went to certain segments of the small business lending 
market in higher proportions than conventional loans from 2001 to 2004. 
First, a higher percentage of 7(a) than conventional loans went to 
minority-owned and start-up businesses. For example, 28 percent of 7(a) 
loans compared with an estimated 9 percent of conventional loans went 
to minority-owned small businesses from 2001 through 2004. In addition, 
25 percent of 7(a) loans went to small business start-ups, while the 
overall lending market served almost exclusively established firms 
(about 95 percent). However, more similar percentages of 7(a) and 
conventional loans went to other segments of the small business lending 
market, such as women-owned firms and those located in distressed 
neighborhoods. For example, 22 percent of 7(a) loans went to women- 
owned firms compared to an estimated 16 percent of conventional loans. 
Finally, the characteristics of 7(a) and conventional loans differed in 
several key respects. In particular, 7(a) loans typically were larger 
and more likely to have variable rates, longer maturities, and higher 
interest rates than conventional loans to small businesses.

* SBA's current reestimates of the credit subsidy costs for 7(a) loans 
made during fiscal years 1992 through 2004 indicate that, in general, 
the long-term costs of these loans will be lower than initially 
estimated. Loan guarantee programs can result in subsidy costs to the 
federal government, and the Federal Credit Reform Act of 1990 (FCRA) 
requires, among other things, that agencies estimate the cost of the 
loan guarantees to the federal government. SBA makes its best initial 
estimate of the 7(a) program's credit subsidy costs and revises the 
estimate annually as new information becomes available. Starting in 
fiscal year 2005, SBA estimated that the credit subsidy cost of the 
7(a) program would be equal to zero--that is, the program would no 
longer require annual appropriations of budget authority. To offset 
some of the costs of the program, such as default costs, SBA adjusted a 
fee paid annually by lenders that are based on the outstanding portion 
of the guaranteed loan so that the initial credit subsidy estimates 
would be zero (based on expected loan performance). However, the most 
recent reestimates, including those made since 2005, may change. Any 
changes would reflect the inherent uncertainties of forecasting subsidy 
costs and the influence of economic conditions such as interest rates 
on several factors, including loan defaults (which exert the most 
influence over projected costs) and prepayment rates. Unemployment, 
which related to the condition of the national economy, could also 
affect the credit subsidy cost--for instance, if unemployment rises 
above projected levels, loan defaults are likely to increase.

* Our recent report made a recommendation to SBA that was intended to 
help ensure that the 7(a) program was meeting its mission 
responsibility of helping small firms succeed through guaranteed loans. 
Specifically, we recommended that SBA complete and expand its current 
work on evaluating the program's performance measures and use the loan 
performance information it already collects, including defaults and 
prepayment rates, to better report how small businesses fare after they 
participate in the 7(a) program. SBA concurred with the recommendation 
but has not yet told us how the agency intends to implement it.

* Finally, SBA disagreed with our analysis that showed limited 
differences in credit scores between small businesses that accessed 
credit without SBA assistance and those that received 7(a) loans. We 
believe that our analysis of credit scores provides a reasonable basis 
for comparison. As SBA noted in its comments, we disclosed the 
limitations of the analysis and noted the need for some caution in 
interpreting the results. Taking into account these limitations, we 
believe that future comparisons of comparable credit score data for 
small business borrowers may provide SBA with a more conclusive picture 
of the relative riskiness of 7(a) and conventional borrowers, 
consistent with the intent of our recommendation.

Background:

To be eligible for the 7(a) loan program, a business must be an 
operating for-profit small firm (according to SBA's size standards) 
located in the United States. To determine whether a business qualifies 
as small for the purposes of the 7(a) program, SBA uses size standards 
that it has established for each industry. SBA relies on the lenders 
that process and service 7(a) loans to ensure that borrowers meet the 
program's eligibility requirements.[Footnote 5] In addition, lenders 
must certify that small businesses meet the "credit elsewhere" 
requirement. SBA does not extend credit to businesses if the financial 
strength of the individual owners or the firm itself is sufficient to 
provide or obtain all or part of the financing the firm needs or if the 
business can access conventional credit. To certify borrowers as having 
met the credit elsewhere requirement, lenders must first determine that 
the firm's owners are unable to provide the desired funds from their 
personal resources. Second, lenders must determine that the business 
cannot secure the desired credit for similar purposes and the same 
period of time on reasonable terms and conditions from nonfederal 
sources (lending institutions) without SBA assistance, taking into 
account the prevailing rates and terms in the community or locale where 
the firm conducts business.

According to SBA's fiscal year 2003-2008 Strategic Plan, the agency's 
mission is to maintain and strengthen the nation's economy by enabling 
the establishment and viability of small businesses and by assisting in 
the economic recovery of communities after disasters. SBA describes the 
7(a) program as contributing to an agencywide goal to "increase small 
business success by bridging competitive opportunity gaps facing 
entrepreneurs." As reported annually in SBA's Performance and 
Accountability Reports (PAR), the 7(a) program contributes to this 
strategic goal by fulfilling each of the following three long-term, 
agencywide objectives:

* increasing the positive impact of SBA assistance on the number and 
success of small business start-ups,

* maximizing the sustainability and growth of existing small businesses 
that receive SBA assistance, and:

* significantly increasing successful small business ownership within 
segments of society that face special competitive opportunity gaps.

Groups facing these special competitive opportunity gaps include those 
that SBA considers to own and control little productive capital and to 
have limited opportunities for small business ownership (such as 
African Americans, American Indians, Alaska Natives, Hispanics, Asians, 
and women) and those that are in certain rural or low-income areas. For 
each of its three long-term objectives, SBA collects and reports on the 
number of loans approved, the number of loans funded (i.e., money that 
was disbursed), and the number of firms assisted.

Loan guarantee programs can result in subsidy costs to the federal 
government, and the Federal Credit Reform Act of 1990 (FCRA) requires, 
among other things, that agencies estimate the cost of these programs-
-that is, the cost of the loan guarantee to the federal government. In 
recognizing the difficulty of estimating credit subsidy costs and 
acknowledging that the eventual cost of the program may deviate from 
initial estimates, FCRA requires agencies to make annual revisions 
(reestimates) of credit subsidy costs for each cohort of loans made 
during a given fiscal year using new information about loan 
performance, revised expectations for future economic conditions and 
loan performance, and improvements in cash flow projection methods. 
These reestimates represent additional costs or savings to the 
government and are recorded in the budget. FCRA provides that 
reestimates that increase subsidy costs (upward reestimates), when they 
occur, be funded separately with permanent indefinite budget 
authority.[Footnote 6] In contrast, reestimates that reduce subsidy 
costs (downward reestimates) are credited to the Treasury and are 
unavailable to the agency. In addition, FCRA does not count 
administrative expenses against the appropriation for credit subsidy 
costs. Instead, administrative expenses are subject to separate 
appropriations and are recorded each year as they are paid, rather than 
as loans are originated.

The 7(a) Program's Policy Objectives Reflect Legislative History, but 
Its Performance Measures Do Not Gauge the Program's Impact on 
Participating Firms:

The legislative basis for the 7(a) program recognizes that the 
conventional lending market is the principal source of financing for 
small businesses and that the loan assistance that SBA provides is 
intended to supplement rather than compete with that market. The design 
of the 7(a) program has SBA collaborating with the conventional market 
in identifying and supplying credit to small businesses in need of 
assistance. Specifically, we highlight three design features of the 
7(a) program that help it address concerns identified in its 
legislative history. First, the loan guarantee, which plays the same 
role as collateral, limits the lender's risk in extending credit to a 
small firm. Second, the "credit elsewhere" requirement is intended to 
provide some assurance that guaranteed loans are offered only to firms 
that are unable to access credit on reasonable terms and conditions in 
the conventional lending market. Third, an active secondary market for 
the guaranteed portion of a 7(a) loan allows lenders to sell the 
guaranteed portion of the loan to investors, providing additional 
liquidity that lenders can use for additional loans.

Furthermore, numerous amendments to the Small Business Act and to the 
7(a) program have laid the groundwork for broadening small business 
ownership among certain groups, including veterans, handicapped 
individuals, and women, as well as among persons from historically 
disadvantaged groups, such as African Americans, Hispanic Americans, 
Native Americans, and Asian Pacific Americans. The 7(a) program also 
includes provisions for extending financial assistance to small 
businesses that are located in urban or rural areas with high 
proportions of unemployed or low-income individuals or that are owned 
by low-income individuals. The program's legislative history highlights 
its role in, among other things, helping small businesses get started, 
allowing existing firms to expand, and enabling small businesses to 
develop foreign markets for their products and services.

All nine performance measures we reviewed provided information that 
related to the 7(a) loan program's core activity, which is to provide 
loan guarantees to small businesses. In particular, the indicators all 
provided the number of loans approved, loans funded, and firms assisted 
across the subgroups of small businesses the 7(a) program was intended 
to assist.

We have stated in earlier work that a clear relationship should exist 
between an agency's long-term strategic goals and its program's 
performance measures.[Footnote 7] Outcome-based goals or measures 
showing a program's impact on those it serves should be included in an 
agency's performance plan whenever possible. However, all of the 7(a) 
program's performance measures are primarily output measures. SBA does 
not collect any outcome-based information that discusses how well firms 
are doing after receiving a 7(a) loan. Further, none of the measures 
link directly to SBA's long-term objectives. As a result, the 
performance measures do not fully support SBA's strategic goal of 
increasing the success of small businesses by "bridging competitive 
opportunity gaps facing entrepreneurs."

SBA officials have recognized the importance of developing performance 
measures that better assess the 7(a) program's impact on the small 
firms that receive the guaranteed loans. SBA is still awaiting a final 
report, originally expected sometime during the summer of 2007, from 
the Urban Institute, which has been contracted to undertake several 
evaluative studies of various SBA programs, including 7(a), that 
provide financial assistance to small businesses.

SBA officials explained that, for several reasons, no formal decision 
had yet been made about how the agency might alter or enhance the 
current set of performance measures to provide more outcome-based 
information related to the 7(a) program. The reasons given included the 
agency's reevaluation of its current strategic plan in response to 
requirements in the Government Performance and Results Act of 1993 that 
agencies reassess their strategic plans every 3 years, a relatively new 
administrator who may make changes to the agency's performance measures 
and goals, and the cost and legal constraints associated with the Urban 
Institute study. However, SBA already collects information showing how 
firms are faring after they obtain a guaranteed loan. In particular, 
SBA regularly collects information on how well participating firms are 
meeting their loan obligations. This information generally includes, 
among other things, the number of firms that have defaulted on or 
prepaid their loans--data that could serve as reasonable proxies for 
determining a firm's financial status. However, the agency primarily 
uses the data to estimate some of the costs associated with the program 
and for internal reporting purposes, such as monitoring participating 
lenders and analyzing its current loan portfolio. Using this 
information to expand its performance measures could provide SBA and 
others with helpful information about the financial status of firms 
that have been assisted by the 7(a) program.

To better ensure that the 7(a) program is meeting its mission 
responsibility of helping small firms succeed through guaranteed loans, 
we recommended in our report that SBA complete and expand its current 
work on evaluating the 7(a) program's performance measures. As part of 
this effort, we indicated that, at a minimum, SBA should further 
utilize the loan performance information it already collects, including 
but not limited to defaults, prepayments, and number of loans in good 
standing, to better report how small businesses fare after they 
participate in the 7(a) program. In its written response, SBA concurred 
with our recommendation.

Limited Evidence Suggests That Certain Market Imperfections May 
Restrict Access to Credit for Some Small Businesses:

We found limited information from economic studies that credit 
constraints such as credit rationing could have some effect on small 
businesses in the conventional lending market. Credit rationing, or 
denying loans to creditworthy individuals and firms, generally stems 
from lenders' uncertainty or lack of information regarding a borrower's 
ability to repay debt. Economic reasoning suggests that there exists an 
interest rate--that is, the price of a loan--beyond which banks will 
not lend, even though there may be creditworthy borrowers willing to 
accept a higher interest rate.[Footnote 8] Because the market interest 
rate will not climb high enough to convince lenders to grant credit to 
these borrowers, these applicants will be unable to access credit and 
will also be left out of the lending market.[Footnote 9] Of the studies 
we identified that empirically looked for evidence of this constraint 
within the conventional U.S. lending market, almost all provided some 
evidence consistent with credit rationing. For example, one study found 
evidence of credit rationing across all sizes of firms.[Footnote 10] 
However, another study suggested that the effect of credit rationing on 
small firms was likely small, and another study suggested that the 
impact on the national economy was not likely to be 
significant.[Footnote 11]

Because the underlying reason for having been denied credit can be 
difficult to determine, true credit rationing is difficult to measure. 
In some studies we reviewed, we found that researchers used different 
definitions of credit rationing, and we determined that a broader 
definition was more likely to yield evidence of credit rationing than a 
narrower definition. For example, one study defined a firm facing 
credit rationing if it had been denied a loan or discouraged from 
applying for credit.[Footnote 12] However, another study pointed out 
that firms could be denied credit for reasons other than credit 
rationing--for instance, for not being creditworthy.[Footnote 13] Other 
studies we reviewed that studied small business lending found evidence 
of credit rationing by testing whether the circumstances of denial were 
consistent with a "credit rationing" explanation such as a lack of 
information. Two studies concluded that having a preexisting 
relationship with the lender had a positive effect on the borrower's 
chance of obtaining a loan.[Footnote 14] The empirical evidence from 
another study suggested that lenders used information accumulated over 
the duration of a financial relationship with a borrower to define loan 
terms.[Footnote 15] This study's results suggested that firms with 
longer relationships received more favorable terms--for instance, they 
were less likely to have to provide collateral. Because having a 
relationship with a borrower would lead to the lender's having more 
information, the positive effect of a preexisting relationship is 
consistent with the theory behind credit rationing.

However, the studies we reviewed regarding credit rationing used data 
from the early 1970s through the early 1990s and thus did not account 
for several recent trends that may have impacted, either positively or 
negatively, the extent of credit rationing within the small business 
lending market. These trends include, for example, the increasing use 
of credit scores, changes to bankruptcy laws, and consolidation in the 
banking industry.

Discrimination on the basis of race or gender may also cause lenders to 
deny loans to potentially creditworthy firms. Discrimination would also 
constitute a market imperfection, because lenders would be denying 
credit for reasons other than interest rate or another risk associated 
with the borrower. A 2003 survey of small businesses conducted by the 
Federal Reserve examined differences in credit use among racial groups 
and between genders.[Footnote 16] The survey found that 48 percent of 
small businesses owned by African Americans and women and 52 percent of 
those owned by Asians had some form of credit, while 61 percent of 
white-and Hispanic-owned businesses had some form of credit.[Footnote 
17] Studies have attempted to determine whether such disparities are 
due to discrimination, but the evidence from the studies we reviewed 
was inconclusive.

A Higher Percentage of 7(a) Loans Went to Certain Segments of the Small 
Business Lending Market, but Conventional Loans Were Widely Available:

Certain segments of the small business lending market received a higher 
share of 7(a) loans than of conventional loans between 2001 to 2004, 
including minority-owned businesses and start-up firms. More than a 
quarter of 7(a) loans went to small businesses with minority ownership, 
compared with an estimated 9 percent of conventional loans (fig. 1). 
However, in absolute numbers many more conventional loans went to the 
segments of the small business lending market we could measure, 
including minority-owned small businesses, than loans with 7(a) 
guarantees.[Footnote 18]

Figure 1: Percentage of 7(a) and Conventional Loans by Minority Status 
of Ownership, 2001-2004:

[See PDF for image]

This figure is a horizontal bar graph depicting the percentage of 7(a) 
and conventional loans by minority status of ownership, 2001-2004. 

The following data is depicted (percentages are approximate):

Non-minority-owned 7(a) loans: approximately 70%; 
Non-minority-owned conventional loans: approximately 90% (bracket from 
about 88 to 92%); 
Minority-owned 7(a) loans: approximately 25%;
Minority-owned conventional loans: approximately 10% (bracket from 
about 8 to 12%). 

Note: The brackets on the conventional loans represent confidence 
intervals. Because the data from SSBF are from a probability survey 
based on random selections, this sample is only one of a large number 
of samples that might have been drawn. Since each sample could have 
provided different estimates, we express our confidence in the 
precision of the particular results as a 95-percent confidence 
interval. This is the interval that would contain the actual population 
value for 95 percent of the samples that could have been drawn. As a 
result, we are 95-percent confident that each of the confidence 
intervals will include the true values in the study population. 
Information on SBA 7(a) loans does not have confidence intervals, 
because we obtained data on all the loans SBA approved and disbursed 
from 2001 to 2004.

[End of figure]

Compared with conventional loans, a higher percentage of 7(a) loans 
went to small new (that is, start-up) firms from 2001 through 2004 
(fig. 2). Specifically, 25 percent of 7(a) loans went to small business 
start-ups, in contrast to an estimated 5 percent of conventional loans 
that went to newer small businesses over the same period.

Figure 2: Percentage of 7(a) and Conventional Loans by Status as a New 
Business, 2001-2004:

[See PDF for image] 

This figure is a horizontal bar graph depicting the percentage 
conventional loans by status as a new business, 2001-2004. 

The following data is depicted (percentages are approximate): 

Existing (2 or more years old) 7(a) loans: approximately 75%; 
Existing (2 or more years old) conventional loans: approximately 95% 
(bracket from about 93 to 97%); 
New (less than 2 years old) 7(a) loans: approximately 25%; 
New (less than 2 years old) conventional loans: approximately 5% 
(bracket from about 3 to 7%). 

Note: The brackets on the conventional loans represent a 95-percent 
confidence interval.

[End of figure]

Only limited differences exist between the shares of 7(a) and 
conventional loans that went to other types of small businesses from 
2001 through 2004. For example, 22 percent of all 7(a) loans went to 
small women-owned firms, compared with an estimated 16 percent of 
conventional loans that went to these firms. The percentages of loans 
going to firms owned equally by men and women were also similar--17 
percent of 7(a) loans and an estimated 14 percent of conventional loans 
(fig. 3). However, these percentages are small compared with those for 
small firms headed by men, which captured most of the small business 
lending market from 2001 to 2004. These small businesses received 61 
percent of 7(a) loans and an estimated 70 percent of conventional loans.

Figure 3: Percentage of 7(a) and Conventional Loans by Gender of 
Ownership, 2001-2004:

[See PDF for image] 

This figure is a vertical bar graph depicting the percentage of 7(a) 
and conventional loans by gender of ownership, 2001-2004. The vertical 
axis of the graph represents percentage from 0 to 70. The horizontal 
axis of the graph represents gender of ownership and type of loan.

The following data is depicted (percentages are approximate): 

Male, 7(a) loans: approximately 60%; 
Male, conventional loans: approximately 70% (brackets from about 68% to 
72%); 
Female, 7(a) loans: approximately 22%; 
Female, conventional loans: approximately 18% (brackets from about 16% 
to 22%); 
50/50 (male/female), 7(a) loans: approximately 17%; 
50/50 (male/female), conventional loans: approximately 15% (brackets 
from about 13% to 17%). 

Note: The brackets on the conventional loans represent a 95-percent 
confidence interval.

[End of figure] 

Similarly, relatively equal shares of 7(a) and conventional loans 
reached small businesses in economically distressed neighborhoods 
(i.e., zip code areas) from 2001 through 2004--14 percent of 7(a) loans 
and an estimated 10 percent of conventional loans.[Footnote 19] SBA 
does not specifically report whether a firm uses its 7(a) loan in an 
economically distressed neighborhood but does track loans that go to 
firms located in areas it considers "underserved" by the conventional 
lending market.[Footnote 20] SBA's own analysis found that 49 percent 
of 7(a) loans approved and disbursed in fiscal year 2006 went to these 
geographic areas.

A higher proportion of 7(a) loans (57 percent) went to smaller firms 
(that is, firms with up to five employees), compared with an estimated 
42 percent of conventional loans. As the number of employees increased, 
differences in the proportions of 7(a) and conventional loans to firms 
with similar numbers of employees decreased. Also, similar proportions 
of 7(a) and conventional loans went to small businesses with different 
types of organizational structures and in different geographic 
locations.

Our analysis of information on the credit scores of small businesses 
that accessed credit without SBA assistance showed only limited 
differences between these credit scores and those of small firms that 
received 7(a) loans. As reported in a database developed by two private 
business research and information providers, The Dun & Bradstreet 
Corporation and Fair Isaac Corporation (D&B/FIC), the credit scores we 
compared are typically used to predict the likelihood that a borrower, 
in this case a small business, will repay a loan.[Footnote 21] In our 
comparison of firms that received 7(a) loans and those that received 
conventional credit, we found that for any particular credit score band 
(e.g., 160 to <170) the differences were no greater than 5 percentage 
points. The average difference for these credit score bands was 1.7 
percentage points (fig. 4). More credit scores for 7(a) borrowers were 
concentrated in the lowest (i.e., more risky) bands compared with 
general borrowers, but most firms in both the 7(a) and the D&B/FIC 
portfolios had credit scores in the same range (from 170 to <200). 
Finally, the percentage of firms that had credit scores in excess of 
210 was less than 1 percent for both groups.

Figure 4: Percentage of Small Business Credit Scores (2003-2006) for 
Firms That Received 7(a) and Conventional Credit in D&B/FIC Sample 
(1996-2000), by Credit Score Range:

[See PDF for image]

This figure is a vertical bar graph depicting the percentage of small 
business credit scores (2003-2006) for firms that received 7(a) and 
conventional credit in D&B/FIC Sample (1996-2000), by credit score 
range. 

The vertical axis of the graph represents percentage from 0 to 25. The 
horizontal axis of the graph represents credit scores from 50 to less 
than 120 up to 210 to 250.

The following data is depicted (percentages are approximate): 

Credit score: 50 to less than 120;
7(a) loans (scores from 2003-2006): approximately 4%;
Conventional loans (scores from 1996-2000): approximately 1.5%. 

Credit score: 1200 to less than 130;
7(a) loans (scores from 2003-2006): approximately 3%;
Conventional loans (scores from 1996-2000): approximately 2%. 

Credit score: 130 to less than 140;
7(a) loans (scores from 2003-2006): approximately 4%;
Conventional loans (scores from 1996-2000): approximately 3%. 

Credit score: 140 to less than 150;
7(a) loans (scores from 2003-2006): approximately 6%;
Conventional loans (scores from 1996-2000): approximately 5%. 

Credit score: 150 to less than 160;
7(a) loans (scores from 2003-2006): approximately 10%;
Conventional loans (scores from 1996-2000): approximately 9%. 

Credit score: 2600 to less than 170;
7(a) loans (scores from 2003-2006): approximately 14.2%;
Conventional loans (scores from 1996-2000): approximately 14%. 

Credit score: 170 to less than 180;
7(a) loans (scores from 2003-2006): approximately 17%;
Conventional loans (scores from 1996-2000): approximately 16%. 

Credit score: 1800 to less than 190;
7(a) loans (scores from 2003-2006): approximately 20%;
Conventional loans (scores from 1996-2000): approximately 24%. 

Credit score: 190 to less than 200;
7(a) loans (scores from 2003-2006): approximately 17%;
Conventional loans (scores from 1996-2000): approximately 20%. 

Credit score: 200 to less than 210;
7(a) loans (scores from 2003-2006): approximately 5%;
Conventional loans (scores from 1996-2000): approximately 6%.  

Credit score: 210 to 250;
7(a) loans (scores from 2003-2006): [Empty];
Conventional loans (scores from 1996-2000): [Empty]. 

Source: GAO analysis of initial credit scores for loans in the BSA 
portfolio (2003-2006) and the D&B/FIC's analysis of credit scores from 
data on small businesses in the small business portfolio score (SBPS) 
development sample (1996-2000).  

[End of figure] 

The results our analysis of credit scores should be interpreted with 
some caution. First, the time periods for the two sets of credit scores 
are different. Initial credit scores for businesses receiving 7(a) 
loans in our analysis are from 2003 to 2006.[Footnote 22] The scores 
developed by D&B/FIC for small businesses receiving conventional credit 
are based on data from 1996 through 2000 that include information on 
outstanding loans that may have originated during or many years before 
that period.[Footnote 23] Second, D&B/FIC's scores for small businesses 
receiving conventional loans may not be representative of the 
population of small businesses. Although D&B/FIC combined hundreds of 
thousands of financial records from many lenders and various loan 
products with consumer credit data for their credit score development 
sample, they explained that the sample was not statistically 
representative of all small businesses. 

Another score developed by D&B, called the Financial Stress Score 
(FSS), gauges the likelihood that a firm will experience financial 
stress--for example, that it will go out of business.[Footnote 24] SBA 
officials said that based on analyses of these scores, the difference 
in the repayment risk of lending associated with 7(a) loans was higher 
than the risk posed by small firms able to access credit in the 
conventional lending market. According to an analysis D&B performed 
based on these scores, 32 percent of 7(a) firms showed a moderate to 
high risk of ceasing operations with unpaid obligations in 2006, while 
only 17 percent of general small businesses had a similar risk profile. 

As already mentioned, SBA disagreed with the results of our credit 
score comparison. In its written comments to our prior report, SBA 
primarily reiterated the cautions included in our report and stated 
that the riskiness of a portfolio was determined by the distribution in 
the riskier credit score categories. SBA said that it had not worked 
out the numbers but had concluded that the impact on loan defaults of 
the higher share of 7(a) loans in these categories would not be 
insignificant. Although SBA disagreed with our results, we believe that 
our analysis of credit scores provides a reasonable basis for 
comparison. Specifically, the data we used were derived from a very 
large sample of financial transactions and consumer credit data and 
reflected the broadest and most recent information readily available to 
us on small business credit scores in the conventional lending market. 
As SBA noted in its comments, we disclosed the data limitations and 
necessary cautions to interpreting the credit score comparison. Taking 
into consideration the limitations associated with our analysis, future 
comparisons of comparable credit score data for small business 
borrowers may provide SBA with a more conclusive picture of the 
relative riskiness of borrowers with 7(a) and conventional loans, which 
would also be consistent with the intent of our recommendation that SBA 
develop more outcome-based performance measures. 

We also compared some of the characteristics of 7(a) and conventional 
loans, including the size of the loans. In the smallest loan categories 
(less than $50,000), a higher percentage of total conventional loans 
went to small businesses--53 percent, compared with 39 percent of 7(a) 
loans. Conversely, a greater percentage of 7(a) loans than conventional 
loans were for large dollar amounts. For example, 61 percent of the 
number of 7(a) loans had dollar amounts in the range of more than 
$50,000 to $2 million (the maximum 7(a) loan amount), compared with an 
estimated 44 percent of conventional loans (fig. 5). 

Figure 5: Percentage of 7(a) Loans and Conventional Loans by Loan Size, 
2001-2004: 

[See PDF for image]  

This figure is a vertical bar graph with the vertical axis representing 
percentage from 0 to 35 and the horizontal axis representing loan size 
from $25,000 or less to more than $2,000,000.  

The following data is depicted (percentages are approximate):  

Loan size: $25,000 or less; 
Percentage of 7(a) loans: 20%; 
Percentage of conventional loans: 31% (brackets from about 27% to 
35%).  

Loan size: $25,001 to $50,000; 
Percentage of 7(a) loans: 19%; 
Percentage of conventional loans: 22% (brackets from about 19% to 
25%).  

Loan size: $50,001 to $150,000; 
Percentage of 7(a) loans: 30%; 
Percentage of conventional loans: 21% (brackets from about 18% to 
24%).  

Loan size: $150,001 to $700,000; 
Percentage of 7(a) loans: 24%; 
Percentage of conventional loans: 19% (brackets from about 17% to 
23%).  

Loan size: $700,001 to $1,000,000; 
Percentage of 7(a) loans: 2.5%; 
Percentage of conventional loans: 2% (brackets from about 1.5% to 
2.5%).  

Loan size: $1,000,001 to $2,000,000; 
Percentage of 7(a) loans: 2.5%; 
Percentage of conventional loans: 2% (brackets from about 1.5% to 
2.5%).  

Loan size: More than $2,000,000; 
Percentage of 7(a) loans: [Empty]; 
Percentage of conventional loans: 2.5% (brackets from about 1.5% to 
3%).  

Source: GAO analysis of SBA and Federal Reserve Board of Governors' 
data.  

Note: The brackets on the conventional loans represent a 95-percent 
confidence interval. The maximum gross 7(a) loan amount is $2 million. 
The dollar range categories on this chart reflect program thresholds 
for loan amounts associated with different interest rates or guarantee 
fee levels. 

[End of figure] 

Further, almost all 7(a) loans had variable interest rates and 
maturities that tended to exceed those for conventional loans. Nearly 
90 percent of 7(a) loans had variable rates compared with an estimated 
43 percent of conventional loans, and almost 80 percent of 7(a) loans 
had maturities of more than 5 years, compared with an estimated 17 
percent of conventional loans (fig. 6). 

Figure 6: Percentage of 7(a) and Conventional Loans by Loan Maturity 
Category, 2001-2004: 

[See PDF for image]  

This figure is a vertical bar graph with the vertical axis representing 
percentage from 0 to 50 and the horizontal axis representing maturity 
in years.  

The following data is depicted (percentages are approximate):  

Maturity (in years): 1 or less; 
Percentage of 7(a) loans: 2%; 
Percentage of conventional loans: 47% (brackets from about 45% to 
50%).  

Maturity (in years): less than 1 to 3; 
Percentage of 7(a) loans: 5%; 
Percentage of conventional loans: 12% (brackets from about 10% to 
15%).  

Maturity (in years): less than 3 to 5; 
Percentage of 7(a) loans: 13%; 
Percentage of conventional loans: 21% (brackets from about 18% to 
23%).  

Maturity (in years): less than 5 to 7; 
Percentage of 7(a) loans: 42%; 
Percentage of conventional loans: 2% (brackets from about 0.5% to 3%).  

Maturity (in years): less than 7 to 10; 
Percentage of 7(a) loans: 13%; 
Percentage of conventional loans: 8% (brackets from about 5% to 10%).  

Maturity (in years): less than 10 to 20; 
Percentage of 7(a) loans: 9%; 
Percentage of conventional loans: 7% (brackets from about 5% to 8%).  

Maturity (in years): More than 20; 
Percentage of 7(a) loans: 9%; 
Percentage of conventional loans: 2% (brackets from about 0.5% to 3%).  

Source: GAO analysis of SBA and Federal Reserve Board of Governors' 
data.  

Note: The brackets on the conventional loans represent a 95-percent 
confidence interval. 

[End of figure] 

For loans under $1 million, interest rates were generally higher for 
7(a) loans than for conventional loans. From 2001 through 2004, 
quarterly interest rates for the 7(a) program were, on average, an 
estimated 1.8 percentage points higher than interest rates for 
conventional loans (fig. 7).[Footnote 25] Interest rates for small 
business loans offered in the conventional market tracked the prime 
rate closely and were, on average, an estimated 0.4 percentage points 
higher.[Footnote 26] Because the maximum interest rate allowed by the 
7(a) program was the prime rate plus 2.25 percent or more, over the 
period the quarterly interest rate for 7(a) loans, on average, exceeded 
the prime rate.[Footnote 27] 

Figure 7: Interest Rate Comparison for Loans under $1 Million and Prime 
Rate, 2001-2004: 

[See PDF for image] 

This figure is a line graph with three lines depicted: 7(a) loans under 
$1 million; General small business loans under $1 million; and Prime 
rate. The vertical axis of the graph represents interest rate 
(percentage) from 0 to 12. The horizontal axis of the graph represents 
year and quarter from 2001, quarter one to 2004, quarter four.  

Source: GAO's analysis of SBA data, the Federal Reserve Board of 
Governors' quarterly Survey of Terms of Bank Lending (2001 to 2004), 
and the Federal Reserve Board of Governors' H.15 statistical release 
for bank prime loan rates.  

[End of figure] 

Current Reestimates Show Lower-Than-Expected Subsidy Costs, but Final 
Costs May be Higher or Lower for Several Reasons: 

The current reestimated credit subsidy costs of 7(a) loans made during 
fiscal years 1992 through 2004 generally are lower than the original 
estimates, which are made at least a year before any loans are made for 
a given fiscal year. Loan guarantees can result in subsidy costs to the 
federal government, and the Federal Credit Reform Act of 1990 (FCRA) 
requires, among other things, that agencies estimate the cost of the 
loan guarantees to the federal government and revise its estimates 
(reestimate) those costs annually as new information becomes available. 
The credit subsidy cost is often expressed as a percentage of loan 
amounts--that is, a credit subsidy rate of 1 percent indicates a 
subsidy cost of $1 for each $100 of loans. As we have seen, the 
original credit subsidy cost that SBA estimated for fiscal years 2005 
and 2006 was zero, making the 7(a) program a "zero credit subsidy" 
program--that is, the program would no longer required annual 
appropriations of budget authority. For loans made in fiscal years 2005 
and 2006, SBA adjusted the ongoing servicing fee that it charges 
participating lenders so that the initial subsidy estimate would be 
zero based on expected loan performance at that time. Although the 
federal budget recognizes costs as loans are made and adjusts them 
throughout the lives of the loans, the ultimate cost to taxpayers is 
certain only when none of the loans in a cohort remain outstanding and 
the agency makes a final, closing reestimate. In addition to the 
subsidy costs, SBA incurs administrative expenses for operating the 
loan guarantee program, though these costs are appropriated separately 
from those for the credit subsidy. In its fiscal year 2007 budget 
request, SBA requested nearly $80 million to cover administrative costs 
associated with the 7(a) program. 

Any forecasts of the expected costs of a loan guarantee program such as 
7(a) are subject to change, since the forecasts are unlikely to include 
all the changes in the factors that can influence the estimates. In 
part, the estimates are based on predictions about borrowers' behavior-
-how many borrowers will pay early or late or default on their loans 
and at what point in time. According to SBA officials, loan defaults 
are the factor that exerts the most influence on the 7(a) credit 
subsidy cost estimates and are themselves influenced by various 
economic factors, such as the prevailing interest rates. Since the 7(a) 
program primarily provides variable rate loans, changes in the 
prevailing interest rates would result in higher or lower loan 
payments, affecting borrowers' ability to pay and subsequently 
influencing default and prepayment rates. For example, if the 
prevailing interest rates fall, more firms could prepay their loans to 
take advantage of lower interest rates, resulting in fewer fees for 
SBA. Loan defaults could also be affected by changes in the national or 
a regional economy. Generally, as economic conditions worsen--for 
example, as unemployment rises--loan defaults increase. To the extent 
that SBA cannot anticipate these changes in the initial estimates, it 
would include them in the reestimates. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other members of the 
Subcommittee may have. 

Contacts and Staff Acknowledgments: 

For additional information about this testimony, please contact William 
B. Shear at (202) 512-8678 or Shearw@gao.gov. Contact points for our 
Offices of Congressional Affairs and Public Affairs may be found on the 
last page of this statement. Individuals making key contributions to 
this testimony included Benjamin Bolitzer, Emily Chalmers, Tania 
Calhoun, Daniel Garcia-Diaz, Lisa Mirel, and Mijo Vodopic. 

[End of section]  

Footnotes:  

[1] Section 7(a) of the Small Business Act, as amended, codified at 15 
U.S.C. ß 636(a); see also 13 C.F.R. Part 120. Although SBA has limited 
legislative authority to make direct loans to borrowers that are unable 
to obtain loans from conventional lenders, SBA has not received any 
funding for these programs since fiscal year 1996. 

[2] GAO, Small Business Administration: Additional Measures Needed to 
Assess 7(a) Loan Program's Performance, GAO -07-769 (Washington, D.C: 
July 13, 2007). 

[3] The Board of Governors of the Federal Reserve System's (Federal 
Reserve) SSBF is the best available data on loans made to small firms 
in the conventional lending market. Firms eligible for the SSBF include 
for-profit, nonagricultural, nondepository institutions, nongovernment 
businesses in operation in December 2003 and during the interview, that 
also had less than 500 employees. Information in the SSBF may include 
some loans that were guaranteed by the 7(a) loan program.  

[4] Office of Management and Budget, Federal Credit Supplement, Budget 
of the U.S. Government, Fiscal Year 2008 (Washington, D.C.: Feb. 5, 
2007). 

[5] Within the 7(a) program, there are several program delivery 
methods--regular 7(a), the certified lender program, the preferred 
lender program, SBAExpress, Community Express, Export Express, and 
Patriot Express. SBA provides final approval for loans made under the 
regular 7(a) program. Certified lenders must perform a thorough credit 
analysis on the loan application packages they submit to SBA that SBA 
can use to perform a credit review, shortening the loan processing 
time. Preferred lenders have delegated authority to make SBA-guaranteed 
loans, subject only to a brief eligibility review and assignment of a 
loan number by SBA. Lenders participating in SBAExpress, Community 
Express, Export Express, and Patriot Express also have delegated 
authority to make SBA-guaranteed loans. 

[6] Permanent, indefinite budget authority is available as a result of 
previously enacted legislation (in this case, FCRA) and is available 
without further legislative action or until Congress affirmatively 
rescinds the authority. The amount of the budget authority is 
indefinite--that is, unspecified at the time of enactment--but becomes 
determinable at some future date (in this case, when reestimates are 
made). 

[7] Some earlier work includes GAO, Executive Guide: Effectively 
Implementing the Government Performance and Results Act, GAO/GGD-96-118 
(Washington, D.C.: June 1996); and GAO, The Results Act: An Evaluator's 
Guide to Assessing Agency Annual Performance Plans, GAO/GGD-10.1.120 
(Washington, D.C.: April 1998). 

[8] For more details on how economic theory predicts credit rationing, 
see J.E. Stiglitz and A. Weiss, "Credit Rationing in Markets with 
Imperfect Information," The American Economic Review, vol. 71, no.3 
(1981).  

[9] However, under certain circumstances, economic reasoning suggests 
that lack of information about certain types of borrowers could result 
in the opposite--an excess of credit. See D. DeMeza and D.C. Webb, "Too 
Much Investment: A Problem of Asymmetric Information," The Quarterly 
Journal of Economics, vol. 102, no. 2 (1987). 

[10] S. J. Perez, "Testing for Credit Rationing: An Application of 
Disequilibrium Econometrics," Journal of Macroeconomics, vol. 20, no. 4 
(1998). 

[11] A. R. Levison and Kristen L. Willard, "Do Firms Get the Financing 
They Want? Measuring Credit Rationing Experienced by Small Businesses 
in the U.S.," Small Business Economics, vol. 14, no. 2 (2000); and A. 
N. Berger and G. F. Udell, "Some Evidence on the Empirical Significance 
of Credit Rationing," The Journal of Political Economy, vol. 100, no. 5 
(1992). 

[12] J. Berkowitz and M. J. White, "Bankruptcy and Small Firms' Access 
to Credit," The RAND Journal of Economics, vol. 35, no. 1 (2004).  

[13] Levinson and Willard, "Do Firms Get the Financing They Want?" 

[14] M. A. Petersen and R. G. Rajan, "The Benefits of Lending 
Relationships: Evidence from Small Business Data," The Journal of 
Finance, vol. 49, no. 1 (1994); and R. A. Cole, "The Importance of 
Relationships to the Availability of Credit," Journal of Banking and 
Finance, vol. 22 (1998). 

[15] A. N. Berger and G. F. Udell, "Relationship Lending and Lines of 
Credit in Small Firm Finance," The Journal of Business, vol. 68, no. 3 
(1995). 

[16] T. L. Mach and J. D. Wolken, "Financial Services Used by Small 
Businesses: Evidence from the 2003 Survey of Small Business Finances," 
Federal Reserve Bulletin Oct.: A167-A195 (2006).  

[17] The survey question specifically asked respondents about having a 
credit line, loan, or capital lease. 

[18] For example, we estimate that in 2004 approximately 62,000 
outstanding 7(a) loans went to minority-owned firms, while there were 
more than 1.6 million outstanding loans to minority-owned small 
businesses from the conventional lending market. 

[19] We defined distressed neighborhoods as zip code areas where at 
least 20 percent of the population had incomes below the national 
poverty line. 

[20] These include the following federally defined areas: Historically 
Underutilized Business Zone, Empowerment Zone/Enterprise Community, low-
and moderate-income census tract (median income of census tract is no 
greater than 80 percent of the associated metropolitan area or 
nonmetropolitan median income), or rural (as classified by the U.S. 
Census). 

[21] The portfolio management score used by SBA is the Small Business 
Predictive Score (SBPS). The SBPS is based on consumer and business 
data and assigns scores to small businesses in the absolute range of 1 
to 300, but the practical range of 50 to 250. A lower score generally 
indicates a greater likelihood of repayment risk, while a higher score 
indicates a greater likelihood that the loan will be repaid.  

[22] SBA says it first received SBPS credit scores for the outstanding 
7(a) loans in its portfolio in March 2003. Since then, SBA has received 
an initial score, known as the Surrogate Origination Score, for a 7(a) 
loan 1 to 4 months after the loan is disbursed. SBA subsequently has 
received SBPS scores on a quarterly basis for almost all of the active 
loans in its portfolio. We obtained data for all 7(a) loans approved 
and disbursed from 2001 through 2005, so the dates of the initial 
credit scores ranged from 2003 to 2006. 

[23] The earlier period of credit scores for firms that obtained credit 
in the conventional lending market represents data D&B/FIC had readily 
available and could provide to us.  

[24] The FSS predicts the likelihood that a business will cease 
operations without paying creditors in full or that will go into 
receivership. 

[25] We used SBA data to calculate the calendar year and quarter in 
which each loan was approved and to calculate interest rates for all 
loans in a given quarter that were for under $1 million. 

[26] We used the Federal Reserve's Survey of Terms of Business Lending, 
which provides information quarterly on commercial and industrial loans 
of loans in four size categories (less than $100,000; from $100,000 
through $999,999; from $1 million through $999,999,000; and $10 million 
or more) made only by commercial banks. We used only data related to 
the first two categories because those loan amounts most resembled the 
7(a) loans in the SBA data and, as discussed previously, SBA considers 
loans reported in call report data of $1 million or less to be for 
small businesses. 

[27] We used the Federal Reserve's historical reports on the monthly 
bank prime rate to estimate the prime rate for every quarter from 2001 
through 2004. 

[End of section]  

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