Better Management of Collateral Can Reduce Losses in SBA's Major Loan Program

CED-81-123: Published: Jul 17, 1981. Publicly Released: Jul 17, 1981.

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The 7(a) loan program of the Small Business Administration (SBA) makes or guarantees loans to small businesses that are unable to obtain financial assistance from other sources such as private lending institutions. In recent years, the 7(a) program has experienced increasing losses. As of April 1981, 14.4 percent of the outstanding loans were delinquent or in liquidation. As loans face possible liquidation, the collateral pledged in support of these loans gains greater significance as a means of reducing losses. GAO reviewed the program to determine if SBA liquidation policies and practices for 7(a) business loans have minimized Federal losses which have increased over recent years.

The standard operating procedures of SBA generally provide a sound basis for managing collateral during loan servicing and liquidation. If these procedures are followed, the losses on defaulted loans can be minimized. A GAO review of 22 charged-off 7(a) loans showed that these procedures were not regularly followed by the district offices. Insufficient staff resources appear to be the primary reason SBA is unable to fully comply with the procedures. During servicing, the collateral position of SBA is often unnecessarily jeopardized because of weaknesses in verifying the use of loan proceeds and monitoring collateral. At liquidation, the recovery by SBA on defaulted loans may not have been maximized because liquidation plans were not prepared and weaknesses existed in the inspection and appraisal of collateral and the financial investigation of obligors. As a result, losses on the loans reviewed were not minimized. The Bank Certification Program is a major effort by SBA to streamline the loan delivery system. The Program's aim is to shorten the time required for SBA to review and approve guaranty loan applications by increasing the lending institution's role. The Bank Certification Program may provide some relief to the staff problems plaguing the servicing and liquidation of loans.

Recommendations for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should modify the standard operating procedures to stipulate a timeframe for making a liquidation field visit to inventory and inspect collateral.

    Agency Affected: Small Business Administration

  2. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should modify the standard operating procedures to require that the current financial condition of loan obligors be determined as soon as a loan is placed in liquidation.

    Agency Affected: Small Business Administration

  3. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should modify the standard operating procedures to clarify the requirement for and stress the importance of liquidation plans.

    Agency Affected: Small Business Administration

  4. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should modify the standard operating procedures to require evidence from the participating bank of the existence, condition, and location of collateral before the loan guaranty is honored.

    Agency Affected: Small Business Administration

  5. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should modify the standard operating procedures to require spot checks of collateral during discretionary field visits to delinquent borrowers.

    Agency Affected: Small Business Administration

  6. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should determine those aspects of the District Office's Portfolio Management Division's workload where it is essential that the Government's interest be protected and align existing staff accordingly.

    Agency Affected: Small Business Administration

  7. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The SBA Administrator should reassign staff made available as a result of the Bank Certification Program to duties in the Portfolio Management Division.

    Agency Affected: Small Business Administration

 

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