Small Business Administration:

Progress Made but Improvements Needed in Lender Oversight

GAO-03-90: Published: Dec 9, 2002. Publicly Released: Jan 6, 2003.

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The Small Business Administration (SBA) has increased its reliance on private lenders to provide small businesses with access to credit. The 7(a) program is SBA's largest business loan program, and SBA has established a preferred lender program (PLP) in which eligible lenders make 7(a) loans without prior SBA approval. SBA guaranteed $9.9 billion in 7(a) loans in 2001. Because lenders are exercising greater autonomy in making 7(a) loans, effective lender oversight is essential to SBA's success in achieving its mission. GAO evaluated SBA's 7(a) lender oversight and reviewed its organizational alignment for conducting PLP and Small Business Lending Company (SBLC) oversight.

SBA has made progress in developing its lender oversight program, but conducts only a cursory review of lenders' processes rather than a qualitative assessment of their decisions with regard to borrowers' creditworthiness and eligibility. The "credit elsewhere" standard--a test to determine whether the borrower can obtain credit without the SBA guarantee--is broad, making a meaningful assessment of lenders' decisions difficult. Although SBA has identified appropriate elements for an effective lender oversight program, it has been slow to incorporate all of the elements. For example, SBA does not adequately measure the financial risk PLP lenders pose to its portfolio and has not developed enforcement policies and procedures. SBA has also been slow to implement program improvements for its oversight of SBLCs, for which it has additional safety and soundness regulatory authority. SBA's lender oversight function does not have the organizational independence or resources necessary to accomplish its goals. Two offices perform lender oversight from within the Office of Capital Access (OCA), whose other responsibilities include lending program promotion and management, thus presenting a possible conflict. Additionally, split responsibilities within OCA, and limited resources, have impeded SBA's ability to complete certain oversight responsibilities, such as the completion of review reports, which could result in increased risk to its portfolio.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In a May 2, 2006, "Procedural Notice," SBA established national territory for PLP lenders and streamlined its procedures for approving PLP authority (Notice control number 5000-989). For example, requests for new PLP authority will be submitted to one office (the Sacramento Loan Process Center) that will coordinate SBA's review and approval process. Previously, a national lender could be approved to make SBA loans in some SBA districts and not in others.

    Recommendation: To improve PLP and SBLC oversight, the SBA Administrator should continue to explore ways to assist large national lenders to participate in the PLP. These efforts could include further development and implementation of SBA's Lender Liaison program and continued attention to standardizing the PLP certification process and enhancing its transparency, as was done with the development of the Lender Evaluation Worksheet to assist lenders in their interactions with district offices.

    Agency Affected: Small Business Administration

  2. Status: Closed - Implemented

    Comments: On December 8, 2004, Congress (PL 108-447) provided SBA certain supervisory and enforcement authorities. On April 25, 2005, SBA published delegations of authority for lender oversight and enforcement activities in the Federal Register (Vol. 70, No. 78, 21262) to establish specific authority for SBA's Office of Lender Oversight and the Lender Oversight Committee. On December 11, 2008, SBA issued an interim final rule that includes SBA's enforcement regulations. Specifically, the rule lists the types of, grounds for, and procedures governing SBA enforcement actions against 7(a) Lenders, Certified Development Companies, Microloan Intermediaries, and Non-Lending Technical Assistance Providers within consolidated enforcement regulations. The rule went into effect on January 12, 2009.

    Recommendation: To improve PLP and SBLC oversight, the SBA Administrator should provide, through regulation, clear policies and procedures for taking enforcement actions against preferred lenders and SBLCs in the event of continued noncompliance with SBA's regulations. Specifically, the Administrator of SBA should adopt regulations that would clearly define SBA authority to take enforcement actions and specify conditions under which supervisory actions would be taken.

    Agency Affected: Small Business Administration

  3. Status: Closed - Implemented

    Comments: SBA acquired a new loan monitoring service in 2003 from Dun & Bradstreet. We reviewed the loan monitoring service in 2004 (GAO-04-610) and found that it provided SBA the ability to monitor and analyze the financial risk lenders pose. In addition, the service enables SBA to perform qualitative assessment of lender performance and lending decisions.

    Recommendation: To improve PLP and SBLC oversight, the SBA Administrator should incorporate strategies into its review process to adequately measure the financial risk lenders pose to SBA, develop specific criteria to apply to the credit elsewhere standard, and perform qualitative assessments of lenders' performance and lending decisions.

    Agency Affected: Small Business Administration

  4. Status: Closed - Implemented

    Comments: SBA has not separated OLO from OCA. However, SBA has taken some actions that address GAO's concerns about OLO's independence from an office whose role could present conflicts with lender oversight. SBA established a Lender Oversight Committee comprised of a majority of senior SBA officials outside of the Office Capital Access. SBA described its responsibilities in a Federal Register notice (April 25, 2005, Vol.70, No. 78, 21262). It reviews reports on lender oversight activities, OLO recommendations for enforcement action, and OLO's budget, staffing and operating plans. SBA also established a Portfolio Analysis Committee, which also includes senior agency officials outside of OCA. It reviews the 7(a) and 504 loan portfolios monthly. In addition, although the deputy head of OCA appraises the performance of the head of OLO, SBA's Chief Operating Officer is the reviewing official for the performance rating. These measures appear to provide the opportunity for more independence for OLO.

    Recommendation: To improve PLP and SBLC oversight, the SBA Administrator should separate lender oversight functions and responsibilities from OCA, including those currently done by the Office of Financial Assistance, such as responsibility for revoking preferred lender status and establish clear authority and guidance for the Office of Lenders Program, or its successor office, that states, at a minimum, its program responsibilities and planned staffing for those responsibilities. This would provide an oversight office with greater autonomy within SBA to match the growing importance of lender oversight in achieving SBA's goal of ensuring that PLP lenders make loans to eligible borrowers while properly managing the financial risk to SBA.

    Agency Affected: Small Business Administration

 

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