Small Business Administration:

Few Reviews of Guaranteed Lenders Have Been Conducted

GGD-98-85: Published: Jun 11, 1998. Publicly Released: Jun 25, 1998.

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Pursuant to a congressional request, GAO reviewed: (1) how the Small Business Administration (SBA) conducts on-site reviews to monitor participating lenders' compliance with its 7(a) loan program policies and procedures; and (2) what actions SBA is taking to comply with the preferred lender oversight provisions of the Small Business Programs Improvement Act of 1996 (SBPIA).

GAO noted that: (1) prior to December 1997, SBA's operating procedures for the 7(a) program required annual on-site reviews of lenders having more than three outstanding guaranteed loans; (2) GAO could not determine from the district offices' files which lenders met this criterion and should have been reviewed; (3) in five SBA district offices GAO visited, about 96 percent of the lenders had not been reviewed by SBA in the past 5 years; (4) for some lenders that had participated in the program for more than 25 years, GAO found no evidence that they had ever been reviewed; (5) without conducting periodic on-site lender reviews, SBA does not have a systematic means to help ensure that lenders' actions do not render loans ineligible, uncreditworthy, or uncollectible, thus increasing the risk of loss to the agency; (6) such monitoring is particularly important as the agency moves from direct involvement on loan approvals to increased reliance on participating lenders to perform the approval and other functions related to the loan process; (7) in the last 5 years, SBA's Inspector General conducted audits at only 3 of the 12 current small business lending companies (SBLC) that all operate as preferred lenders; (8) beginning December 1997, SBPIA required SBA to review preferred lenders annually or more frequently; (9) SBPIA did not change the oversight requirements for regular and certified lenders; (10) as of May 1998, SBA was in the process of implementing a central review program for preferred lenders, but SBA had not yet conducted any reviews because of delays in developing the program; and (11) although the central review program may offer a more comprehensive and systematic approach to assessing lender compliance with SBA's standards, it is too early to tell how successful the program will be until reviews are conducted and information on the program is available.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Administrator, SBA, should ensure that the required 7(a) lender oversight reviews are conducted. In this regard, the Administrator should establish organizational responsibilities and a mechanism for ensuring that information on the lender review process is collected, reported, and analyzed. This information should be useful in assessing the results of the review process and determining whether additional initiatives may be needed.

    Agency Affected: Small Business Administration

    Status: Closed - Implemented

    Comments: On August 17, 1999, the Administrator of SBA approved creation of an Office of Lender Oversight. SBA has developed procedures for oversight reviews of all of its lenders, including preferred lenders. According to SBA officials, the Office of Lender Oversight currently has about five staff members, including the senior executive that leads the Office. SBA and its contractor periodically (normally on an annual basis) conduct oversight reviews of each of its preferred lenders. In addition to preferred lender reviews, SBA's Small Business Lending Companies (SBLCs) are examined for safety and soundness. The preferred lender review group, which is centralized in Kansas City, reports to the Office of Lender Oversight. The Office of Lender Oversight is in charge of the SBLC examinations. SBA district offices still conduct reviews of other lenders, but they follow the guidelines established by SBA. In addition, the Office of Lender Oversight counsels the district offices to ensure that required reviews are conducted.

    Recommendation: The Administrator, SBA, should develop and implement a mechanism to satisfy its supervision and examination function for small business lending companies.

    Agency Affected: Small Business Administration

    Status: Closed - Implemented

    Comments: SBA and the SBA's Inspector General entered into a contract with the Farm Credit Administration (FCA) to examine the Small Business Lending Companies (SBLCA). As of August 1999, all 12 active SBAs have been examined once. SBA is negotiating with FCA to continue this examination function and is exploring possible mechanisms to fund the examination function.

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