SBA's 7(a) Loan Guarantee Program:

An Assessment of Its Role in the Financial Market

RCED-83-96: Published: Apr 25, 1983. Publicly Released: Apr 25, 1983.

Additional Materials:

Contact:

John H. Luke
(202) 275-6111
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

GAO reviewed the role of the Small Business Administration's (SBA) 7(a) Loan Guarantee Program in assisting small businesses.

GAO sent questionnaires to lenders participating in the program to determine what role the SBA guarantee plays in their small business lending practices. GAO found that the SBA guarantee is an important factor in a bank's decision to lend to new businesses and businesses with less equity than usually required. The guarantee increases a bank's ability and willingness to make larger loans because the guaranteed portion of the loan does not count against federally required lending limits. Although banks are using the program to make larger loans, only 28 percent of those interviewed believe that the guarantee limit should be raised. Losses on 7(a) guaranteed loans have been steadily increasing. SBA has not collected program demand data needed to estimate the impact of its proposed budgetary reductions on small businesses' ability to obtain long-term loans. Lenders can sell the guaranteed portion of SBA loans to investors in the secondary market and thus rapidly recover 90 percent of the funds. Concerns over inconsistencies in the way interest payments are calculated on SBA guaranteed loans, lack of timely payments, and other administrative problems have caused some investors to discontinue purchases.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: The committees should propose legislation requiring SBA to accumulate and integrate loan demand data into future budget proposals for the 7(a) loan program. These data, based on past and forecasted economic conditions, would give the committees a better basis for deciding future program authorization levels in the context of overall federal credit policy.

  2. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: The committees should propose legislation requiring SBA to accumulate and integrate loan demand data into future budget proposals for the 7(a) loan program. These data, based on past and forecasted economic conditions, would give the committees a better basis for deciding future program authorization levels in the context of overall federal credit policy.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should evaluate district office implementation of loan quality standards to see whether they are clear and applied consistently throughout SBA so that individual borrowers, who satisfy SBA quality standards, are not denied credit.

    Agency Affected: Senate Committee on Small Business

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should accumulate data on 7(a) loan applications, approvals, and rejections and use these data, together with data of forecasted economic activity, to project future demand for 7(a) assistance. Activity data on application, approvals, and rejections should also be used to monitor the consistent application of loan quality standards in SBA offices.

    Agency Affected: Small Business Administration

  3. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should direct the Associate Administrator for Finance and Investment and the Director, Office of Secondary Market Operations, to develop procedures to clearly state SBA goals and objectives in promoting the secondary market.

    Agency Affected: Small Business Administration

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should develop better procedures for keeping records of secondary market transactions, including service fees and prices paid by investors for loans. The Administrator should determine whether improved recordkeeping controls should be accomplished more efficiently by internal changes in SBA procedures or by using the services of the fiscal transfer agent for all loans sold in the secondary market.

    Agency Affected: Small Business Administration

  5. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should direct the Associate Administrator for Finance and Investment and the Director, Office of Secondary Market Operations, to develop a strategy for using the secondary market to offer small businesses the option of fixed-rate financing. This strategy should address the desirability of actions such as the Minnesota Plan, the use of loan pooling, and the advantages and disadvantages of setting interest rates on fixed-rate loans at the time of loan disbursement.

    Agency Affected: Small Business Administration

  6. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should implement the recommendation of the Capital Access Committee that would require lenders that sell SBA-guaranteed loans to stipulate their methods of accruing interest and then continue to remit funds on this basis as long as the loan is active.

    Agency Affected: Small Business Administration

  7. Status: Closed - Not Implemented

    Comments: The fiscal transfer agent has adopted this recommendation as an optional service to investors without any needed action or involvement by SBA.

    Recommendation: The Administrator, SBA, should determine whether SBA has the authority to implement the recommendation of the Capital Access Committee which would require the fiscal transfer agent to remit interest to the investor as calculated on a 30/360 basis, regardless of the actual interest accrual method used by the lender. If SBA has this authority, GAO further recommends that the Capital Access Committee's recommendation be implemented.

    Agency Affected: Small Business Administration

  8. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should request from the fiscal transfer agent a formal proposal on how it could function as a central paying agent and determine whether this proposal or the recommendation of the Capital Access Committee that would require lenders to remit principal and interest on a timely basis is the more preferable and act accordingly.

    Agency Affected: Small Business Administration

  9. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: If the Administrator, SBA, should decide to control servicing fees, as recommended by the Capital Access Committee, he should take certain steps to ensure that the Committee's intent of lowering borrower interest rates is achieved.

    Agency Affected: Small Business Administration

  10. Status: Closed - Implemented

    Comments: SBA has deregulated the interest rate under its preferred lenders program. While SBA agreed that the prime rate is not necessarily appropriate as a benchmark for fixed rate loans, it is reluctant to stop using the prime rate until a proven system is developed and broadly used by lending institutions.

    Recommendation: The Administrator, SBA, should change the current regulatory policy either by continuing to regulate interest rates through a national ceiling, but with different benchmarks for fixed variable rate loans, or by eliminating the national maximum allowable interest rate and relying on procedures and guidance to field offices for determining the reasonableness of interest rates in their local areas.

    Agency Affected: Small Business Administration

  11. Status: Closed - Not Implemented

    Comments: SBA is experimenting with deregulation of interest rates. In the interim, SBA has stated that, while it agreed with GAO, the prime rate is not necessarily appropriate as a benchmark for fixed rate loans and that it is reluctant to change from using the prime rate until it is broadly used by lending institutions.

    Recommendation: The Administrator, SBA, should use a long-term instrument, such as Treasury notes and bonds, of comparable maturity for fixed-rate loans, if SBA continues to use a maximum allowable rate.

    Agency Affected: Small Business Administration

  12. Status: Closed - Not Implemented

    Comments: SBA has not provided an adequate explanation to why it is not acting on this recommendation. Limited staff and experimentation with deregulation were the reasons given for not acting on this recommendation.

    Recommendation: The Administrator, SBA, should consult with representatives from the banking industry to determine how a change in the benchmark would affect their lending practices and their required margin.

    Agency Affected: Small Business Administration

  13. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should emphasize to field offices the importance of adhering to existing standard operating procedures.

    Agency Affected: Small Business Administration

  14. Status: Closed - Not Implemented

    Comments: The SBA experiment with deregulated interest rates was not successful and, as a result, it continues to use the prime rate as the benchmark.

    Recommendation: The Administrator, SBA, should provide additional guidance in detailing what should be done when proposed rates on loan applications exceed local prevailing rates.

    Agency Affected: Small Business Administration

  15. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should monitor interest rate trends on approved and declined loans to determine how the elimination of a national ceiling affects interest rates charged on SBA loans.

    Agency Affected: Small Business Administration

 

Explore the full database of GAO's Open Recommendations »

Sep 22, 2014

Sep 16, 2014

Jul 28, 2014

Jul 23, 2014

Jul 22, 2014

Jul 21, 2014

Jun 26, 2014

Jun 20, 2014

Jun 6, 2014

Looking for more? Browse all our products here