Small Business Administration: Section 7(a) General Business Loans Credit Subsidy Estimates

The process and types of data the Small Business Administration (SBA) uses to estimate the subsidy cost of the 7(a)General Business Loan Program are generally reasonable and comply with existing Office of Management and Budget guidance. GAO's review of actual and originally estimated defaults and recoveries showed that, on a cumulative basis since 1992, defaults were overestimated by approximately $2 billion and recoveries were overestimated by approximately $450 million. During this same period, SBA overestimated the cost of the 7(a) program by $958 million as evidenced from a trend of downward reestimates. The majority of these downward reestimates can be attributed to the overestimate of defaults. For those loan guarantees approved from fiscal years 1992 through 1997, GAO was unable to determine the specific reason for the overestimate of defaults primarily because the basis SBA used for the estimated default rate for these years was not documented. During this period reestimates account for approximately 84 percent of the total $958 million reestimate. SBA began using its current methodology in 1998. Under this method, high default rates associated with loan guarantees approved in fiscal years 1986 through 1990 contributed to the difference between estimated and actual defaults for loan guarantees approved from 1998 through 2000. SBA has proposed to the Office of Management and Budget another methodology that uses the five most recent years of actual loan performance prior to each activity year being estimated--referred to as the lookback period--rather than the current approach. The proposed method would be more sensitive to fluctuations in economic conditions or changes in program delivery or design because it uses a shorter lookback period. The benefit of this approach is that, in a continuing stable economy, the original subsidy cost estimate would be expected to more closely match actual loan performance and reestimates would therefore be smaller. However, the risk of this approach is that a sudden downturn in the economy would be more likely to result in actual loan performance being different than estimated and thus would likely result in larger upward reestimates than under the current approach.