Status of the Small Business Administration's Implementation of Administrative Provisions in the American Recovery and Reinvestment Act of 2009

GAO-10-298R: Published: Jan 19, 2010. Publicly Released: Jan 19, 2010.

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William B. Shear
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Due to recent turmoil in U.S. credit markets, many lenders have been reluctant to offer conventional loans--that is, loans not guaranteed by the federal government--to small businesses so that they can finance their operations and capital needs. While the Small Business Administration's (SBA) principal loan guarantee programs, the 7(a) and 504 programs, are intended to help small businesses raise critical financing that they may have difficulty obtaining from other sources, the availability of such loans has also declined. Under the 7(a) program, SBA traditionally has provided lenders guarantees on up to 85 percent of the value of loans to qualifying small businesses in exchange for fees to help offset the costs of the program. Under the 504 program, which generally applies to small business real estate and other fixed assets, SBA provides certified development companies with a guarantee on up to 40 percent of the financing of the projects' costs in exchange for fees--the small business borrowers and other lenders provide the remaining 60 percent of the financing on an unguaranteed basis. Traditionally, lenders, such as banks, that participate in the 7(a) or 504 programs often sell qualifying small business loans on the 7(a) and 504 secondary markets to raise funds necessary for additional lending. However, from mid-2008 to early-2009, investors that had typically purchased securities collateralized by the pools of 7(a) guaranteed small business loans and certain 504 loans largely withdrew from the secondary markets due to potential losses, and as a result, many such loans remained on the balance sheets of the broker-dealers that package the securities or on the balance sheets of the original lenders. According to SBA, the dollar volume of 7(a) loans sold as securities on the secondary market dropped from $425.4 million to $85.9 million, or 79.8 percent, from the end of the third quarter of 2008 to the end of the first quarter of 2009. Under the American Recovery and Reinvestment Act (ARRA), enacted on February 17, 2009, SBA was required to implement eight new authorities--referred to throughout this report, and by ARRA, as administrative provisions--to help facilitate small business lending and enhance liquidity in the secondary markets. The provisions included requirements for, among other things, (1) temporarily lowering or eliminating certain fees on 7(a) and 504 loans, as well as increasing the maximum guarantee on the former; (2) establishing new programs to facilitate secondary market activity; and (3) establishing a new, temporary guaranteed loan program for viable small businesses experiencing financial hardship, which SBA refers to as the America's Recovery Capital (ARC) Loan Program. The administrative provisions took effect when ARRA was enacted, with certain provisions granting SBA emergency rulemaking authority to hasten their implementation.

While SBA did not meet its internal June 2009 deadline for implementing all of the ARRA administrative provisions, all such provisions were implemented by November 2009. Of the three provisions that required the issuance of regulations using SBA's emergency rulemaking authority, SBA implemented Section 506 (ARC Loan Program) on June 15, 2009, but did not implement the Section 503 secondary market provision (504 first-lien guarantee) until October 30, 2009, and the Section 509 (loans to systemically important broker-dealers) until November 19, 2009. Consistent with the findings in our April 2009 report, we identified several factors that may have contributed to SBA's delay in implementing these administrative provisions, including: (1) challenges related to the creation of new and complex programs, including new systems and processes, regulations, policies, and procedures; (2) SBA's reduced staffing levels and loss of expertise through retirements and turnover in key positions; and (3) challenges associated with resolving key policy issues and addressing statutory language that, while designed to protect taxpayer interests, could limit acceptance of market participants. For example, implementation of Section 509 was delayed until SBA officials could determine the extent to which broker-dealers, and perhaps small business lenders, would be required to share in the potential losses associated with extending the guarantee in the 504 loan program. While requiring broker-dealers and lenders to share in potential losses could help ensure sound loan underwriting and thereby limit SBA's potential exposure, it could also lessen their willingness to participate, in turn limiting the expansion of secondary market activity as ARRA intended. Under the interim final rule, which SBA published on October 30, 2009, broker-dealers retain 5 percent of the potential losses on 504 first-lien loans, lenders 15 percent, and SBA 80 percent. SBA data suggest that liquidity in 7(a) and 504 loan markets appears to have largely recovered. Specifically, SBA data show that lenders' origination of 7(a) loans in the primary market doubled from an average of about $650 million per month in the fourth quarter of 2008 to an average of about $1.4 billion per month in the third quarter of 2009, which is higher than second and third quarter 2008 average monthly originations of $1.1 billion and $1 billion, respectively. In addition, SBA 7(a) secondary market sales more than tripled between the fourth quarter of 2008 and the third quarter of 2009, from a monthly average of about $108.8 million to a monthly average of about $336.9 million. Furthermore, data indicate that the secondary market for the SBA-guaranteed, or debenture, portion of 504 loans has also improved. SBA officials and market participants we interviewed said there has been a significant recovery in the markets for 7(a) and 504 loans throughout 2009, although they also said that the secondary market for 504 first-lien loans remains limited.

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