Department of Veterans Affairs:

Credit Costs and Risks of Proposed VA Small Business Loan Guarantee Program

GGD-00-158: Published: Jun 30, 2000. Publicly Released: Jun 30, 2000.

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Thomas J. McCool
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Pursuant to a legislative requirement, GAO provided information on the federal costs and risks of a proposed program for the Department of Veterans Affairs (VA) to guarantee small business loans to veterans, focusing on: (1) the federal credit costs and risks of the proposed program; (2) the cost impact of alternative borrower requirements in the implementation of the proposed program; and (3) the administrative issues resulting from VA's implementation of the proposed program.

GAO noted that: (1) the federal credit costs and risks of the proposed program could be similar to the Small Business Administration's (SBA) 7(a) or 504 loan guarantee programs, depending on which program it most resembled; (2) a proposed VA program designed like SBA's 7(a) program could require a similar federal credit subsidy because fees collected from program participants likely would not cover federal guarantee payments; (3) based on SBA's most recent estimates, the credit subsidy rates for the 7(a) program for fiscal years 1992 through 1999 have been under 2 percent; (4) alternatively, if the proposed program were designed like SBA's 504 program, its credit subsidy rate would be harder to predict; (5) SBA's most recent estimates showed the credit subsidy rates were around 4 or 5 percent for fiscal years 1992 through 1996; (6) fees charged to 504 program participants were increased in 1996, and the program has not required a federal subsidy since 1997; (7) based on historical patterns of the 504 program, it is uncertain whether a federal subsidy will be required in the future; (8) based on historic experience and the design of the program, including the differing fee structures, the subsidy rate for SBA's 7(a) program is generally expected to be higher than for SBA's 504 program; (9) GAO's analysis of veteran loan performance indicated that credit costs resulting from borrower defaults on loan payments would be about the same for veterans who could participate in the proposed program; (10) an economic downturn or other events could increase the proposed program's federal credit costs; (11) alternative borrower requirements, such as requiring personal equity as a down payment, have the potential to lower credit costs; (12) GAO was not able to quantify the impacts of alternative borrower requirements on federal credit costs of the proposed program because SBA does not generally maintain these data for the benchmark programs; (13) VA's lack of experience in administering a small business loan guarantee program could create administrative challenges and may lead to higher administrative costs than the benchmark SBA programs; (14) VA officials said that while they have the expertise to adequately evaluate mortgage applications, they do not have the knowledge of human capital resources to adequately evaluate business loan applications; and (15) in February 2000, VA, SBA, and the Association of Small Business Development Centers entered into a Memorandum of Understanding to share expertise with the intent to expand small business opportunities for veterans.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: In their comments on the draft report, the Department of Veterans Affairs (VA) and Small Business Administration (SBA) agreed with this Matter for Congressional Consideration. Consistent with this Matter for Congressional Consideration, Congress is not considering the establishment of a small business loan guarantee program within VA. To date, it appears that Congress has not taken action on the other items contained in the Matter for Congressional Consideration, such as encouraging expertise sharing between VA and SBA through the hearings' process and monitoring SBA's outreach efforts aimed at veterans. SBA has moved the Veterans Business Program from the Entrepreneurial Department to the Administrator's Office.

    Matter: This coordination initiative when fully implemented has the potential to achieve many of the objectives of the proposed VA business loan program by expanding veteran participation in SBA guaranteed loan programs. Given the administrative challenges and costs VA would face in establishing a new program and the initiatives currently under way between VA and SBA, it may be prudent to defer consideration of a new VA loan program. In addition, congressional committees with oversight of veterans' affairs and small business matters may want to encourage even greater expertise sharing between VA and SBA that would take further advantage of the small business loan opportunities offered by SBA to provide business training and funding options for veteran-owned small business. Furthermore, the committees may want to monitor closely SBA's outreach efforts aimed at veterans.


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