Small Business:

Analysis of SBA's Preferred Lenders Program

RCED-92-124: Published: May 15, 1992. Publicly Released: Jun 15, 1992.

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Judy A. England Joseph
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Pursuant to a congressional request, GAO reviewed the Small Business Administration's (SBA) Preferred Lenders Program, focusing on: (1) preliminary program results; (2) characteristics of preferred loans compared with other SBA-guaranteed business loans; (3) the geographic distribution of preferred loans; and (4) independent audit determinations of preferred lenders' compliance with SBA regulations.

GAO found that: (1) the Preferred Lenders Program has achieved better results than either the certified or regular loan programs, but most preferred loans have not reached the age when loans typically fail; (2) preferred lenders have not always complied with SBA rules and regulations; (3) the number of preferred loans has increased nearly every year since the program's inception in 1983; (4) loan processing takes one-third the time of loan processing under the certified loan program, and one-quarter the time under the regular guaranteed loan program; (5) such efficiency helped SBA maintain a fairly stable volume of guaranteed lending despite reductions in staff; (6) the failure rate of preferred loans is only one-third that of loans made under other SBA guaranteed loan programs; (7) compared with other SBA-guaranteed loans, preferred loans are larger in dollar amount but have similar interest rates, receive the maximum SBA guarantee applicable to that program more often, and are typically made to businesses that are similar in terms of their organizational type and industry; (8) lending under the preferred loan program is concentrated geographically due to competition among lenders and regional economies' effect on the demand for loans; (9) recent Preferred Lenders Program audits identified problems with preferred lenders' loan making, use of loan proceeds, and inadequate collateral to secure loans; and (10) the 1990 SBA Federal Managers' Financial Integrity Act report identified SBA oversight of preferred lenders as a material weakness.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: SBA is modifying the existing system to ensure that it accurately compiles loan information on individual lenders.

    Recommendation: Because of the increasing volume of preferred loans and to ensure that SBA is aware of the performance of all lenders, the Administrator, SBA, should require the Assistant Administrators for Information Resources Management and for Financial Assistance to develop an automated process capable of compiling loan data on individual lenders and ensure that monitoring staff use this information when reviewing lenders' performance and renewing lenders' certification.

    Agency Affected: Small Business Administration


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