Small Business Administration: Accounting Anomalies and Limited Operational Data Make Results of Loan Sales Uncertain

GAO-03-87 Published: Jan 03, 2003. Publicly Released: Jan 06, 2003.
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Highlights

The Small Business Administration's (SBA) loan asset sales are being closely watched because similar sales are projected for other government agencies as a means of reducing loan assets and servicing costs. To assess the progress and effects of SBA's loan sales, GAO undertook this study to (1) describe the process for selling loans, (2) identify how lenders and borrowers have reacted to loan sales, (3) determine whether SBA is properly accounting for its loan sales and their subsequent impact on credit subsidy estimates, and (4) assess whether loan sales generated operational benefits for the agency. GAO did not determine whether SBA maximized proceeds from the loan sales.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Small Business Administration To ensure that SBA has complete information to enforce borrower protections in its loan sale agreements and has reliable information to report to Congress on how borrowers are reacting to the sales, the Administrator should develop procedures for documenting and processing inquiries and complaints from borrowers, and provide guidance to the field offices about implementing them.
Closed – Implemented
SBA reported that it has (1) established an electronic mail account for use by all employees to record and forward borrower comments to SBA's Washington, D.C. office, (2) established a database to maintain and track these borrower comments, and (3) implemented enhancements to a tracking system used for residential borrower inquiries that is maintained in SBA's El Paso, Texas servicing center. SBA also reported that it drafted a procedural notice on a new process for handling borrower inquiries and complaints, but the notice was not issued because SBA canceled the loan asset sales program after conducting the analysis to respond to our other recommendations and found that the sales were not beneficial to SBA or the federal government.
Small Business Administration To address the errors and weaknesses in SBA's accounting and budget reporting, the Administrator should correct the errors in SBA's loss calculations for loan sales one through five, and adjust the fiscal years 2000 and 2001 financial statements before conducting additional loan asset sales.
Closed – Implemented
SBA established new methods to determine the gain or loss on its loan sales. This analysis showed that SBA lost nearly $1 billion on the loans it sold. SBA reported this revised information in its fiscal year 2003 financial statements.
Small Business Administration To address the errors and weaknesses in SBA's accounting and budget reporting, the Administrator should perform the necessary analyses to assess the effect of loan sales on the reestimates, to determine whether the cash flow assumptions in SBA's model reasonably predict future loan performance before conducting additional loan asset sales.
Closed – Implemented
SBA conducted a comparison of the characteristics of the loans sold and the remaining loans. SBA used the results of this comparison during the development of a new cash flow model to estimate the costs of the disaster loan program to ensure that the cash flow model took into consideration loan characteristics that differed between the sold and kept loans. As a result, the new model's estimation methodology considers the effect of loans sold when calculating re-estimates for the program.
Small Business Administration To address the errors and weaknesses in SBA's accounting and budget reporting, the Administrator should perform the necessary analyses to determine and correct the cause of the unexplained decline in the subsidy allowance account, and make the relevant adjustments to the fiscal years 2000 and 2001 financial statements, as appropriate, before conducting additional loan asset sales.
Closed – Implemented
SBA conducted a comprehensive review of its financial records and systems to identify the deficiencies related to the accounting for its disaster loans. SBA found, among other things, that the cash flow model used to estimate the cost of the disaster loan program was unreliable and underestimated the cost, which in turn contributed to the unexplained decline in the allowance account balance. To correct this deficiency, SBA developed a new cash flow model to estimate the cost of the disaster program. This new model improved the reliability of the disaster program cost estimates and corrected the abnormal balance in the allowance for the disaster loan program.
Small Business Administration The Inspector General should, in conjunction with SBA's financial statement auditors, assess the impact of any identified errors in the financial statements and determine whether previously issued audit opinions for the fiscal years 2000 and 2001 financial statements need to be revised.
Closed – Implemented
After assessing the errors GAO identified in SBA's financial statements related to SBA's credit program balances, SBA's financial statement auditor notified SBA in December 2002, that the fiscal years 2000 and 2001 financial statements and audit reports should no longer be relied upon. Furthermore, in January 2003, partly due to the issues GAO identified, SBA's auditor issued a disclaimer of opinion on SBA's fiscal years 2001 and 2002 financial statements.
Small Business Administration Finally, to provide Congress and SBA with a better understanding of the impact of loan sales on SBA's operations, the Administrator should conduct a more comprehensive evaluation of the loan sales' impact on the agency and the cost savings from the sales.
Closed – Implemented
SBA established new methods to determine the gain or loss on its loan sales. This analysis showed that SBA lost nearly $1 billion on the loans it sold. Therefore, SBA determined that the loan asset sales had a negative impact on its operations and the agency decided to end its loan asset sales program.

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