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Highlights

The Small Business Administration (SBA) has increased its reliance on private lenders to provide small businesses with access to credit. The 7(a) program is SBA's largest business loan program, and SBA has established a preferred lender program (PLP) in which eligible lenders make 7(a) loans without prior SBA approval. SBA guaranteed $9.9 billion in 7(a) loans in 2001. Because lenders are exercising greater autonomy in making 7(a) loans, effective lender oversight is essential to SBA's success in achieving its mission. GAO evaluated SBA's 7(a) lender oversight and reviewed its organizational alignment for conducting PLP and Small Business Lending Company (SBLC) oversight.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Small Business Administration 1. To improve PLP and SBLC oversight, the SBA Administrator should incorporate strategies into its review process to adequately measure the financial risk lenders pose to SBA, develop specific criteria to apply to the credit elsewhere standard, and perform qualitative assessments of lenders' performance and lending decisions.
Closed - Implemented
SBA acquired a new loan monitoring service in 2003 from Dun & Bradstreet. We reviewed the loan monitoring service in 2004 (GAO-04-610) and found that it provided SBA the ability to monitor and analyze the financial risk lenders pose. In addition, the service enables SBA to perform qualitative assessment of lender performance and lending decisions.
Small Business Administration 2. To improve PLP and SBLC oversight, the SBA Administrator should provide, through regulation, clear policies and procedures for taking enforcement actions against preferred lenders and SBLCs in the event of continued noncompliance with SBA's regulations. Specifically, the Administrator of SBA should adopt regulations that would clearly define SBA authority to take enforcement actions and specify conditions under which supervisory actions would be taken.
Closed - Implemented
On December 8, 2004, Congress (PL 108-447) provided SBA certain supervisory and enforcement authorities. On April 25, 2005, SBA published delegations of authority for lender oversight and enforcement activities in the Federal Register (Vol. 70, No. 78, 21262) to establish specific authority for SBA's Office of Lender Oversight and the Lender Oversight Committee. On December 11, 2008, SBA issued an interim final rule that includes SBA's enforcement regulations. Specifically, the rule lists the types of, grounds for, and procedures governing SBA enforcement actions against 7(a) Lenders, Certified Development Companies, Microloan Intermediaries, and Non-Lending Technical Assistance Providers within consolidated enforcement regulations. The rule went into effect on January 12, 2009.
Small Business Administration 3. To improve PLP and SBLC oversight, the SBA Administrator should continue to explore ways to assist large national lenders to participate in the PLP. These efforts could include further development and implementation of SBA's Lender Liaison program and continued attention to standardizing the PLP certification process and enhancing its transparency, as was done with the development of the Lender Evaluation Worksheet to assist lenders in their interactions with district offices.
Closed - Implemented
In a May 2, 2006, "Procedural Notice," SBA established national territory for PLP lenders and streamlined its procedures for approving PLP authority (Notice control number 5000-989). For example, requests for new PLP authority will be submitted to one office (the Sacramento Loan Process Center) that will coordinate SBA's review and approval process. Previously, a national lender could be approved to make SBA loans in some SBA districts and not in others.
Small Business Administration 4. To improve PLP and SBLC oversight, the SBA Administrator should separate lender oversight functions and responsibilities from OCA, including those currently done by the Office of Financial Assistance, such as responsibility for revoking preferred lender status and establish clear authority and guidance for the Office of Lenders Program, or its successor office, that states, at a minimum, its program responsibilities and planned staffing for those responsibilities. This would provide an oversight office with greater autonomy within SBA to match the growing importance of lender oversight in achieving SBA's goal of ensuring that PLP lenders make loans to eligible borrowers while properly managing the financial risk to SBA.
Closed - Implemented
SBA has not separated OLO from OCA. However, SBA has taken some actions that address GAO's concerns about OLO's independence from an office whose role could present conflicts with lender oversight. SBA established a Lender Oversight Committee comprised of a majority of senior SBA officials outside of the Office Capital Access. SBA described its responsibilities in a Federal Register notice (April 25, 2005, Vol.70, No. 78, 21262). It reviews reports on lender oversight activities, OLO recommendations for enforcement action, and OLO's budget, staffing and operating plans. SBA also established a Portfolio Analysis Committee, which also includes senior agency officials outside of OCA. It reviews the 7(a) and 504 loan portfolios monthly. In addition, although the deputy head of OCA appraises the performance of the head of OLO, SBA's Chief Operating Officer is the reviewing official for the performance rating. These measures appear to provide the opportunity for more independence for OLO.

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