The Small Business Administration (SBA) approved about $8.6 billion in loan guarantees through its 7(a) loan program in fiscal year 2003. SBA must estimate the subsidy cost of this program. Since fiscal year 2003, SBA has been using econometric modeling to estimate the subsidy. This report reviews SBA's estimation methodology and equations, assesses the default and recovery rates the model produced, identifies ways to enhance the estimates' reliability, describes the process for developing the model, and analyzes SBA's data.
Recommendations for Executive Action
|Small Business Administration||To further enhance the reliability of SBA's subsidy estimates, the SBA Administrator should determine how best to include in future subsidy models borrower-specific information, such as credit scores and loan-to-value ratios, to be collected in the new loan monitoring system.|
|Small Business Administration||To further enhance the reliability of SBA's subsidy estimates, the SBA Administrator should ensure that the model remains reasonable by establishing a process for periodically evaluating the model to correct any errors and revising it to reflect changes in the 7(a) business loan program or other factors that could affect the subsidy estimate.|
|Small Business Administration||To demonstrate and explain the rationale and basis for the 7(a) econometric model and all other models developed, the SBA Administrator should prepare and retain adequate documentation of the model development process including a detailed discussion of the alternative variables or combinations of variables that were considered, tested, and rejected, as well as the reasons for rejecting them.|
|Office of Management and Budget||To facilitate (1) validation of models used to generate credit subsidy estimates, (2) external oversight, and (3) financial statement audits, the Director, OMB, should revise OMB Circular A-11 to require that agencies document the development of their credit subsidy models, including the process followed for selecting modeling methodologies over alternatives, and variables tested and rejected, along with the basis for excluding them.|