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The Small Business Administration's (SBA) 7(a) program is intended to provide loan guarantees to small business borrowers who cannot obtain conventional credit at reasonable terms and do not have the personal resources to provide financing themselves. In fiscal year 2008, SBA guaranteed over 69,000 loans valued at about $13 billion. To assist in oversight of the 7(a) program, GAO was asked to (1) describe SBA's criteria and lenders' practices for determining that borrowers cannot obtain credit elsewhere and (2) examine SBA's efforts to ensure that lenders are complying with the credit elsewhere provision. To meet these objectives, GAO reviewed applicable statutes and guidance, visited 18 lenders and reviewed 238 of their loan files, reviewed 97 on-site lender review reports, and interviewed SBA officials. GAO's samples of lenders and loan files were not generalizable.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Small Business Administration To improve the Small Business Administration's (SBA) oversight of lenders' compliance with the credit elsewhere requirement, the SBA Administrator should issue more detailed guidance to lenders on how to document their compliance with the credit elsewhere requirement. As part of developing this guidance, SBA could consider (1) requiring lenders to include the analysis that supports their credit elsewhere determinations and (2) identifying promising practices currently being used by lenders. After revising its guidance, SBA also could consider collecting and analyzing any additional information lenders are required to provide on how they apply the credit elsewhere standard.
Closed - Implemented
We made this recommendation because we found that lenders tended to provide general statements about a borrower's ability to obtain credit elsewhere, generally citing just one of the six acceptable factors listed in the standard operating procedure without customizing the statement to fit the borrower or lender in question. We concluded that this practice made it difficult to reasonably conclude that borrowers met the credit elsewhere requirement. In response to the recommendation, SBA revised its standard operating procedure. The guidance had previously stated that the lender must substantiate the factors that prevent the financing from being accomplished without SBA support and retain the explanation in the Small Business Applicant's file. In October 2009, SBA added the following language: The file must contain documentation that specifically identifies the factors in the present financing that meet the Credit Elsewhere Test. To determine if SBA had conveyed to lenders that they cannot satisfy this requirement by simply using a checklist with the six acceptable factors, we asked SBA to provide excerpts from training provided to lenders. In September 2013, SBA provided slides that would be used to train lenders at an upcoming conference and subsequent training classes. In addition to listing the six acceptable factors, the slides gave some examples of specific language that could be used. For instance, if the credit elsewhere test was satisfied for a restaurant loan because the lender's policy normally does not allow loans to new businesses or businesses in the applicant's industry, SBA suggested noting that the lender's conventional commercial policy does not make loans to restaurants. A slide also stressed that the specific factors relating to the credit, such as noted in the examples shown, must be discussed and retained in the applicant's loan file.

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