The Small Business Administration (SBA) guarantees individual loans that lenders originate. The agency uses its Loan and Lender Monitoring System (L/LMS) to assess the individual risk of each loan, and SBA's contractor developed a lender risk rating system based on L/LMS data. However, questions have been raised about the extent to which SBA has used its lender risk rating system to improve its oversight of lenders. The Government Accountability Office (GAO) was asked to examine (1) how SBA's risk rating system compares with those used by federal financial regulators and lenders and the system's usefulness for predicting lender performance and (2) how SBA uses the lender risk rating system in its lender oversight activities. To meet these objectives, GAO reviewed SBA documents; interviewed officials from three federal financial regulators and 10 large SBA lenders; analyzed SBA loan data; and interviewed SBA officials.
Recommendations for Executive Action
|Small Business Administration||1. To ensure that the lender risk rating system effectively evaluates risk, when validating the system and undertaking any redevelopment efforts, the Administrator of the Small Business Administration (SBA) should ensure that SBA's contractor follows sound model validation practices. These practices should include (1) testing of the lender risk rating system data, processes, and results, including a routine reassessment of which factors are the most predictive of lender performance; (2) utilizing an independent party to conduct validations; and (3) maintaining complete documentation of the validation process and results.|
|Small Business Administration||2. To ensure that the lender risk rating system effectively evaluates risk, when validating the system and undertaking any redevelopment efforts, the Administrator should use SBA's own data to assess how well the lender risk ratings predict individual lender performance.|
|Small Business Administration||3. To make better use of the lender risk rating system in SBA's oversight of lenders, the Administrator should develop a strategy for targeting lenders for on-site reviews that relies more on SBA's lender risk ratings.|
|Small Business Administration||4. To make better use of the lender risk rating system in SBA's oversight of lenders, the Administrator should consider revising SBA policies and procedures for conducting on-site reviews. These revised policies and procedures could require staff to (1) use lender risk ratings to tailor the scope of file reviews performed during on-site reviews to areas that pose the greatest risk, (2) incorporate an assessment of lenders' credit decisions in file reviews, and (3) use the results of expanded file reviews to identify information, such as emerging lending trends, that could be incorporated into its lender risk rating system.|