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Highlights

GAO reviewed the role of the Small Business Administration's (SBA) 7(a) Loan Guarantee Program in assisting small businesses.

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Recommendations

Matter for Congressional Consideration

Matter Status
The committees should propose legislation requiring SBA to accumulate and integrate loan demand data into future budget proposals for the 7(a) loan program. These data, based on past and forecasted economic conditions, would give the committees a better basis for deciding future program authorization levels in the context of overall federal credit policy.
Closed - Implemented
The committees should propose legislation requiring SBA to accumulate and integrate loan demand data into future budget proposals for the 7(a) loan program. These data, based on past and forecasted economic conditions, would give the committees a better basis for deciding future program authorization levels in the context of overall federal credit policy.
Closed - Implemented

Recommendations for Executive Action

Agency Affected Recommendation Status
Small Business Administration 1. The Administrator, SBA, should evaluate district office implementation of loan quality standards to see whether they are clear and applied consistently throughout SBA so that individual borrowers, who satisfy SBA quality standards, are not denied credit.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 2. The Administrator, SBA, should accumulate data on 7(a) loan applications, approvals, and rejections and use these data, together with data of forecasted economic activity, to project future demand for 7(a) assistance. Activity data on application, approvals, and rejections should also be used to monitor the consistent application of loan quality standards in SBA offices.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 3. The Administrator, SBA, should direct the Associate Administrator for Finance and Investment and the Director, Office of Secondary Market Operations, to develop procedures to clearly state SBA goals and objectives in promoting the secondary market.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 4. The Administrator, SBA, should develop better procedures for keeping records of secondary market transactions, including service fees and prices paid by investors for loans. The Administrator should determine whether improved recordkeeping controls should be accomplished more efficiently by internal changes in SBA procedures or by using the services of the fiscal transfer agent for all loans sold in the secondary market.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 5. The Administrator, SBA, should direct the Associate Administrator for Finance and Investment and the Director, Office of Secondary Market Operations, to develop a strategy for using the secondary market to offer small businesses the option of fixed-rate financing. This strategy should address the desirability of actions such as the Minnesota Plan, the use of loan pooling, and the advantages and disadvantages of setting interest rates on fixed-rate loans at the time of loan disbursement.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 6. The Administrator, SBA, should implement the recommendation of the Capital Access Committee that would require lenders that sell SBA-guaranteed loans to stipulate their methods of accruing interest and then continue to remit funds on this basis as long as the loan is active.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 7. The Administrator, SBA, should determine whether SBA has the authority to implement the recommendation of the Capital Access Committee which would require the fiscal transfer agent to remit interest to the investor as calculated on a 30/360 basis, regardless of the actual interest accrual method used by the lender. If SBA has this authority, GAO further recommends that the Capital Access Committee's recommendation be implemented.
Closed - Not Implemented
The fiscal transfer agent has adopted this recommendation as an optional service to investors without any needed action or involvement by SBA.
Small Business Administration 8. The Administrator, SBA, should request from the fiscal transfer agent a formal proposal on how it could function as a central paying agent and determine whether this proposal or the recommendation of the Capital Access Committee that would require lenders to remit principal and interest on a timely basis is the more preferable and act accordingly.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 9. If the Administrator, SBA, should decide to control servicing fees, as recommended by the Capital Access Committee, he should take certain steps to ensure that the Committee's intent of lowering borrower interest rates is achieved.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 10. The Administrator, SBA, should change the current regulatory policy either by continuing to regulate interest rates through a national ceiling, but with different benchmarks for fixed variable rate loans, or by eliminating the national maximum allowable interest rate and relying on procedures and guidance to field offices for determining the reasonableness of interest rates in their local areas.
Closed - Implemented
SBA has deregulated the interest rate under its preferred lenders program. While SBA agreed that the prime rate is not necessarily appropriate as a benchmark for fixed rate loans, it is reluctant to stop using the prime rate until a proven system is developed and broadly used by lending institutions.
Small Business Administration 11. The Administrator, SBA, should use a long-term instrument, such as Treasury notes and bonds, of comparable maturity for fixed-rate loans, if SBA continues to use a maximum allowable rate.
Closed - Not Implemented
SBA is experimenting with deregulation of interest rates. In the interim, SBA has stated that, while it agreed with GAO, the prime rate is not necessarily appropriate as a benchmark for fixed rate loans and that it is reluctant to change from using the prime rate until it is broadly used by lending institutions.
Small Business Administration 12. The Administrator, SBA, should consult with representatives from the banking industry to determine how a change in the benchmark would affect their lending practices and their required margin.
Closed - Not Implemented
SBA has not provided an adequate explanation to why it is not acting on this recommendation. Limited staff and experimentation with deregulation were the reasons given for not acting on this recommendation.
Small Business Administration 13. The Administrator, SBA, should emphasize to field offices the importance of adhering to existing standard operating procedures.
Closed - Implemented
Please call 202/512-6100 for information.
Small Business Administration 14. The Administrator, SBA, should provide additional guidance in detailing what should be done when proposed rates on loan applications exceed local prevailing rates.
Closed - Not Implemented
The SBA experiment with deregulated interest rates was not successful and, as a result, it continues to use the prime rate as the benchmark.
Small Business Administration 15. The Administrator, SBA, should monitor interest rate trends on approved and declined loans to determine how the elimination of a national ceiling affects interest rates charged on SBA loans.
Closed - Implemented
Please call 202/512-6100 for information.

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