Small Business: Improving SBA Loan Collateral Liquidations Would Increase Recoveries
RCED-92-5
Published: Dec 19, 1991. Publicly Released: Jan 21, 1992.
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Highlights
Pursuant to congressional request, GAO reviewed the Small Business Administration's (SBA) management of its section 7(a) general business loan portfolio, focusing on: (1) SBA liquidation of loan collateral for defaulted loans; (2) the adequacy and valuation of collateral; and (3) SBA and private lenders' collateral recovery efforts.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| To provide assistance to small businesses, while at the same time protecting the government's, and ultimately the taxpayer's, financial interests, Congress may wish to consider mandating that SBA require stronger collateral, in amounts that reflect anticipated declines in value, at the time a loan is made or guaranteed. This may be accomplished by discounting the value of collateral when loans are made to reflect their liquidation value instead of their market value. However, requiring additional collateral will preclude some potential borrowers who have repayment ability from getting a loan. | Congress has no action planned on the matters for consideration. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Small Business Administration | To ensure that the initial loan collateral offered by a loan applicant exists and is properly valued, the Administrator, SBA, should take action to have collateral independently verified and valued. |
SBA amended its SOP to require loan applicants to furnish SBA an itemized list of collateral showing the manufacturer's name, make, model, serial number, and/or pertinent identification data. It also requires the lender/SBA to request data on collateral additions prior to approval of the loan application.
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| Small Business Administration | In the absence of independent verification, the Administrator, SBA, should require loan applicants to provide additional supporting information, such as tax information for real estate or sales receipts for machinery and equipment, to confirm the existence and value of collateral. |
SBA amended its SOP to require loan applicants to furnish SBA an itemized list of collateral showing the manufacturer's name, make, model, serial number, and/or pertinent identification data.
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| Small Business Administration | To maximize recoveries on collateral, the Administrator, SBA, should take action to ensure that SBA field offices comply with existing loan liquidation and acquired property procedures. |
SBA SOP have been amended to require on-going contact with liquidating lenders, with monthly reviews by SBA liquidation officers and bimonthly reviews by SBA liquidation line supervisors. Besides, an SBA loan officer must be in attendance at all public sales conducted by the lender. Also, a copy of the auctioneer's accounting must be sent to SBA.
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| Small Business Administration | When a loan is placed in liquidation, the Administrator, SBA, should require that: (1) collateral be specifically identified, inventoried, and valued in a timely manner, within 2 weeks; and (2) liquidation plans be prepared by, or in the case of private lenders, approved by, SBA. Those plans should specify the liquidation steps to be taken, set time frames, and estimate costs. |
SBA SOP have been amended to require that the borrower be visited by the lender within 10 working days after the loan is placed in liquidation status. Also, these SOP have been revised to cover all aspects of lenders' liquidation plans, including specification of liquidation steps, timeframes, and estimated costs.
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| Small Business Administration | To maximize recoveries on private lender liquidations of SBA loans, the Administrator, SBA, should revise and update the loan liquidation and acquired property procedures to include adequate monitoring and oversight of those activities. At a minimum, this should include SBA prior approval and active monitoring of private lender liquidation actions. |
SBA SOP have been amended to include the following additional requirements. It requires that a loan officer be in attendance at all public sales conducted by the lender. Also, a copy of the auctioneer's accounting must be sent to SBA. Failure of the participant to furnish the required documentation may be justification to disallow lender-conducted liquidations or auctioneer-conducted auctions.
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