Most 7(a) Lenders with Whom We Spoke Are Satisfied with the Loan Sales

Lenders who participate in SBA’s 7(a) loan guaranty program have an  interest in the outcome of the sales, because they still have a stake in the  7(a) loans for sale. Information on Borrowers Is Incomplete Because SBA’s Process for Documenting and Tracking Borrower Inquiries and Complaints Has Weaknesses

We were unable to validate the way in which borrowers have reacted to the  loan sales, because SBA could not provide a reliable estimate or  information on the number of borrowers who had contacted them about  their sold loans. SBA’s Accounting for Loan Sales and the Remaining Portfolio Was Flawed

SBA sold almost 110,000 loans with an unpaid principal balance of about  $4.4 billion in five loan sales from August 1999 through January 2002. Specifically, SBA (1) incorrectly calculated loan sales  losses reported in the footnotes to its financial statements; (2) did not  appropriately consider the effect of loan sales on its estimates of the cost of  the remaining portfolio, which could significantly affect its budget and  financial statement reporting; and (3) had significant unexplained declines  in its subsidy allowance for the disaster loan program. Though we found that loan servicing volume had declined for SBA disaster  home loan centers, the effect on regular business loans was less clear. 5), and SBA’s  analysis of the servicing centers shows that if more loans are sold, SBA  may be able to reduce and consolidate its loan servicing resources for  disaster home loans. Since SBA incorrectly calculated the losses on its loan sales and lacks  reliable financial data, we were unable to determine the financial impact of  SBA’s loan sales on its budget and financial statements. Further, because  SBA did not analyze the effect of loan sales on its remaining portfolio, its  reestimates of loan program costs for the budget and financial statements  may contain significant errors. Until SBA corrects these errors and  determines the cause of the precipitous decline in the subsidy allowance  account, SBA’s financial statements will likely be misstated, and the audit  opinion on past financial statements may be incorrect. Further, the  reliability of the current and future subsidy cost estimates will remain  unknown. These errors and the lack of key analyses also mean that  congressional decisionmakers are not receiving accurate financial data to  make informed decisions about SBA’s budget and the level of  appropriations the agency should receive. Finally, some of the operational benefits of the loan sales have not yet been  realized, or may be overstated. It would be imprudent to continue SBA loan asset sales in the absence of  reliable and complete information on the accounting and budgetary effects  of the sales. A successful loan sales program is not solely about maximizing  proceeds and attracting investors: it is also a means of improving an  agency’s ability to achieve its mission and to best serve the American  people. Moreover, as OMB continues to encourage loan asset sales, it is  important that agencies embarking on new loan asset sales programs have  the capability to properly carry out and account for these activities. Finally, to provide Congress and SBA with a better understanding of the  impact of loan sales on SBA’s operations, we also recommend that the  Administrator conduct a more comprehensive evaluation of the loan sales’  impact on the agency and the cost savings from the sales.
Why GAO Did This Study

The Small Business Administration's (SBA) loan asset sales are being closely watched because similar sales are projected for other government agencies as a means of reducing loan assets and servicing costs. To assess the progress and effects of SBA's loan sales, GAO undertook this study to (1) describe the process for selling loans, (2) identify how lenders and borrowers have reacted to loan sales, (3) determine whether SBA is properly accounting for its loan sales and their subsequent impact on credit subsidy estimates, and (4) assess whether loan sales generated operational benefits for the agency. GAO did not determine whether SBA maximized proceeds from the loan sales.

What GAO Found

From August 1999 through January 2002, SBA held five loan asset sales, disposing of a total of $4.4 billion in disaster assistance home and business loans (85 percent) and regular business loans (15 percent). SBA created a sales process that has attracted investors and responded to their concerns. Lenders who participate in the 7(a) business loan guaranty program were also satisfied with the sales as an option for disposing of their defaulted loans. SBA relies on borrower inquiries and complaints to determine whether purchasers of the loans are using prudent loan servicing practices, as required in the loan sale agreements. However, information on borrowers' reactions to loan sales is incomplete, because SBA does not have a comprehensive process to capture the inquiries and complaints it receives. SBA incorrectly calculated the accounting losses on the loan sales and lacked reliable financial data to determine the overall financial impact of the sales. Further, because SBA did not analyze the effect of loan sales on its remaining portfolio, its reestimates of loan program costs for the budget and financial statements may contain significant errors. In addition, SBA could not explain significant declines in its loss allowance account for disaster loans. Until SBA corrects these errors and determines the cause of the precipitous decline in the loss allowance account, SBA's financial statements will likely be misstated, and the audit opinion on past financial statements may be incorrect. Further, the reliability of current and future subsidy cost estimates will remain unknown. These errors and the lack of key analyses also mean that congressional decisionmakers are not receiving accurate financial data to make informed decisions about SBA's budget and the level of appropriations the agency should receive. Our analysis of the operational benefits from loan sales suggests that some benefits that SBA reported either have not yet materialized or were overstated. SBA conducted a limited analysis of the impact of loan sales on its loan servicing centers, showing that loan servicing volume had been reduced. However, loan sales had a much greater impact on disaster loan servicing than on business loan servicing. Therefore, how the sales will help SBA realign its workforce in the small business programs remains unclear. It would be imprudent to continue SBA loan asset sales in the absence of reliable and complete information on the accounting and budgetary effects. A successful loan sales program is not solely about maximizing proceeds and attracting investors: it is also a means of improving an agency's ability to achieve its mission and to best serve the American people. Moreover, as the Office of Management and Budget (OMB) continues to encourage loan asset sales, it is important that agencies embarking on new loan asset sales programs have the capability to properly carry out and account for these activities.