Today, SBA’s stated purpose is to promote small business development  and entrepreneurship through business financing, government contracting,  and technical assistance programs. The 7(a) loan program, which is  SBA’s largest business loan program, is intended to serve small business  borrowers who cannot obtain credit elsewhere. Therefore, strong oversight of lenders by SBA is needed  to ensure that qualified borrowers get 7(a) loans and to protect SBA from  financial risk. In administering the 7(a) program, SBA has evolved  from making loans directly to depending on lending partners, primarily  banks that make SBA guaranteed loans. SBA’s other lending partners are  Small Business Lending Companies (SBLC)—privately owned and  managed, non-depository lending institutions that are licensed and  regulated by SBA and make only 7(a) loans. Since the mid-1990s, when SBA had virtually no oversight program for its  7(a) guaranteed loan program, the agency has established a program and  developed some enhanced monitoring tools. We have conducted four  studies of SBA’s oversight efforts since 1998 and made numerous  recommendations related to establishing a lender oversight function and  improving it. In the  same year, SBA contracted with the Farm Credit Administration—the  safety and soundness regulator of the Farm Credit System—to perform  examinations of SBLCs. We did,  however, find some shortcomings in the program and made  recommendations for improving it. SBA Has Experienced Mixed Success in Addressing Other Management Challenges to Its 7(a) Loan Program

Since the late 1990s, SBA has taken steps to address other management  challenges that affect its ability to manage its business loan program and  the technical assistance it provides small businesses. Information  technology, human capital, and financial management have posed  challenges for SBA, as we have noted in special reports to Congress. This effort led to SBA awarding a contract to Dun and  Bradstreet in April 2003 to obtain loan monitoring services, including loan  and lender monitoring and evaluation; and risk management tools. We found that the agency had applied some key practices important to  successful organizational change, but had overlooked aspects that  emphasize transparency and communication. However, for fiscal year 2005 SBA’s auditor  continued to note weaknesses in SBA’s overall internal controls. SBA Provided Disaster Loans in Response to September 11th and Now Is Responding to the Gulf Coast Hurricanes

Disaster assistance has been part of SBA since its inception, and SBA’s  physical disaster loan program is the only form of assistance not limited to  small businesses. Following the terrorist attacks of September 11th, SBA provided  approximately $1 billion in loans to businesses and individuals in the  federally declared disaster areas and to businesses nationwide that  suffered related economic injury. First, the  volume of loan applications SBA mailed out and received has far exceeded  any previous disaster. Second, although SBA’s new disaster-loan processing system  provides opportunities to streamline the loan origination process, initially  it experienced numerous outages and slow response times in accessing  information. Third, SBA’s planning efforts to address a disaster of this  magnitude appear to have been inadequate. We are also assessing other factors that have affected SBA’s ability to  provide timely loans to disaster victims in the Gulf region including:   workforce transformation, the exercise of its regulatory authority to  streamline program requirements and delivery to meet the needs of  disaster victims, coordination with state and local government agencies,  SBA’s efforts to publicize the benefits offered by the disaster loan  program, and the limits that exist on the use of disaster loan funds. Small Business Administration: SBA Followed Appropriate Policies and  Procedures for September 11 Disaster Loan Applications. Small Business Administration: Progress Made but Improvements  Needed in Lender Oversight.
Why GAO Did This Study

The Small Business Administration's (SBA) purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. SBA's largest business financing program is its 7(a) program, which provides guarantees on loans made by private-sector lenders to small businesses that cannot obtain financing under reasonable terms and conditions from the private sector. In addition, SBA's Office of Disaster Assistance makes direct loans to households to repair or replace damaged homes and personal property and to businesses to help with physical damage and economic losses. This testimony, which is based on a number of reports that GAO issued since 1998, discusses (1) changes in SBA's oversight of the 7(a) business loan program; (2) steps SBA has taken to improve its management of information technology, human capital, and financial reporting for business loans; and (3) SBA's administration of its disaster loan program.

What GAO Found

Since the mid-1990s, when GAO found that SBA had virtually no oversight program for its 7(a) guaranteed loan program, SBA has, in response to GAO recommendations, established a program and developed some enhanced monitoring tools. The oversight program is led by its Office of Lender Oversight, which was established in 1999. Strong oversight of SBA's lending partners is needed to protect SBA from financial risk and to ensure that qualified borrowers get 7(a) loans. In addition to its bank lending partners, loans are made by Small Business Lending Companies (SBLC)--privately owned and managed, non-depository lending institutions that are licensed and regulated by SBA. Since SBLCs are not subject to safety and soundness oversight by depository institution regulators, SBA has developed such a program under a contract with the Farm Credit Administration. Over the years, SBA has implemented many GAO recommendations for lender oversight and continues to make improvements toward addressing others. Since the late 1990s, SBA has experienced mixed success in addressing other management challenges that affect its ability to manage the 7(a) loan program. With respect to using information technology to monitor loans made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in developing its own system to establish a risk management database as required by law. However, SBA awarded a contract in April 2003 to obtain loan monitoring services. Regarding SBA's most recent workforce transformation efforts begun in 2002, GAO found that SBA applied some key practices important to successful organizational change but overlooked aspects that emphasize transparency and communication. SBA has implemented some related GAO recommendations for improvements in those areas. SBA has also made good progress in response to GAO recommendations addressing financial management issues. With respect to SBA's administration of its disaster loan program after the September 11, 2001, terrorist attacks, GAO found that SBA followed appropriate policies and procedures for disaster loan applications in providing approximately $1 billion in loans to businesses and individuals in the disaster areas, and to businesses nationwide that suffered economic injury. GAO's preliminary findings from ongoing evaluations of SBA's response to the 2005 Gulf Coast hurricanes indicate that SBA's workforce and new loan processing system have been overwhelmed by the volume of loan applications. GAO identified three factors that have affected SBA's ability to provide a timely response to the Gulf Coast disaster victims: (1) the volume of loan applications far exceeded any previous disaster; (2) although SBA's new disaster loan processing system provides opportunities to streamline the loan origination process, it initially experienced numerous outages and slow response times in accessing information; and (3) SBA's planning efforts to address a disaster of this magnitude appear to have been inadequate.