Prior to December 1997, the procedures required district offices to conduct annual reviews of participating lenders having more than three outstanding SBA guaranteed loans. The current policy requires a review at least once every 3 years for regular and certified lenders with three or more loans and annually for preferred lenders. Without conducting periodic lender reviews, SBA has no systematic means to evaluate lenders’ determinations of loan eligibility, creditworthiness, or collectibility, thus increasing the risk of loss to the agency. Such monitoring becomes more important as the agency moves from direct involvement in each loan guarantee transaction to increased reliance on participating lenders in processing, servicing, and liquidating loans. In the 5 district offices, of the 744 lenders that had been in the program at least 1 year, we found no evidence that 625 had ever been reviewed since they began participating in the 7(a) program. The preferred lender review program may offer a more comprehensive and systematic approach to assessing lender practices. However, it is too early to tell how successful it will be until reviews are conducted and information on the program is available. In the last 5 years, SBA’s Inspector General conducted audits at three SBLCs. As of the end of March 1998, SBA was in the process of implementing its centralized review program for preferred lenders, but it had not yet conducted any reviews. Recommendations

We recommend that the Administrator of the Small Business Administration ensure that the required 7(a) lender oversight reviews are conducted. Scope and Methodology

As requested by the Chairman of the Senate Committee on Small Business, our objectives were to determine (1) how SBA conducts on-site reviews to monitor participating lenders’ compliance with its 7(a) loan program policies and procedures, and (2) what actions SBA is taking to comply with the preferred lender oversight provisions of the Small Business Programs Improvement Act of 1996. To determine SBA’s compliance with the preferred lender oversight requirements of SBPIA, we reviewed documentation relating to SBA’s implementation of a centralized review program for preferred lenders.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed: (1) how the Small Business Administration (SBA) conducts on-site reviews to monitor participating lenders' compliance with its 7(a) loan program policies and procedures; and (2) what actions SBA is taking to comply with the preferred lender oversight provisions of the Small Business Programs Improvement Act of 1996 (SBPIA).

What GAO Found

GAO noted that: (1) prior to December 1997, SBA's operating procedures for the 7(a) program required annual on-site reviews of lenders having more than three outstanding guaranteed loans; (2) GAO could not determine from the district offices' files which lenders met this criterion and should have been reviewed; (3) in five SBA district offices GAO visited, about 96 percent of the lenders had not been reviewed by SBA in the past 5 years; (4) for some lenders that had participated in the program for more than 25 years, GAO found no evidence that they had ever been reviewed; (5) without conducting periodic on-site lender reviews, SBA does not have a systematic means to help ensure that lenders' actions do not render loans ineligible, uncreditworthy, or uncollectible, thus increasing the risk of loss to the agency; (6) such monitoring is particularly important as the agency moves from direct involvement on loan approvals to increased reliance on participating lenders to perform the approval and other functions related to the loan process; (7) in the last 5 years, SBA's Inspector General conducted audits at only 3 of the 12 current small business lending companies (SBLC) that all operate as preferred lenders; (8) beginning December 1997, SBPIA required SBA to review preferred lenders annually or more frequently; (9) SBPIA did not change the oversight requirements for regular and certified lenders; (10) as of May 1998, SBA was in the process of implementing a central review program for preferred lenders, but SBA had not yet conducted any reviews because of delays in developing the program; and (11) although the central review program may offer a more comprehensive and systematic approach to assessing lender compliance with SBA's standards, it is too early to tell how successful the program will be until reviews are conducted and information on the program is available.