Patriot Express Loans Default at a Higher Rate Than Other SBA Loans, and Costs Have Exceeded Overall Program Income Since 2007

From 2007 through 2012, SBA made 8,511 Patriot Express loans. The higher numbers of Patriot Express  loans approved in 2009 and 2010 may be attributable, in part, to the  American Recovery and Reinvestment Act of 2009 (ARRA) and  subsequent legislation, which provided funding to temporarily subsidize  the overall 7(a) guarantee program’s fees and to increase the maximum  loan guarantee percentage from 75 or 85 percent to 90 percent, with the exception of loans approved under the SBA Express 7(a) subprogram.With a 5 to 15 percent increase in the maximum allowed guarantee  through ARRA, lenders had a greater incentive to approve SBA loans in  general (including Patriot Express loans), knowing that SBA would  guarantee a higher percentage of the loan. More than 64 percent of loans up to $25,000 were  provided by one lender and this lender accounted for about 26 percent of  total loans in the program. Although overall default rates have decreased  since 2008, the default rates for this lender remain significantly higher  than those of all other lenders. Stakeholders Reported Benefits and Challenges, but SBA Has Not Evaluated the Effects of the Patriot Express Pilot

Selected loan recipients and lenders, as well as veteran service  organizations we met with, identified various benefits and challenges to  Patriot Express, but SBA has not evaluated the effects of the Patriot  Express pilot. GAO’s guide for designing evaluations states  that an evaluation gives an agency the opportunity to refine the design of  a program and provides a useful tool to determine whether program  operations have resulted in the desired benefits for participants. SBA has conducted performance  measurement and monitoring activities—such as internally reporting the  number of Patriot Express loans made each quarter and deciding not to  renew a top lender’s delegated authority to make Patriot Express loans  based on ongoing monitoring, as previously mentioned—but these   Because there are  activities are not the same as program evaluation.many more 7(a) loans, which therefore pose a greater risk to SBA than  the smaller volume of Patriot Express loans, SBA officials told us that  they have focused more resources on evaluating the performance of 7(a)  loans. SBA’s Internal Controls May Not Provide Assurance of Borrower Eligibility

SBA has two primary internal control activities to ensure lender  compliance with borrower eligibility requirements—on-site examinations  and purchase reviews. In  addition, although SBA officials told us that they expect borrowers to  maintain their eligibility throughout the term of the loan, SBA has not  developed procedures to provide reasonable assurance that Patriot  Express loans continue to serve eligible borrowers after a loan is  disbursed. Conclusions

Prior to 2007, SBA served the small business needs of veteran  entrepreneurs through its 7(a) and SBA Express programs. SBA  established the Patriot Express Pilot Loan initiative in 2007 as a targeted  effort to provide veterans and other eligible members of the military  community access to capital to establish or expand small businesses. Without evaluations of pilot  initiatives, SBA lacks the information needed to determine if a pilot  program is achieving its intended goals and whether it should be  cancelled, modified, or expanded. Finally, SBA’s reliance on lenders to assess borrowers’ eligibility for  Patriot Express highlights the importance of strong internal controls over  lenders to ensure that only eligible borrowers are served by the program. Federal internal control guidance and GAO’s fraud-prevention framework  indicate that program controls should include monitoring and detection. As a result, SBA’s  internal controls may not provide the necessary assurance that Patriot  Express loans are made to and used by only eligible members of the  military community—the intended mission of the program. Recommendations for Executive Action

As SBA considers whether or not to extend the Patriot Express Pilot Loan  program, we recommend that the Administrator of SBA design and  implement an evaluation plan for the pilot program that assesses how  well the Patriot Express pilot is achieving program goals and objectives  regarding its performance and its effect on eligible borrowers. The  evaluation plan should include information such as evaluation of SBA data on performance of Patriot Express loans; evaluation of borrowers served by Patriot Express in relation to  veteran borrowers served by other SBA loan programs; and review of relevant SBA OIG reports and other external studies. To help ensure that Patriot Express loans are only provided to members  of the military community eligible to participate in the program, we  recommend that the Administrator of SBA strengthen existing internal  controls, including  sampling a larger number of Patriot Express loans during  examinations; developing a requirement in SBA’s Standard Operating Procedures  for lenders to verify the eligibility of the borrower, including the 51  percent ownership requirement, after the loan has been disbursed;  and periodically monitoring the lenders’ implementation of this eligibility  requirement. He  stated that the agency will consider the findings from this report as it  reviews the extension of the Patriot Express Pilot Loan Program. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) trends in the Patriot Express program  and related Small Business Administration (SBA) guarantee programs,  including performance of these loans, and what is known about the costs  of the Patriot Express program, (2) the benefits and challenges of the  Patriot Express program for members of the military community eligible to  participate as well as training and counseling opportunities available to  them, and (3) what internal controls SBA has in place to ensure that the  Patriot Express program is available only to eligible members of the  military community.
Why GAO Did This Study

In June 2007, SBA established the Patriot Express Pilot Loan Program within its 7(a) loan guarantee program to provide small businesses owned and operated by veterans and other eligible members of the military community access to capital. Through Patriot Express, SBA guarantees individual small business loans that lenders originate. GAO was asked to evaluate the program. This report examines (1) trends in the volume and performance of Patriot Express and related SBA loan programs; (2) the effect of the program on eligible members of the military community; and (3) SBA internal controls to ensure that only eligible borrowers participate. GAO analyzed data on performance and costs of Patriot Express and other similar SBA loan programs from 2007 through 2012; interviewed selected borrowers, lenders, and veteran service organizations; and reviewed SBA internal control guidance on borrower eligibility.

What GAO Found

Patriot Express loans valued at about $703 million have defaulted at a higher rate than loans under the Small Business Administration's (SBA) other related loan guarantee programs, and losses for Patriot Express have exceeded its income. With the exception of loans approved in 2007, Patriot Express loans have defaulted at a higher rate than loans made under SBA's main 7(a) program or loans made under SBA's streamlined loan guarantee program (SBA Express). The Patriot Express program's overall default rate was significantly higher for smaller loans, especially for loans below $25,000 (20 percent). Additionally, one lender accounted for more than 64 percent of these smaller loans and experienced higher default rates than the remaining lenders. From 2007 through 2012, losses in the Patriot Express program exceeded income by $31.1 million (not accounting for future fee revenues or funds recovered from loans in default).
Selected borrowers and lenders, as well as veteran service organizations GAO met with, reported various benefits and challenges to the Patriot Express program, but SBA has yet to evaluate the effect of this pilot program on eligible members of the military community. Borrowers and lenders said that some benefits of the program were that it helped veterans expand their businesses and allowed them to take advantage of the streamlined application process. Some challenges they identified were low awareness of the program and which lenders participated in the program. In 2010, SBA extended the Patriot Express pilot through 2013 to allow time to evaluate the effect of the program. To date, SBA has not evaluated the program or established a plan of what it intends to do to evaluate it. SBA officials told us that they focused their resources on evaluating 7(a) loans because there are many more of them and, therefore, they pose a greater risk to SBA than Patriot Express loans. In addition to Patriot Express, SBA has previously initiated other pilot programs that it has not evaluated. GAO has found that a program evaluation gives an agency the opportunity to refine program design, assess if program operations have resulted in the desired benefits, and, for pilots, determine whether to make the programs permanent. Without conducting evaluations of pilot programs, SBA lacks the information needed to assess their performance and their effects on eligible participants and decide whether to extend these programs, including Patriot Express.
SBA's internal controls over lenders may not provide reasonable assurance that Patriot Express loans are only made to eligible members of the military community and that only these members benefit from loan proceeds. SBA relies on lenders to verify and document borrower eligibility at the time of loan approval. One of SBA's controls over lenders' compliance with eligibility requirements consists of sampling loan files during examinations of the 7(a) program, but few Patriot Express loans are reviewed. Patriot Express is intended to assist only eligible members of the military community and SBA officials told us that they expect borrowers to maintain eligibility after the loan is disbursed. But SBA has not developed procedures for lenders to provide reasonable assurance that borrowers maintain this eligibility. Federal internal control standards and GAO's fraud-prevention framework indicate that ongoing monitoring is an important component of an effective internal control system. Without enhanced internal controls, particularly with respect to monitoring of borrowers, SBA lacks assurance that Patriot Express loans are serving only eligible borrowers.

What GAO Recommends

SBA should design and implement an evaluation plan to assess how well the Patriot Express pilot is achieving program objectives and goals and serving the needs of veterans and eligible borrowers. Going forward, SBA should include an evaluation plan as part of any pilot programs initiated under its own authority and consider the results of the evaluation when deciding whether to extend or terminate a pilot. Further, SBA should enhance internal controls over borrower eligibility requirements. SBA said that it will consider the findings from this report as it reviewed the extension of the Patriot Express pilot.