Our review focused on SBA’s first five loan sales  through January 2002 in which 110,000 loans with an outstanding balance  of $4.4 billion were sold. SBA Expanded and Changed the Terms of Its Disaster Loan Program in Response to the September 11 Attacks

In the weeks and months following the terrorist attacks, SBA and  Congress faced the challenge of responding to the lingering effects of the  attacks and subsequent federal actions on small businesses throughout the  country. SBA and Congress Modified the Disaster Loan Program in Response to Complaints from Small Businesses

In the months after the terrorist attacks, small business owners affected by  the terrorist attacks presented a number of concerns to Congress about  SBA’s Disaster Loan Program. SBA, however, did not change its  underwriting criteria for September 11 victims. SBA officials believed that many of the complaints about the disaster  program resulted from the mismatch between victims’ expectations of  SBA’s disaster program and the nature of the program. There is a lack of measures for intermediate or end outcomes,  and features in SBA’s description of the Disaster Loan Program in its  performance plans made assessing the program difficult. But we found that only one of the performance measures SBA  was using—customer satisfaction—had the potential to assess a stated  outcome of the Disaster Loan Program. SBA’s Performance Plans Had Limitations

We identified several features of the description of the Disaster Loan  Program in the 2002 and 2003 performance plans that make it difficult to  assess whether SBA is making progress in attaining its strategic goal. SBA’s program to sell disaster  loans that it makes directly to borrowers and subsequently services results  in private investors owning and servicing the loans over their remaining  terms. We identified  numerous errors in SBA’s accounting for the loan sales, including  unexplained declines in SBA’s loss allowance account for disaster loans. Information on How Selling Disaster Loans Affects Borrowers Is Incomplete

SBA built in some safeguards to protect borrowers when their loans are  sold. In addition, SBA does not sell some disaster loans, including those  issued to borrowers currently residing in a federally declared disaster area  and those that are less than 2 years old. Nevertheless, we were not able to validate the way in which borrowers  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

During our review, we found errors that we believe could have  significantly affected the reported results in the budget and financial  statements for fiscal years 2000 and 2001. Loan Sales Have Reduced SBA’s Loan Servicing Volume, but Other Operational Benefits May Be Overstated

SBA reported that loan asset sales had benefited the agency’s operations  by reducing loan servicing, and that this reduction in loan servicing  volume should help allocate resources to other areas necessary to  achieving SBA’s mission and help the agency to manage its loan portfolio  more effectively.
Why GAO Did This Study

This testimony discusses the role of the Small Business Administration's (SBA) Disaster Loan Program in responding to the September 11, 2001, terrorist attacks, general performance measures for the program, and the effects of SBA's program to sell loans to private investors on disaster loans and their borrowers. In reviewing SBA's loan sales program, which includes disaster loans, we identified three areas needing improvement: tracking borrower inquiries and complaints; sales budgeting and accounting which affect the reliability of SBA financial statements and budget information; and reporting on the operational benefits of the loans sales. This testimony focuses on SBA's (1) response to the September 11 terrorist attacks; (2) performance plans and measures for its Disaster Loan program; and (3) loan assets sales program, which involves selling disaster and other loans.

What GAO Found

The nature of the September 11 attacks and subsequent government actions presented SBA's Disaster Loan Program with new and difficult challenges. Specifically, small businesses in both the declared disaster areas and around the nation suffered economic injury. SBA sought to respond to the concerns of small businesses in the months following September 11by extending eligibility for economic injury loans nationwide--a marked change from earlier disasters that affected primarily businesses in one geographic location. In addition, SBA modified both the terms and lending practices of its Disaster Loan Program. We found that SBA had adapted its Disaster Loan Program to respond to the needs of September 11 victims but that SBA's performance measures did not provide congressional decisions makers with an accurate description of the program's performance. In addition, some output measures had not kept up with SBA's actual progress in assisting disaster victims. Further we identified features in SBA's description of its Disaster Loan Program in the 2002 and 2003 performance plans that made assessing the agency's progress in attaining its strategic goals difficult. Our review of SBA's five loan sales from August 1999 to January 2002 revealed that 85 percent of the $4.4 billion in loans sold were disaster assistance home and business loans. SBA established some policies to protect borrowers whose loans were sold. In trying to determine how borrowers reacted to having their loans sold, we found that SBA relied on borrower inquiries and complaints to determine whether purchasers of the loans were using prudent loan servicing practices. However, information o n borrowers' reaactions was incomplete because SBA did not have a comprehensive process to capture the inquiries and complaints it recieves. Moreover, we found serious issues in SBA's budgeting and accounting for the loans sold, as well as the remainder of the portfolio. In addition, there were significant unexplained declines in the subsidy allowance for the disaster program. SBA is continuing to work on resolving its accounting and financial reporting problems. Finally, our analysis of the operational benefits from loan sales suggested that some benefits that SBA reported, such as reductions in servicing and workload volume, either had not yet materialized or were overstated.