	Background

The 7(a) loan program, which is authorized by Section 7(a) of the Small  Business Act, is SBA’s largest business loan program. Under  7(a), SBA provides guarantees of up to 85 percent on loans made by  participating lenders. Of the three categories, preferred lenders  have the most autonomy in that they can make loans without prior SBA  review or approval. Most preferred lenders are banks that have their own  safety and soundness regulators, such as the Office of the Comptroller of  the Currency. The other preferred  lenders, which are SBLCs, have no regulator other than SBA—making SBA  oversight more critical. To give you an idea of this program’s scope, in fiscal year 2002,  7(a) loan approvals totaled approximately $12.2 billion, of which preferred  lenders approved $6.7 billion. Two offices within SBA have primary responsibility for 7(a) lender  oversight—the Office of Lender Oversight (OLO) and the Office of  Financial Assistance (OFA). As participants in the 7(a) program, SBLCs are subject to the same  review requirements as other 7(a) lenders, and they are also subject to  safety and soundness oversight by SBA. Lender Oversight Is Not Achieving All of Its Goals

SBA has identified goals for its lender oversight program that are  consistent with appropriate standards for an oversight program; however,  SBA had not yet established a program that is likely to achieve them. Since  our last review, SBA had made progress in developing its lender oversight  program, but there are still areas in need of improvement if SBA is to  develop a successful program. SBA has highlighted risk management in its  strategy to modernize the agency; however, PLP reviews are not designed  to evaluate financial risk, and the agency has been slow to respond to  recommendations made for improving its monitoring and management of  financial risk—posing a potential risk to SBA’s portfolio. Although SBA has identified problems with preferred lender and SBLC  lending practices, it has not developed clear policies that would describe  enforcement responses to specific conditions. SBA’s Lender Oversight Does Not Adequately Focus on Financial Risk

While elements of SBA’s oversight program touch on the financial risk  posed by preferred lenders, including SBLCs, weaknesses in the program  limit SBA’s ability to focus on, and respond to, current and future financial  risk to their portfolio. Upon the completion of its examinations, FCA  provides a draft report to SBA for comment, incorporates any changes,  and then provides a final report to SBA, which, in turn, issues a final report  to the SBLC. Our work confirmed these findings. SBA has been slow to implement recommendations from FCA for  improving the SBLC examination program. In addition to examining  SBLCs, FCA was asked by SBA to provide recommendations for changes  in the SBLC program. PLP Reviews Do Not Provide Adequate Assurance That Lenders Are Sufficiently Assessing Eligibility and Creditworthiness

Assessing whether a borrower is eligible for 7(a) assistance is difficult  because the requirements are broad and variable, making a qualitative  assessment of a lender’s decision by a trained reviewer all the more  important. Factors that lenders should consider include the following:    The business requires a loan with a longer maturity than the lender’s    The requested loan exceeds either the lender’s legal limit or policy limit,  regarding amounts loaned to one customer;   The lender’s liquidity depends upon selling the guaranteed portion of the  loan on the secondary market;   The collateral does not meet the lender’s policy requirements because of  its uniqueness or low value;   The lender’s policy normally does not allow loans to new ventures or  businesses in the applicant’s industry; and   Any other factors relating to the credit that in the lender’s opinion cannot  be overcome except by receiving a guaranty. Moreover, because it is a cursory review of documents in the file, the PLP  review also does not qualitatively assess a lender’s credit decision. We had noted both of  these measures in our December 9, 2002 report. And,  where a lender persists in noncompliance, SBA will generally allow the  status to expire, rather than terminating it. We will continue  to followup with SBA and monitor its response on this matter. SBA’s Organizational Alignment Does Not Adequately Support SBA’s Lender Oversight Functions

In our past work analyzing organizational alignment and workload issues  at SBA and other agencies’ efforts to improve management and  performance, we have described the importance of tying organizational  alignment to a clear and comprehensive mission statement and strategic  plan. By organizational alignment, we mean the integration of  organizational components, activities, core processes, and resources to  support efficient and effective achievement of outcomes. And second, in evaluating program compliance, SBA  needs to weigh the financial risks to the federal government along with the  7(a) program’s mission to provide credit to those who cannot get it  elsewhere. OFA, also part of OCA, is responsible for providing overall direction for  the administration of SBA’s lending programs, including working with  lenders to deliver lending programs, including 7(a), and developing loan  policies and standard operating procedures.
Why GAO Did This Study

The Small Business Administration (SBA) is responsible for oversight of its 7(a) loan program lenders, including those who participate in the Preferred Lenders Program or PLP. SBA delegates full authority to preferred lenders to make loans without prior SBA approval. In fiscal year 2002, preferred lenders approved 55 percent of the dollar value of all 7(a) loans--about $7 billion. Small businesses are certainly a vital part of the nation's economy. According to SBA, they generate more than half of the nation's gross domestic product and are the principal source of new jobs in the U.S. economy. In turn, SBA's mission is to maintain and strengthen the nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses. Providing small businesses with access to credit is a major avenue through which SBA strives to fulfill its mission. Strong oversight of lenders by SBA is needed to protect SBA from financial risk and to ensure that qualified borrowers get 7(a) loans. SBA has a total portfolio of about $46 billion, including $42 billion in direct and guaranteed small business loans and other guarantees. Because SBA guarantees up to 85 percent of the 7(a) loans made by its lending partners, there is risk to SBA if the loans are not repaid. SBA must ensure that lenders provide loans to borrowers who are eligible and creditworthy to protect the integrity of the 7(a) program. Our statement today is based on the report we issued December 9, 2002, Small Business Administration: Progress Made but Improvements Needed in Lender Oversight (GAO-03-90). The report and our remarks will focus on our evaluation of (1) SBA's 7(a) lender oversight program and (2) SBA's organizational alignment for conducting oversight of preferred lenders and Small Business Lending Companies (SBLC). In addition, we will comment on SBA's latest response to our findings and recommendations. Our overall objective is to provide the Senate Committee on Small Business and Entrepreneurship with information and perspectives to consider as it moves forward on SBA reauthorization.

What GAO Found

SBA has made progress in developing its lender oversight program, but there are still areas in need of improvement. While SBA has identified appropriate elements for an effective lender oversight program, it has been slow to change programs and procedures to fully incorporate all of these elements. In addition, financial risk management issues have become more critical for SBA, as its current loan programs focus on partnering with lenders, primarily banks, that make loans guaranteed up to 85 percent by SBA. However, our work showed that SBA had not yet consistently incorporated adequate measures of financial risk into the PLP review process or the SBLC examination program. The current PLP review process, which SBA uses to ensure compliance with the program mission, rules, and regulations, involves a cursory review of documentation maintained in lenders' loan files rather than a qualitative assessment of borrower creditworthiness or eligibility. SBA's standards for borrower eligibility (the "credit elsewhere" requirement) are broad and therefore subject to interpretation. SBA had not developed clear enforcement policies for preferred lenders or SBLSs that would specifically describe its response in the event that reviews discover noncompliance or safety and soundness problems. SBA had been slow to finalize and issue SBLC examination reports. In addition, SBA had been slow to respond to recommendations for improving the SBLC examination program. Without continued improvement to better enable SBA to assess the financial risk posed by 7(a) loans and to ensure that its lending partners are making loans to eligible small businesses, SBA will not have a successful lender oversight program. Although SBA has listed the oversight of its lending partners as an agency priority, the function does not have the necessary organizational independence or resources to accomplish its goals. In our past work analyzing organizational alignment and workload issues, we have described the importance of (1) tying organizational alignment to a clear and comprehensive mission statement and strategic plan and (2) providing adequate resources to accomplish the mission. However, two different offices--Lender Oversight and Financial Assistance, both of which are in the Office of Capital Access (OCA)--carry out SBA's lender oversight functions. OCA also promotes and implements SBA's lending programs. This alignment presents a possible conflict because PLP promotion and operations are housed in the same office that assesses lender compliance with SBA safety and soundness and mission requirements. Additionally, split responsibilities within OCA and limited resources have impeded SBA's ability to complete certain oversight responsibilities, which could result in heightened risk to its portfolio or lack of comprehensive awareness of portfolio risk.