Small Business Administration: Improvements Made, but Loan
Programs Face Ongoing Management Challenges (06-APR-06,
GAO-06-605T).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-605T
ACCNO: A51097
TITLE: Small Business Administration: Improvements Made, but
Loan Programs Face Ongoing Management Challenges
DATE: 04/06/2006
SUBJECT: Business development loans
Internal controls
Program management
Risk management
Small business assistance
Small business loans
Loan management
Policies and procedures
SBA 7(a) Loan Program
SBA Disaster Loan Program
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GAO-06-605T
* Selected GAO Products
Testimony
Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:30 p.m. EDT
Thursday, April 6, 2006
SMALL BUSINESS ADMINISTRATION
Improvements Made, but Loan Programs Face Ongoing Management Challenges
Statement of William B. Shear, Director Financial Markets and Community
Investment
GAO-06-605T
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to be here today as you consider the
effectiveness of the Small Business Administration (SBA). Established by
Congress in 1953 to fulfill the role of several previous agencies, SBA's
purpose is to promote small business development and entrepreneurship
through business financing, government contracting, and technical
assistance programs. In addition, SBA's Office of Disaster Assistance
(ODA) makes loans to households to repair or replace damaged homes and
personal property, and to businesses to help with physical damage and
economic losses. For over a decade, SBA has been centralizing some
functions to improve efficiency and has moved more toward partnering with
outside entities, such as private-sector lenders, to provide direct
services to small businesses. Significant changes in SBA's management of
its loan programs, information technology, human capital, and financial
resources have occurred, and we have studied various aspects of these
changes.
My statement today is based on a number of reports that we have issued
over the past decade addressing SBA's administration of its major loan
guarantee and disaster loan programs. I will discuss (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 after the September 11, 2001, terrorist attacks
and the recent Gulf Coast hurricanes.
In summary:
o Since the mid-1990s, when we found that SBA had virtually no
oversight program for its 7(a) guaranteed loan program, SBA has,
in response to our recommendations, established a program and
developed some enhanced monitoring tools. The oversight program is
led by its Office of Lender Oversight (OLO), 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. Although we have not
comprehensively reviewed the 7(a) program in some time, over the
years, SBA has implemented many of our recommendations for lender
oversight and continues to make improvements toward addressing
others.
o Since the late 1990s, SBA has experienced mixed success in
addressing other management challenges that affect its ability to
manage the 7(a) 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, we found that although SBA applied some key
practices important to successful organizational change, it
overlooked aspects that emphasize transparency and communication.
SBA has implemented some related recommendations for improvements
in those areas. SBA has made good progress in response to our
recommendations addressing financial management issues.
o With respect to SBA's administration of its disaster loan
program after the September 11, 2001, terrorist attacks, we 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. Our
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. We 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.
SBA was established in 1953, but its basic mission dates to the
1930s and 1940s when a number of predecessor agencies assisted
small businesses affected by the Great Depression and, later, by
wartime competition. The first of these, the Reconstruction
Finance Corporation, was abolished in the early 1950s; SBA was
established by the Small Business Act of 1953,1 to continue the
functions of the previous agencies. By 1954, SBA was making
business loans directly to small businesses and guaranteeing loans
banks made, making loans directly to victims of disasters, and
providing a wide range of technical assistance to small
businesses.
Today, SBA's stated purpose is to promote small business
development and entrepreneurship through business financing,
government contracting, and technical assistance programs. SBA
also serves as a small business advocate, working with other
federal agencies to, among other things, reduce regulatory burdens
on small businesses. Most SBA financial assistance is now provided
in the form of guarantees for loans made by private and other
institutions, but the agency's disaster program remains a direct
loan program and is available to homeowners and renters that are
affected by disasters of any kind; and to all businesses,
regardless of their size, to cover physical damages.
At the end of fiscal year 2005, SBA had authority for over 4,000
full-time employees and budgetary resources of approximately 1.1
billion.2
Providing small businesses with access to credit is a major avenue
through which SBA strives to fulfill its mission. 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.3 Because SBA guarantees up to 85 percent of each 7(a)
loan made by its lending partners, there is risk to SBA if the
loans are not repaid.
SBA is to ensure that lenders provide loans to borrowers who are
eligible and creditworthy. 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. As of September 30, 2005,
SBA's portfolio of 7(a) loans totaled $43 billion. 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.4 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. Unlike SBA's bank
lending partners, SBLCs are not generally regulated by financial
institution regulators.5
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. Although we sometimes
repeated recommendations in more than one report because SBA had
not acted to address them, SBA has now addressed many of the
outstanding recommendations and is in the process of addressing
others.
Prior to December 1997, SBA's procedures required annual on-site
reviews of lenders with more than three outstanding guaranteed
loans. But in a June 1998 study, we could not determine from the
district offices' files which lenders met this criterion and
should have been reviewed.6 In the five SBA district offices we
visited, we found that about 96 percent of the lenders had not
been reviewed in the past 5 years and that some lenders
participating in the program for more than 25 years had never been
reviewed. When we did our study, SBA was implementing a central
review program for its "preferred" lenders (those SBA certifies to
make loans without preapproval).7 The Small Business Programs
Improvement Act of 1996 required SBA to review preferred lenders
either annually or more frequently.8
In our 1998 report, we recommended that SBA establish a lender
review process for all of its 7(a) lenders, including the SBLCs.
In 1999, SBA established OLO and charged it with, among other
duties, managing lender reviews, including safety and soundness
examinations of SBLCs. 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. Numerous
deficiencies were identified in those first examinations, but the
SBLCs and SBA responded positively to address the recommendations.
SBA continues its contracting arrangement with FCA.
It was during our 2000 study on oversight of SBLCs that we first
recommended that SBA clarify its authority to take enforcement
actions, if necessary, against SBLCs, and to seek any statutory
authority it might need to do so.9 We made this recommendation
again in 2002 and in 2004 and included a call to clarify
procedures for taking actions against preferred lenders as well.
We recommended that SBA provide, through regulation, clear
policies and procedures for taking enforcement actions against
preferred lenders or SBLCs in the event of continued noncompliance
with its regulations. During this time, SBA sought appropriate
authority from Congress to take enforcement actions against SBLCs
similar to those of other regulators of financial institutions,
such as cease-and-desist and civil money penalty powers. Congress
provided SBA enforcement authority over non-bank lenders in late
2004, and SBA announced related delegations of authority in the
Federal Register in April 2005 to clarify responsibilities within
the agency.10 SBA officials have told us that they will issue
related regulations in 2006.
Our 2002 study focused more broadly on the relatively new OLO and
found that the agency had made more progress in developing its
lender oversight program.11 OLO had developed guidance,
centralized the lender review processes, and was performing more
reviews of its lenders. We did, however, find some shortcomings in
the program and made recommendations for improving it. For
example:
o While elements of the oversight program touched on the
financial risk posed by preferred lenders, weaknesses limited
SBA's ability to focus on, and respond to, current and future
financial risk to its portfolio. Neither the lender review process
nor SBA's off-site monitoring adequately focused on the financial
risk lenders posed. The reviews used an automated checklist to
focus on lenders' compliance with SBA's 7(a) processing,
servicing, and liquidation standards. The reviews did not provide
adequate assurance that lenders were sufficiently assessing
borrowers' eligibility and creditworthiness. We recommended that
SBA incorporate strategies into its review process to adequately
measure the financial risk lenders pose to SBA, develop specific
criteria to apply to the "credit elsewhere" standard, and perform
qualitative assessments of lenders' performance and lending
decisions.12 By 2004, as I will discuss in a moment, we found that
SBA had made progress in its ability to monitor and measure the
financial risk lenders pose but had not developed criteria for its
credit elsewhere standard.
o Although SBA had taken a number of steps to develop its lender
oversight function, the placement of its OLO within the Office of
Capital Access (OCA) did not give OLO the necessary organizational
independence it needed to accomplish its goals. OCA has other
objectives, including promoting the lending program to appropriate
lenders. We recommended that SBA make lender oversight a separate
function and establish clear authority and guidance for OLO. SBA
has taken several steps to address this recommendation but has not
made OLO an independent office. In the 2005 delegations of
authority published in the Federal Register, SBA specified that a
Lender Oversight Committee (comprised of a majority of senior SBA
officials outside of OCA) would have responsibilities for
reviewing reports on lender-oversight activities; OLO
recommendations for enforcement action; and OLO's budget,
staffing, and operating plans. SBA officials believe that these
and other measures will ensure sufficient autonomy and authority
for OLO to independently perform its duties. These measures appear
to provide the opportunity for more independence for OLO, but we
have not evaluated how the measures are actually working.
Our most recent review of SBA's oversight efforts, completed in
June 2004, focused on the agency's risk management needs and its
acquisition and use of a new loan monitoring service.13 Using an
assessment of best practices, we determined that SBA would need to
base its capabilities for monitoring its loan portfolio and lender
partners on a credit risk management program.14 Largely because
SBA relies on lenders to make its guaranteed loans, it needs a
loan and lender monitoring capability that will enable it to
efficiently and effectively analyze various aspects of its overall
portfolio of loans, its individual lenders, and their portfolios.
While SBA must determine the level of credit risk it will
tolerate, it must do so within the context of its mission and its
programs' structures. Since SBA is a public agency, its mission
obligations will drive its credit risk management policies. For
example, different loan products in the 7(a) program have
different levels of guarantees. These and other differences
influence the mix of loans in SBA's portfolio and, consequently,
would impact how SBA manages its credit risk.
Such a credit risk management program would likely include a
comprehensive infrastructure-including, skilled personnel, strong
management information systems, and functioning internal controls
related to data quality-along with appropriate methodologies and
policies that would ensure compliance with SBA criteria.
In 2003, SBA contracted with Dun and Bradstreet for loan
monitoring services. These services could enable the agency to
conduct the type of monitoring and analyses typical of "best
practices" among major lenders, and are recommended by financial
institution regulators. The services SBA obtained reflect many
best practices, particularly those related to infrastructure and
methodology, and can facilitate a new level of sophistication in
SBA's oversight efforts.15 The services also give SBA a way to
measure the financial risk posed by its lending partners, and
analyze loan and lending patterns efficiently and effectively.
However, SBA did not develop the comprehensive policies it needed
to implement the best practices as we recommended.
SBA officials have told us that they have taken steps to address
this recommendation. For example, the management plan governing
the agency's relationship with Dun and Bradstreet addresses a
process for continuous improvement. SBA has also established the
Lender Oversight Committee and a Portfolio Analysis Committee to
review portfolio performance. SBA officials told us that these
committees meet frequently. They also described the type of
analyses of the loan portfolio and individual lenders made
available for review and discussion by the committees, and
provided examples of these analyses. Although these developments
could provide the tools for risk management that we envisioned, we
have not evaluated them.
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.16
SBA has now acquired the ability to monitor its portfolio of
business loans through its arrangement with Dun and Bradstreet, as
mentioned earlier. SBA took this positive step after an
unsuccessful attempt to establish a risk management database as
required by the Small Business Programs Improvement Act of 1996.17
We monitored the agency's progress as it attempted to meet this
challenge on its own. When we reviewed SBA's plans in 1997, we
found that it had not undertaken the essential planning needed to
develop the proposed system.18 We periodically reported on SBA's
progress in planning and developing the loan monitoring system
since 1997.19 From 1998 to 2001, SBA's estimate for implementing
the system grew from $17.3 million to $44.6 million. By 2001, SBA
had spent $9.6 million for developmental activities, but had never
completed the mandated planning activities or developed a
functioning loan monitoring system.
In 2001, Congress did not appropriate funds for the loan
monitoring system and instead permitted SBA to use reprogrammed
funds, provided that SBA notify Congress in advance of SBA's use
of the reprogrammed funds.20 Congress also directed SBA to develop
a project plan to serve as a basis for future funding and
oversight of the loan monitoring system. As a result, SBA
suspended the loan monitoring system development effort. Of the
$32 million appropriated for the loan monitoring system effort,
about $14.7 million remained. In 2002, SBA contracted for
assistance to identify alternatives and provide recommendations
for further developing a loan monitoring system. 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. The contract
includes four 1-year options at an average cost of approximately
$2 million a year.
In 2001 we reported on SBA's organizational structure and the
challenges it presented for SBA to deliver services to small
businesses.21 We reviewed how well SBA's organization was aligned
to achieve its mission. We found a field structure that did not
consistently match with SBA's mission requirement. This was caused
by past realignment efforts during the mid-1990s that changed how
SBA performed its functions, but left some aspects of the previous
structure in place. Among the other weaknesses we identified were:
o ineffective lines of communication;
o confusion over the mission of district offices; and
o complicated, overlapping organizational relationships.
SBA began realigning its organization, operations, and workforce
to better serve its small-business customers in the 1990's. With
less responsibility for direct lending and a declining operating
budget, SBA streamlined its field structure by downsizing its 10
regional offices, moving the workload to district or headquarters
offices, and eliminating most of the regional offices' role as the
intermediate management layer between headquarters and the field.
SBA created the Office of Field Operations, largely to represent
the field offices in headquarters and to provide guidance and
oversight to field office management. In 2002, the agency planned
to approach its 5-year transformation efforts in phases, testing a
number of initiatives in order to make refinements before
implementing the initiatives agencywide. These efforts are
ongoing. SBA's current transformation objectives are to:
o streamline ODA by realigning offices, employees, and space to
better serve disaster victims and leverage use of the new disaster
loan processing system;
o centralize all 7(a) loan processing in two centers to
standardize procedures and reduce the workforce required for this
program;
o centralize all 504 loan liquidations in two centers to
standardize processing and increase efficiency;
o centralize disaster loan liquidations in one center to
standardize processing and increase efficiency; and
o transform the regional and district offices by standardizing
their size and function.
In October 2003, when we reported on SBA's transformation, SBA was
near completion of the first phase of its transformation
process.22 This initial phase aimed to
o transform the role of the district office to focus on outreach
to small businesses about SBA's products and services, and link
these businesses to the appropriate resources, including lenders;
and
o centralize some of its loan functions to improve efficiency and
the consistency of its loan approval and liquidation processes.
We found that the agency had applied some key practices important
to successful organizational change, but had overlooked aspects
that emphasize transparency and communication. For example, SBA
had top leadership support and a designated
transformation-implementation team, but the makeup of the team was
not communicated to employees and stakeholders, and the team's
leadership was not always consistent. Also, SBA had developed a
transformation plan that contained goals, anticipated results, and
an implementation strategy--but the plan was not made public, and
employees and stakeholders were not apprised of the details of the
plan. Also, certain aspects of the plan were revised, causing
further confusion among non-management employees. Further, SBA had
developed strategic goals to guide its transformation, but these
goals were not linked with measurable performance goals that would
demonstrate the success of the agency's plan to expand the focus
of the district offices on marketing and outreach.
Based on our findings and the possibility that further progress
could be impeded by budget and staff realignment challenges, we
recommended that SBA:
o ensure that implementation leadership is clearly identified to
employees and stakeholders;
o finalize its transformation plan and share it with employees
and stakeholders;
o develop performance goals that reflect the strategic goals for
transformation, and budget requests that clearly link resource
needs to achieving strategic goals;
o use the new performance management system to define
responsibilities;
o develop a communication strategy that promotes two-way
communication; and
o solicit ideas and feedback from employees and the union, and
ensure that their concerns were considered.
SBA officials have told us of the Administrator's increased
efforts to communicate with staff by holding agencywide meetings
with employees, for example. In addition, the agency plans to
finalize a transformation plan and share it with employees in
June. These actions could address some of the recommendations we
made to SBA, but we have not documented or evaluated the efforts.
SBA has made good progress towards addressing financial management
issues that for several years prevented it from obtaining an
unqualified audit opinion on its financial statements. We reported
on some of these issues in our January 2003 report on SBA's loan
sales.23 Specifically, we found that SBA lacked reliable data to
determine the overall financial results of its loan sales.
Further, because SBA did not analyze the effect of loan sales on
its remaining portfolio, we reported that its credit program cost
estimates for the budget and financial statements may have
contained significant errors. In addition, SBA could not explain
unusual account balances related to the disaster loan program,
which indicated that the subsidized program was expected to
generate a profit. These issues raised concerns about SBA's
ability to properly account for loan sales and to make reasonable
estimates of program costs.
In response to our findings and several recommendations, SBA
conducted an extensive analysis to resolve the issues we
identified and implemented a number of corrective actions. For
example, SBA developed a new cash- flow model to estimate the
costs of its disaster loan program, and implemented standard
operating procedures for annually revising the cost estimates for
its credit programs. SBA also revised its approach to determine
the results of loan sales and found that loans were sold at
losses, which was contrary to the original determination that the
sales generated gains. These findings prompted SBA to eventually
discontinue its loan sales program. We reviewed the improvements
made by SBA and reported in April 2005 that the loan accounting
issues we previously identified were resolved, and that the new
cash-flow model improved its ability to prepare more reliable cost
estimates and to determine the results of prior loan sales.24
However, we recommended additional steps that would improve the
long-term reliability of the cost estimates, such as routine
testing of the model. According to SBA officials, steps have been
taken to address each of our recommendations, including the
development of policies and procedures on how to operate and test
the model.
These improvements helped SBA achieve an unqualified audit opinion
on its fiscal year 2005 financial statements, which represents
significant progress from prior years. However, for fiscal year
2005 SBA's auditor continued to note weaknesses in SBA's overall
internal controls. The auditor noted three areas involving
internal controls that are considered to be weaknesses.25 The
first area, which the auditor considered to be a significant
weakness, related to financial management and reporting controls.
Specifically, the auditor found that SBA needed to improve its
funds management (i.e., canceling loan amounts not disbursed and
closing out grants), its review process for accounting
transactions, and its financial statement preparation process. The
other two less significant control weaknesses related to SBA's ODA
administrative expenditure controls and agencywide information
system controls. While these internal control weaknesses were not
severe enough to impact SBA's audit opinion for fiscal year 2005,
it is important for SBA to address them to help ensure that SBA
continues to be able to generate reliable financial data.
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.26 Through the ODA, SBA
provides low-interest, long-term loans to individuals and
businesses to assist them with disaster recovery. Unlike the 7(a)
program, the disaster loan program provides loans directly to
disaster victims. Businesses can apply for "physical loans" to
repair or replace business property to pre-disaster conditions, as
well as economic injury disaster loans (EIDLs) to obtain working
capital funds to meet their normal operating expenses. The maximum
loan amount for both physical business loans and EIDLs is $1.5
million, but SBA was given federal authority and supplemental
appropriations to increase the amount for 9/11 disaster loans.
Homeowners and renters can also apply for loans to cover their
uninsured losses. The maximum amount available for home loans is
$200,000, and personal property loans to replace items such as
automobiles, clothing, and furniture are available up to
$40,000.27 SBA offers terms of up to 30 years for repayment.
According to SBA, although ODA aims to provide loan funds to
disaster victims as quickly as possible, its focus is on long-term
recovery, and not on emergency relief.
Since SBA provides low-interest loans, the agency is required to
determine whether each applicant is able to obtain financial
assistance at reasonable rates and terms from non-government
sources prior to assigning an interest rate. A higher rate applies
for physical loan applicants if they are determined to have other
credit available, and economic injury loan applicants are
ineligible if they have other credit available. Physical business
loans--where the applicant has credit available from other
sources--are also subject to a maximum 3-year term for
repayment.28 SBA also has standard procedures and requirements for
disaster loans, including verification of losses claimed,
verification of repayment ability, and collateral to secure loans
for economic injury loans over $5,000 or for home loans or
physical disaster business loans over $10,000.29 SBA verifies
losses for physical loans and also deducts certain forms of
compensation, including insurance recoveries, from the eligible
loan amount. Federal Emergency Management Agency (FEMA) is the
coordinating agency for presidential disaster declarations, and
most disaster victims register with FEMA initially before
receiving a referral to SBA.30 SBA can review FEMA's information
to determine if an applicant has already received federal
assistance or insurance proceeds to avoid duplication of
benefits.31 If insurance reimbursement is undetermined at the time
of application, SBA can approve a loan for the total replacement
cost, but any insurance proceeds must be assigned to SBA to reduce
the loan balance. In considering any loan, SBA must have
reasonable assurance that the loan can be repaid. To make this
determination, SBA examines federal tax returns and income
information and reviews credit reports to verify the manner in
which an applicant's obligations, including federal debts, have
been met. One of the reasons that SBA may decline a loan
application is unsatisfactory history on a federal obligation. The
law does not require collateral for disaster loans, but SBA policy
establishes collateral requirements in order to balance the
agency's disaster recovery mission with its responsibility as a
lender of federal tax dollars. For example, for physical disaster
loans over $10,000, applicants are required to provide collateral
that will best secure the loan, and multiple loans totaling over
$10,000 also require collateral to secure each loan. Real estate
is the preferred form of collateral, but SBA will not
automatically decline an application if the best available
collateral is insufficient in value to secure the loan.
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.32 Home and business owners
in the federally declared disaster areas received just under half
of the disbursed loans; the remainder went to eligible businesses
around the country. Congress and SBA made several modifications to
the programs in response to complaints from small businesses. For
example, the EIDL program was expanded to the entire country and
to industries that had not previously been covered, size standards
for some eligible business were changed, and loan approval and
disbursement were expedited. 33
In 2004, in response to concerns that about half of the loan
applications submitted by small businesses were declined or
withdrawn, we reviewed a representative sample of these
applications and found that SBA had followed the appropriate
policies and procedures in making loan decisions.34 We compared
SBA's loan requirements to those of selected nonprofit agencies in
the New York area that provided financial assistance to local
small businesses following the disaster. Generally, we found that
SBA had loan requirements that were similar to these nonprofits,
but the nonprofits' programs allowed some additional flexibility
to address the particular needs of their small business
constituents.
We also currently have work under way to identify and assess the
factors that have affected the SBA's ability to respond to victims
of Hurricane Katrina and the other 2005 Gulf Coast hurricanes in a
timely manner.35 As part of our work, we are evaluating how SBA's
new Disaster Credit Management System, which has been in use since
January 2005, affected SBA's response. As the primary federal
lender to disaster victims, including individual homeowners,
renters, and businesses, SBA's ability to process and disburse
loans in a timely manner is critical to the recovery of the Gulf
Coast region. As of February 25, 2006, SBA faced a backlog of
about 103,300 applications in loan processing pending a final
decision, and the average time these applications had been in
process was about 94 days. During the month of March, SBA
continued to process applications. By March 25, 2006, SBA had
mailed out more than 1.6 million loan applications, received over
350,000 completed applications, processed more than 290,000
applications, and disbursed about $600 million in disaster loan
funds. Although SBA's current goal is to process loan applications
within 7 to 21 days, as of March 25, 2006, SBA faced a backlog of
about 55,000 applications in loan processing pending a final
decision and the average age of these loan applications was about
88 days. SBA also has more than 43,000 loan applications that have
been approved but have not been closed or fully disbursed. As a
result, disaster victims in the Gulf Region have not received
timely assistance in recovering from this disaster and rebuilding
their lives.
Based on our preliminary analysis of SBA's disaster loan
origination process, we have identified several factors that have
affected SBA's ability to provide a timely response to Gulf Coast
disaster victims. First, the volume of loan applications SBA
mailed out and received has far exceeded any previous disaster.
Compared with the Florida hurricanes of 2004 or the 1994
Northridge earthquake, the hurricanes that hit the Gulf Coast in
2005 resulted in the issuance of roughly two to three times as
many loan applications. 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. However, we have not
yet determined the duration and impact of these outages on
processing. SBA officials have attributed many of these problems
to a combination of hardware-and telecommunications- capacity
limitations as well as the level of service SBA has received from
its contractors. Third, SBA's planning efforts to address a
disaster of this magnitude appear to have been inadequate.
Although SBA's disaster planning efforts focused primarily on
responding to a disaster the size of the Northridge earthquake,
SBA officials said that it initially lacked the critical resources
such as office space, staff, phones, computers, and other
resources to process loans for this disaster. SBA has participated
in disaster simulations on a limited basis only and it is unclear
whether previous disaster simulations of category 4 hurricanes
hitting the New Orleans area were considered.
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.
Mr. Chairman, this concludes my prepared statement. I would be
happy to answer any questions at this time.
For further information on this testimony, please contact William
B. Shear at (202) 512-8678. Individuals making key contributions
to this testimony included Katie Harris, Assistant Director, and
Bernice Benta.
SBA Disaster Loan Program: Accounting Anomalies Resolved but
Additional Steps Would Improve Long-Term Reliability of Cost
Estimates. GAO-05-409 . Washington, D.C.: April 14, 2005.
Small Business Administration: SBA Followed Appropriate Policies
and Procedures for September 11 Disaster Loan Applications.
GAO-04-885 . Washington, D.C.: August 31, 2004.
Small Business Administration: New Service for Lender Oversight
Reflects Some Best Practices, but Strategy for Use Lags Behind.
GAO-04-610 . Washington, D.C.: June 8, 2004.
Small Business Administration: Model for 7(a) Program Subsidy Had
Reasonable Equations, but Inadequate Documentation Hampered
External Reviews. GAO-04-9 . Washington, D.C.: March 31, 2004.
Small and Disadvantaged Businesses: Most Agency Advocates View
Their Roles Similarly. GAO-04-451 . Washington, D.C.: March 22,
2004.
Small Business Administration: Progress Made, but Transformation
Could Benefit from Practices Emphasizing Transparency and
Communication. GAO-04-76 . Washington, D.C.: October 31, 2003.
Small and Disadvantaged Businesses: Some Agencies' Advocates Do
Not Report to the Required Management Level. GAO-03-863 .
Washington, D.C.: September 4, 2003.
Small Business Administration: Observations on the Disaster Loan
Program. GAO-03-721T . Washington, D.C.: May 1, 2003.
Small Business Administration: Progress Made but Improvements
Needed in Lender Oversight. GAO-03-720T . Washington, D.C.: April
30, 2003.
Small Business Administration: Response to September 11 Victims
and Performance Measures for Disaster Lending. GAO-03-385 .
Washington, D.C.: January 29, 2003.
Small Business Administration: Accounting Anomalies and Limited
Operational Data Make Results of Loan Sales Uncertain. GAO-03-87 .
Washington, D.C.: January 3, 2003.
Major Management Challenges and Program Risks: Small Business
Administration. GAO-03-116 . Washington, D.C.: January 1, 2003.
Small Business Administration: Progress Made but Improvements
Needed in Lender Oversight. GAO-03-90 . Washington, D.C.: December
9, 2002.
September 11: Small Business Assistance Provided in Lower
Manhattan in Response to the Terrorist Attacks. GAO-03-88 .
Washington, D.C.: November 1, 2002.
Small Business Administration: Workforce Transformation Plan Is
Evolving. GAO-02-931T . Washington, D.C.: July 16, 2002.
Loan Monitoring System: SBA Needs to Evaluate the Use of Software.
GAO-02-188 . Washington, D.C.: November 30, 2001.
Small Business Administration: Current Structure Presents
Challenges for Service Delivery. GAO-02-17 . Washington, D.C.:
October 26, 2001.
Small Business Administration: Actions Needed to Strengthen Small
Business Lending Company Oversight. GAO-01-192 . Washington, D.C.:
November 17, 2000.
SBA Loan Monitoring System: Substantial Progress Yet Key Risks and
Challenges Remain. GAO/AIMD-00-124 . Washington, D.C.: April 25,
2000.
Small Business Administration: Planning for Loan Monitoring System
Has Many Positive Features but Still Carries Implementation
Challenges. GAO/T-AIMD-98-233 . Washington, D.C.: July 16, 1998.
Small Business Administration: Mandated Planning for Loan
Monitoring System Is Not Complete. GAO/AIMD-98-214R . Washington,
D.C.: June 30, 1998.
Small Business Administration: Few Reviews of Guaranteed Lenders
Have Been Conducted. GAO/GGD-98-85 . Washington, D.C.: June 11,
1998.
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Background
SBA Has Developed and Continues to Improve an Oversight Program for Its Business
Loan Program
1Pub. L. No. 83-163, tit. II, 67 Stat. 232 (July 30, 1953), as amended,
which was withdrawn as part of that Act and made a separate Act known as
the "Small Business Act" by Pub. L. No. 85-536, 72 Stat. 384 (July 18,
1958) (codified at 15 U.S.C. S:S: 631 - 657e).
2Budgetary resources include new budget authority and unobligated balances
of previous budget authority.
315 U.S.C. S: 636(a).
4Within the 7(a) program, there are three classifications of
lenders-regular, certified, and preferred lenders. The Small Business
Administration continues to provide final approval of loans made by its
regular lenders. Certified lenders have the authority to process, close,
service, and may liquidate SBA guaranteed loans. Preferred lenders are
given full authority to make loans without prior SBA approval.
5Small Business Lending Companies that are subsidiaries of bank holding
companies are subject to Federal Reserve Board oversight.
6See GAO, Small Business Administration: Few Reviews of Guaranteed Lenders
Have Been Conducted, GAO-98-85 (Washington, D.C.: June 11, 1998).
7The percentage of loans accounted for by preferred lenders represented
about 30 percent of 7(a) loan approvals and 50 percent of loan volume in
1997.
8The assessments are to include, among other things, defaults, loans, and
recoveries of loans made by the lender. Pub. L. No. 104-208, div. D, title
1, S: 103(h), 110 Stat. 3009, 3009-728 (Sept. 30, 1996) (codified at 15
U.S.C. S: 634 note).
9GAO, Small Business Administration: Actions Needed to Strengthen Small
Business Lending Company Oversight, GAO-01-192 (Washington, D.C.: Nov. 17,
2000).
10See Small Business Reauthorization and Manufacturing Assistance Act of
2004 (Pub. L. No. 108-447, div.K, S: 161, 118 Stat. 2809, 3458 (Dec. 8,
2004) (codified at 15 U.S.C. S: 650); and 70 Fed. Reg. 21262, 21263 (Apr.
25, 2005).
11See GAO, Small Business Administration: Progress Made but Improvements
Needed in Lender Oversight, GAO-03-90 (Washington, D.C.: Dec. 9, 2002).
1215 U.S.C. S: 636(a)(1)(A) prohibits SBA from providing financial
assistance to an applicant that can obtain credit elsewhere. 13 C.F.R. S:
120.101 states, in part, "SBA provides business loan assistance only to
applicants for whom the desired credit is not otherwise available on
reasonable terms from non-Federal sources."
13See GAO, Small Business Administration: New Service for Lender Oversight
Reflects Some Best Practices, but Strategy for Use Lags Behind, GAO-04-610
(Washington, D.C.: June 8, 2004).
14"Credit risk" is the risk of financial loss due to borrower default.
SBA Has Experienced Mixed Success in Addressing Other Management Challenges to
Its 7(a) Loan Program
15The best practices include continuous improvements in the service and
its tools, frequent and routine portfolio reviews, and active involvement
of senior managers in reviewing how the information from the service is
used.
16GAO, Major Management Challenges and Program Risks: Small Business
Administration, GAO-03-116 (Washington, D.C.: Jan. 2003); see
www.gao.gov/pas/2005 for a 2005 update. We first addressed these
management challenges in 2001. See GAO, Major Management Challenges and
Program Risks: Small Business Administration, GAO-01-260 (Washington,
D.C.: Jan. 2001).
SBA Has Made Advancements in Information Technology Critical to Business Loans
17Pub. L No. 104-208, div. D, title I, S: 102,110 Stat. 3009-724,
3009-725, (Sept. 30, 1996) (codified at 15 U.S.C. S: 633(b)(3).
18GAO, Small Business Administration: Better Planning and Controls Needed
for Information Systems, GAO/AIMD-97-94 (Washington, D.C.: June 27, 1997).
19GAO, Small Business Administration: Mandated Planning for Loan
Monitoring System Is Not Complete, GAO/AIMD-98-214R (Washington, D.C.:
June 30,1998); Small Business Administration: Planning for Loan Monitoring
System Has Many Positive Features but Still Carries Implementation
Challenges, GAO/T-AIMD-98-233 (Washington, D.C.: July 16, 1998); SBA Loan
Monitoring System: Substantial Progress Yet Key Risks and Challenges
Remain, GAO/AIMD-00-124 (Washington, D.C.: Apr. 25, 2000); Loan Monitoring
System: SBA Needs to Evaluate the Use of Software, GAO-02-188 (Washington,
D.C.: Nov. 30, 2001).
20 See Pub. L. No. 107-77, 115 Stat. 748, 796-799 (Nov. 28, 2001); and
H.R. Conf. Rep. No. 107-278 at 164 (2001).
SBA Has Applied Key Practices but Overlooked Transparency and Communication
During Its Workforce Transformation
21GAO, Small Business Administration: Current Structure Presents
Challenges for Service Delivery, GAO-02-17 (Washington, D.C.: Oct. 26,
2001).
22GAO, Small Business Administration: Progress Made, but Transformation
Could Benefit from Practices Emphasizing Transparency and Communication,
GAO-04-76 (Washington, D.C.: Oct. 31, 2003).
SBA Addressed Major Financial Management Issues, but Additional Steps are
Necessary to Sustain Progress
23GAO, Small Business Administration: Accounting Anomalies and Limited
Operational Data Make Results of Loan Sales Uncertain, GAO-03-87
(Washington, D.C.: Jan. 3, 2003). Between fiscal years 1999 and 2003, SBA
conducted seven loan sales, divesting itself of about 166,000 loans with
an outstanding balance of about $5.7 billion. Approximately 86 percent of
the amount sold was from disaster assistance loans.
24GAO, SBA Disaster Loan Program: Accounting Anomalies Resolved but
Additional Steps Would Improve Long-Term Reliability of Cost Estimates,
GAO-05-409 (Washington, D.C.: Apr. 14, 2005).
SBA Provided Disaster Loans in Response to September 11th and Now Is Responding
to the Gulf Coast Hurricanes
25There are two types of internal control weaknesses. A "reportable
condition" is a significant deficiency in the design or operation of
internal controls that could adversely affect the organization's ability
to provide reasonable assurance on the reliability of its financial
reporting, performance reporting, and compliance with laws and
regulations. The more significant weakness, referred to as a "material
internal control weakness," is a reportable condition that does not reduce
to a relatively low level the risk that errors, fraud, or noncompliance
involving significant amounts may occur and may not be detected in a
timely manner, by employees in the normal course of performing their
assigned functions.
26The economic injury disaster loan (EIDL) program under 15 U.S.C. S:
636(b)(2) covers small business concerns and small agricultural
cooperatives located in a disaster area.
2713 C.F.R. S: 123.105.
2813 C.F.R. S: 123.203(a).
2913 C.F.R. S: 123.11.
30Non-business disaster victims initially register with the Federal
Emergency Management Agency (FEMA) and are directed to apply for an SBA
disaster assistance loan if they meet certain basic criteria. Business
owners are also encouraged to register with FEMA. Applicants not approved
for an SBA loan are referred back to FEMA for possible grant assistance.
31ODA's new Disaster Credit Management System (DCMS) has a direct link to
FEMA's database, which allows SBA to conduct the duplication of benefits
(DOB) review electronically.
32GAO, Small Business Administration: Response to September 11 Victims and
Performance Measures for Disaster Lending, GAO-03-385 (Washington, D.C.:
Jan. 29, 2003).
33SBA was given supplemental appropriations to make loans after September
11th and the 2005 Gulf Coast hurricane disasters.
34GAO, Small Business Administration: SBA Followed Appropriate Policies
and Procedures for September 11 Disaster Loan Applications, GAO-04-885
(Washington, D.C.: Aug. 31, 2004). In addition to SBA disaster loans,
Congress allowed SBA to collect reduced annual fees on 7(a) loans made by
lenders to small businesses "adversely affected" by the terrorist attacks
and their aftermath (see Pub. L. 107-117, S: 203, 115 Stat. 2230,
2297-2298 (Jan. 10, 2002)). These loans were designated by SBA as
"Supplemental Terrorist Activity Relief" or STAR, loans. When the STAR
program expired on January 10, 2003, approximately $3.7 billion in STAR
loans had been approved. In a review of the STAR loan program, SBA's
Office of Inspector General found that most lender files did not contain
sufficient information to demonstrate that borrowers were adversely
affected by the attacks and their aftermath, and that SBA did not
establish specific requirements to review or verify lenders' STAR
justifications. See SBA, Office of Inspector General, Audit of SBA's
Administration of the Supplemental Terrorist Activity Relief (STAR) Loan
Program, Rept. No. 6-09 (Washington, D.C.: Dec. 23, 2005). We did not
review the STAR program.
35 Hurricane Katrina struck the Gulf Coast on August 29; Hurricanes Rita
and Wilma struck the U.S. Mainland on September 24 and October 24,
respectively.
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Highlights of GAO-06-605T , a testimony to the Subcommittee on Federal
Financial Management, Government Information, and International Security,
Committee on Homeland Security and Governmental Affairs, U.S. Senate
April 6, 2006
SMALL BUSINESS ADMINISTRATION
Improvements Made, but Loan Programs Face Ongoing Management Challenges
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.
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.
*** End of document. ***