The Small Business Administration's Secondary Market Process

Gao ID: 123558 March 6, 1984

GAO discussed the Small Business Administration's (SBA) 7(a) loan guarantee program and the SBA role in the secondary market for guaranteed loans. In the secondary market, lending institutions gain an immediate return on guaranteed loans to small businesses by selling the guaranteed portions of loans to other investors. GAO believes that the secondary market can benefit small businesses by: (1) increasing the likelihood that lenders with liquidity problems will make small business loans; (2) enabling lenders to leverage capital and make more small business loans; (3) increasing the availability of fixed-rate loans; and (4) lowering interest rates. Problems cited by GAO included: (1) confusion within SBA over administrative responsibility for the secondary market process; (2) the lack of an automated system to account for secondary market transactions; and (3) reconciliation of investor records with those of the SBA fiscal transfer agent. GAO also discussed the effect on interest rates of servicing fees, which lending institutions charge to investors in the secondary market. Servicing fees usually consist of the difference between the interest rate that the bank charges to the borrower and the rate that the investor is willing to accept. GAO found wide variations in the service fees charged in the secondary market and believes that the secondary market will not lower interest rates until this practice is controlled. GAO also commented favorably on S.2375, a bill which proposes changes to the regulation of the secondary market.

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