Small Business

Improving SBA Loan Collateral Liquidations Would Increase Recoveries Gao ID: RCED-92-5 December 19, 1991

The Small Business Administration (SBA) has the authority to provide assistance to new or existing small businesses through direct (government-funded) loans or guaranteed loans made by private lenders. With almost $11.5 billion in outstanding loans, the general business loan program is SBA's largest financial assistance effort. However, more than $1.2 billion of these loans are in liquidation. SBA is experiencing substantial losses in liquidating loans because (1) collateral is insufficient to cover the losses when loans are liquidated and (2) SBA does not maximize recoveries on existing loan collateral. This report provides an overview of SBA's liquidation of loan collateral for defaulted loans, including losses on liquidated loans; the adequacy and valuation of collateral; and collateral recovery efforts by SBA and private lenders.

GAO found that: (1) in the three regions reviewed, SBA lost about $153.5 million of $216.8 million in liquidated 7(a) general business loans due to insufficient collateral and liquidating actions that did not maximize recoveries; (2) the estimated market value of the collateral for those loans dropped 68 percent, from an initial market value of $428.4 million to an estimated liquidation value of $136.1 million; (3) although the liquidation rate of collateral is generally less than the market value, such factors as poor economic conditions and collateral that either declines in value or is used during the course of business further contributes to this decline; (4) SBA did routinely verify the existence of collateral throughout the term of the loan, timely inventory collateral at liquidation, or ensure that businesses had adequate liquidation plans; and (5) private lenders of SBA-guaranteed loans had little incentive to maximize recovery, since SBA generally made guaranteed payment to lenders before complete collateral recovery.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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