Small Business

The 7(a) general business loan program, the Small Business Administration's (SBA) largest financial assistance program, aids small businesses that cannot obtain credit at reasonable terms from conventional lenders without government assistance. Losses for the program, however, are not fully disclosed in SBA's annual loss study because the actual results from the sale of acquired collateral are omitted. In addition, expenses incurred in managing and selling collateral are not included in collateral sales accounts nor in the annual loss study. While SBA may not consider these unreported losses significant when compared with total cumulative loan program losses or program disbursements, they do amount to millions of dollars and should be disclosed so that individual 7(a) loan program losses are more accurately reported to SBA program managers and Congress. In formulating protective bids to acquire collateral, SBA does not consistently comply with its standard operating procedures for determining collateral values and sometimes acquires collateral that costs the taxpayers more than it is worth. Furthermore, the assigned collateral values may provide borrowers excessive debt relief and preclude SBA from future collection opportunities.

GAO found that: (1) SBA does not include actual gains or losses on acquired collateral and costs associated with the management and sale of acquired collateral in its annual loan loss study; (2) SBA records the actual gains and losses realized from collateral sales in separate asset disposition accounts; (3) SBA uses separate accounts to record and account for the acquisition and final sale of acquired collateral because the final sale of collateral may take several months and SBA can more quickly resolve borrowers' loan accounts by using an assigned collateral value, rather than actual liquidation receipts; (4) SBA records the additional costs it incurs while managing and selling acquired collateral separately in general expense accounts; (5) SBA protective bids for acquiring collateral at foreclosure sales frequently do not reflect additional expenses associated with acquiring collateral and, as a result, SBA sometimes overvalues collateral and makes acquisition decisions that are not advantageous to the government; (6) inappropriate protective bid amounts can also improperly reduce a borrower's outstanding debt; (7) SBA does not consistently comply with its standard operating procedures for acquiring loan collateral at forced liquidation sales; and (8) from the 7(a) Program's inception through 1989, total actual losses from the sale of acquired collateral were about $168 million greater than SBA reported in the annual loss studies.

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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