Small Business

Under its Preferred Lenders Program, the Small Business Administration (SBA) gives its best private lenders the authority to approve and service SBA-guaranteed loans. The goal is to improve service to small businesses without increasing SBA's involvement. Early indicators show that the program has had favorable results in terms of the number of preferred loans made, the efficiency with which these loans are processed, and the rate at which these loans fail. GAO notes, however, that most preferred loans have not reached the stage at which most loans typically fail, and the Office of Inspector General has found that some preferred lenders are not complying with SBA rules and regulations. Because SBA has not identified all loans with temporary lender identification numbers and its loan accounting system database cannot automatically link temporary and permanent identification numbers, SBA cannot quickly compile data on the amount of lending by and loan failures for individual lenders. SBA officials said that while they can obtain accurate failure rates by manually compiling each preferred and certified lender's guaranteed loan portfolio, they cannot do so for regular loans because of the high volume of regular loans. With the increasing volume of preferred loans, manual compilation will become a major chore.

GAO found that: (1) the Preferred Lenders Program has achieved better results than either the certified or regular loan programs, but most preferred loans have not reached the age when loans typically fail; (2) preferred lenders have not always complied with SBA rules and regulations; (3) the number of preferred loans has increased nearly every year since the program's inception in 1983; (4) loan processing takes one-third the time of loan processing under the certified loan program, and one-quarter the time under the regular guaranteed loan program; (5) such efficiency helped SBA maintain a fairly stable volume of guaranteed lending despite reductions in staff; (6) the failure rate of preferred loans is only one-third that of loans made under other SBA guaranteed loan programs; (7) compared with other SBA-guaranteed loans, preferred loans are larger in dollar amount but have similar interest rates, receive the maximum SBA guarantee applicable to that program more often, and are typically made to businesses that are similar in terms of their organizational type and industry; (8) lending under the preferred loan program is concentrated geographically due to competition among lenders and regional economies' effect on the demand for loans; (9) recent Preferred Lenders Program audits identified problems with preferred lenders' loan making, use of loan proceeds, and inadequate collateral to secure loans; and (10) the 1990 SBA Federal Managers' Financial Integrity Act report identified SBA oversight of preferred lenders as a material weakness.

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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