Small Business Administration

This report reviews the Small Business Administration's (SBA) oversight of lenders participating in its 7(a) loan program and its efforts to comply with the preferred lender review requirements of the Small Business Programs Improvement Act of 1996. The 7(a) loan program is intended to serve small business borrowers who cannot otherwise obtain financing under reasonable terms and conditions from the private sector. In fiscal year 1997, 7(a) loan approvals totaled nearly $9.5 billion. GAO determines (1) how SBA conducts on-site reviews to monitor participating lenders' compliance with its 7(a) loan program policies and procedures and (2) what steps SBA is taking to comply with the preferred lender oversight provisions of the Small Business Programs Improvement Act.

GAO noted that: (1) prior to December 1997, SBA's operating procedures for the 7(a) program required annual on-site reviews of lenders having more than three outstanding guaranteed loans; (2) GAO could not determine from the district offices' files which lenders met this criterion and should have been reviewed; (3) in five SBA district offices GAO visited, about 96 percent of the lenders had not been reviewed by SBA in the past 5 years; (4) for some lenders that had participated in the program for more than 25 years, GAO found no evidence that they had ever been reviewed; (5) without conducting periodic on-site lender reviews, SBA does not have a systematic means to help ensure that lenders' actions do not render loans ineligible, uncreditworthy, or uncollectible, thus increasing the risk of loss to the agency; (6) such monitoring is particularly important as the agency moves from direct involvement on loan approvals to increased reliance on participating lenders to perform the approval and other functions related to the loan process; (7) in the last 5 years, SBA's Inspector General conducted audits at only 3 of the 12 current small business lending companies (SBLC) that all operate as preferred lenders; (8) beginning December 1997, SBPIA required SBA to review preferred lenders annually or more frequently; (9) SBPIA did not change the oversight requirements for regular and certified lenders; (10) as of May 1998, SBA was in the process of implementing a central review program for preferred lenders, but SBA had not yet conducted any reviews because of delays in developing the program; and (11) although the central review program may offer a more comprehensive and systematic approach to assessing lender compliance with SBA's standards, it is too early to tell how successful the program will be until reviews are conducted and information on the program is available.

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.

Director: Team: Phone: