Small Business Administration
Progress Made but Improvements Needed in Lender Oversight Gao ID: GAO-03-720T April 30, 2003The Small Business Administration (SBA) is responsible for oversight of its 7(a) loan program lenders, including those who participate in the Preferred Lenders Program or PLP. SBA delegates full authority to preferred lenders to make loans without prior SBA approval. In fiscal year 2002, preferred lenders approved 55 percent of the dollar value of all 7(a) loans--about $7 billion. Small businesses are certainly a vital part of the nation's economy. According to SBA, they generate more than half of the nation's gross domestic product and are the principal source of new jobs in the U.S. economy. In turn, SBA's mission is to maintain and strengthen the nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses. Providing small businesses with access to credit is a major avenue through which SBA strives to fulfill its mission. Strong oversight of lenders by SBA is needed to protect SBA from financial risk and to ensure that qualified borrowers get 7(a) loans. SBA has a total portfolio of about $46 billion, including $42 billion in direct and guaranteed small business loans and other guarantees. Because SBA guarantees up to 85 percent of the 7(a) loans made by its lending partners, there is risk to SBA if the loans are not repaid. SBA must ensure that lenders provide loans to borrowers who are eligible and creditworthy to protect the integrity of the 7(a) program. Our statement today is based on the report we issued December 9, 2002, Small Business Administration: Progress Made but Improvements Needed in Lender Oversight (GAO-03-90). The report and our remarks will focus on our evaluation of (1) SBA's 7(a) lender oversight program and (2) SBA's organizational alignment for conducting oversight of preferred lenders and Small Business Lending Companies (SBLC). In addition, we will comment on SBA's latest response to our findings and recommendations. Our overall objective is to provide the Senate Committee on Small Business and Entrepreneurship with information and perspectives to consider as it moves forward on SBA reauthorization.
SBA has made progress in developing its lender oversight program, but there are still areas in need of improvement. While SBA has identified appropriate elements for an effective lender oversight program, it has been slow to change programs and procedures to fully incorporate all of these elements. In addition, financial risk management issues have become more critical for SBA, as its current loan programs focus on partnering with lenders, primarily banks, that make loans guaranteed up to 85 percent by SBA. However, our work showed that SBA had not yet consistently incorporated adequate measures of financial risk into the PLP review process or the SBLC examination program. The current PLP review process, which SBA uses to ensure compliance with the program mission, rules, and regulations, involves a cursory review of documentation maintained in lenders' loan files rather than a qualitative assessment of borrower creditworthiness or eligibility. SBA's standards for borrower eligibility (the "credit elsewhere" requirement) are broad and therefore subject to interpretation. SBA had not developed clear enforcement policies for preferred lenders or SBLSs that would specifically describe its response in the event that reviews discover noncompliance or safety and soundness problems. SBA had been slow to finalize and issue SBLC examination reports. In addition, SBA had been slow to respond to recommendations for improving the SBLC examination program. Without continued improvement to better enable SBA to assess the financial risk posed by 7(a) loans and to ensure that its lending partners are making loans to eligible small businesses, SBA will not have a successful lender oversight program. Although SBA has listed the oversight of its lending partners as an agency priority, the function does not have the necessary organizational independence or resources to accomplish its goals. In our past work analyzing organizational alignment and workload issues, we have described the importance of (1) tying organizational alignment to a clear and comprehensive mission statement and strategic plan and (2) providing adequate resources to accomplish the mission. However, two different offices--Lender Oversight and Financial Assistance, both of which are in the Office of Capital Access (OCA)--carry out SBA's lender oversight functions. OCA also promotes and implements SBA's lending programs. This alignment presents a possible conflict because PLP promotion and operations are housed in the same office that assesses lender compliance with SBA safety and soundness and mission requirements. Additionally, split responsibilities within OCA and limited resources have impeded SBA's ability to complete certain oversight responsibilities, which could result in heightened risk to its portfolio or lack of comprehensive awareness of portfolio risk.
GAO-03-720T, Small Business Administration: Progress Made but Improvements Needed in Lender Oversight
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Testimony:
Before the Committee on Small Business and Entrepreneurship, U.S.
Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EDT:
Wednesday, April 30, 2003:
Small Business Administration:
Progress Made but Improvements Needed in Lender Oversight:
Statement of Davi M. D'Agostino
Director, Financial Markets and Community Investments:
GAO-03-720T:
Madam Chair and Members of the Committee:
I am pleased to be here today at this roundtable to discuss the results
of our work on the Small Business Administration's (SBA) oversight of
its 7(a) loan program lenders, particularly those who participate in
the Preferred Lenders Program or PLP. SBA delegates full authority to
preferred lenders to make loans without prior SBA approval. In fiscal
year 2002, preferred lenders approved 55 percent of the dollar value of
all 7(a) loans--about $7 billion. Small businesses are certainly a
vital part of the nation's economy. According to SBA, they generate
more than half of the nation's gross domestic product and are the
principal source of new jobs in the U.S. economy. In turn, SBA's
mission is to maintain and strengthen the nation's economy by aiding,
counseling, assisting, and protecting the interests of small
businesses. Providing small businesses with access to credit is a major
avenue through which SBA strives to fulfill its mission. Strong
oversight of lenders by SBA is needed to protect SBA from financial
risk and to ensure that qualified borrowers get 7(a) loans. SBA has a
total portfolio of about $46 billion, including $42 billion in direct
and guaranteed small business loans and other guarantees.[Footnote 1]
Because SBA guarantees up to 85 percent of the 7(a) loans made by its
lending partners, there is risk to SBA if the loans are not repaid. SBA
must ensure that lenders provide loans to borrowers who are eligible
and creditworthy to protect the integrity of the 7(a) program.
Our statement today is based on the report we issued December 9, 2002,
Small Business Administration: Progress Made but Improvements Needed in
Lender Oversight (GAO-03-90). The report and our remarks will focus on
our evaluation of (1) SBA's 7(a) lender oversight program and (2) SBA's
organizational alignment for conducting oversight of preferred lenders
and Small Business Lending Companies (SBLC).[Footnote 2] In addition,
we will comment on SBA's latest response to our findings and
recommendations.[Footnote 3] Our overall objective is to provide the
Committee with information and perspectives to consider as it moves
forward on SBA reauthorization.
In analyzing SBA's oversight of its preferred lenders, we defined
oversight to include both SBA's reviews of preferred lenders for
compliance with SBA rules and regulations and SBA's evaluations of
lenders to decide their initial and continued participation in the PLP.
We focused our reviews in part to follow up on recommendations made in
our June 1998 report, where we found that SBA was doing few reviews of
its preferred lenders.[Footnote 4] We analyzed a sample of review
reports and PLP guidance, and review and lending data to the extent
that they were available. We also interviewed SBA headquarters and
regional staff, PLP lenders, and representatives of the National
Association of Government Guaranteed Lenders.
Summary:
SBA has made progress in developing its lender oversight program, but
there are still areas in need of improvement. While SBA has identified
appropriate elements for an effective lender oversight program, it has
been slow to change programs and procedures to fully incorporate all of
these elements. In addition, financial risk management issues have
become more critical for SBA, as its current loan programs focus on
partnering with lenders, primarily banks, that make loans guaranteed up
to 85 percent by SBA. However, our work showed that:
* SBA had not yet consistently incorporated adequate measures of
financial risk into the PLP review process or the SBLC examination
program.
* The current PLP review process, which SBA uses to ensure compliance
with the program mission, rules, and regulations, involves a cursory
review of documentation maintained in lenders' loan files rather than a
qualitative assessment of borrower creditworthiness or eligibility.
* SBA's standards for borrower eligibility (the "credit elsewhere"
requirement) are broad and therefore subject to interpretation.
* SBA had not developed clear enforcement policies for preferred
lenders or SBLCs that would specifically describe its response in the
event that reviews discover noncompliance or safety and soundness
problems.
* SBA had been slow to finalize and issue SBLC examination
reports.[Footnote 5] In addition, SBA had been slow to respond to
recommendations for improving the SBLC examination program.
Without continued improvement to better enable SBA to assess the
financial risk posed by 7(a) loans and to ensure that its lending
partners are making loans to eligible small businesses, SBA will not
have a successful lender oversight program.
Although SBA has listed the oversight of its lending partners as an
agency priority, the function does not have the necessary
organizational independence or resources to accomplish its goals. In
our past work analyzing organizational alignment and workload issues,
we have described the importance of (1) tying organizational alignment
to a clear and comprehensive mission statement and strategic plan and
(2) providing adequate resources to accomplish the mission. However,
two different offices--Lender Oversight and Financial Assistance, both
of which are in the Office of Capital Access (OCA)--carry out SBA's
lender oversight functions (see fig. 1). OCA also promotes and
implements SBA's lending programs. This alignment presents a possible
conflict because PLP promotion and operations are housed in the same
office that assesses lender compliance with SBA safety and soundness
and mission requirements. Additionally, split responsibilities within
OCA and limited resources have impeded SBA's ability to complete
certain oversight responsibilities, which could result in heightened
risk to its portfolio or lack of comprehensive awareness of portfolio
risk.
Our report made recommendations to improve SBA's oversight of its
lenders. Specifically, we recommended that SBA:
* incorporate strategies into its review process to adequately measure
the financial risk lenders' portfolios of guaranteed SBA loans pose to
SBA,
* develop specific criteria to apply to the credit elsewhere standard
used to determine borrower eligibility,
* perform qualitative assessments of lenders' performance and lending
decisions,
* clarify its enforcement authority and specify conditions under which
it would take enforcement action,
* make the preferred lender program more accessible to large national
lenders, and:
* better emphasize lender oversight in its organizational alignment to
provide an oversight office with greater autonomy within SBA to match
the growing importance of lender oversight.
SBA essentially disagreed with part or all of our recommendations for
improving its assessments of lenders, said that it was "working to
address" issues we raised about enforcement and accessibility of the
preferred lender program, and disagreed with our recommendation to
separate lender oversight functions and responsibilities from preferred
lender program management functions.
Figure 1: Preferred Lender Oversight Responsibilities within OCA:
[See PDF for image]
[End of figure]
Background:
The 7(a) loan program, which is authorized by Section 7(a) of the Small
Business Act, is SBA's largest business loan program.[Footnote 6] It is
intended to serve small business borrowers who otherwise cannot obtain
financing under reasonable terms and conditions from the private
sector. In administering the 7(a) program, SBA has evolved from making
guaranteed loans directly to depending on lending partners, primarily
banks.[Footnote 7] Under 7(a), SBA provides guarantees of up to 85
percent on loans made by participating lenders.
Within 7(a), there are three classifications of lenders--regular,
certified, and preferred. SBA evaluates and grants preferred lender
status to 7(a) lenders after receiving nominations and reviews from its
70 district offices and a regional processing center. Of the three
categories, preferred lenders have the most autonomy in that they can
make loans without prior SBA review or approval. Most preferred lenders
are banks that have their own safety and soundness regulators, such as
the Office of the Comptroller of the Currency. Those regulators,
however, may not focus on the 7(a) loans that SBA guarantees when they
examine the bank. The other preferred lenders, which are SBLCs, have no
regulator other than SBA--making SBA oversight more critical. As of
August 2002, SBA had over 400 preferred lenders. To give you an idea of
this program's scope, in fiscal year 2002, 7(a) loan approvals totaled
approximately $12.2 billion, of which preferred lenders approved $6.7
billion. However, preferred lending activity is concentrated in a few
larger institutions. Less than 1 percent of 7(a) lenders account for
more than 50 percent of 7(a) dollar volume outstanding. According to
SBA, most of these lenders are preferred lenders.
Two offices within SBA have primary responsibility for 7(a) lender
oversight--the Office of Lender Oversight (OLO) and the Office of
Financial Assistance (OFA). OLO is responsible for many oversight
functions, such as managing all headquarters and field office
activities regarding lender reviews. However, OFA has retained some
oversight responsibilities. OFA's current role in lender oversight is
to provide final approval of lenders' PLP status. Lenders are granted
PLP status in specific SBA districts for a period of 2 years or less.
OFA collects information about the lender prepared by the Sacramento
Processing Center, with input from one or more of SBA's 70 district
offices, and decides whether to renew a lender's PLP status or to grant
status in an additional district. OFA may also discontinue a lender's
PLP status.
Other lenders participating in the 7(a) program are subject to a
different oversight regime. Specifically, SBA divides SBLC program
functions between OLO and OFA. OLO is responsible for SBLC on-site
examination, and OFA handles day-to-day program management and
policymaking. Ultimate responsibility for enforcement of corrective
actions rests with OCA. As participants in the 7(a) program, SBLCs are
subject to the same review requirements as other 7(a) lenders, and they
are also subject to safety and soundness oversight by SBA.
Lender Oversight Is Not Achieving All of Its Goals:
SBA has identified goals for its lender oversight program that are
consistent with appropriate standards for an oversight program;
however, SBA had not yet established a program that is likely to
achieve them. Since our last review, SBA had made progress in
developing its lender oversight program, but there are still areas in
need of improvement if SBA is to develop a successful program. SBA has
highlighted risk management in its strategy to modernize the agency;
however, PLP reviews are not designed to evaluate financial risk, and
the agency has been slow to respond to recommendations made for
improving its monitoring and management of financial risk--posing a
potential risk to SBA's portfolio. PLP reviews are designed to
determine lender compliance with SBA regulations and guidelines, but
they do not provide adequate assurance that lenders are sufficiently
assessing eligibility and creditworthiness of borrowers.
Although SBA has identified problems with preferred lender and SBLC
lending practices, it has not developed clear policies that would
describe enforcement responses to specific conditions. Thus, it is not
clear what actions SBA would take to ensure that preferred lenders or
SBLCs address lending program weaknesses. Although the process for
certifying lenders for PLP status--another means by which SBA oversees
lenders--has become better defined and more objective, some lenders
told us they continue to experience confusing and inconsistent
procedures during this process due to varying recommendations from
field offices.
SBA Has Made Progress in Developing Its Lender Oversight Function:
Since our June 1998 report, SBA has responded to a number of
recommendations for improving lender oversight by developing guidance,
establishing OLO, and doing more reviews. SBA developed "Standard
Operating Procedures" (SOP) for oversight of SBA's lending partners and
the "Loan Policy and Program Oversight Guide for Lender Reviews" in
October 1999.
SBA established OLO in fiscal year 1999 to coordinate and centralize
lender review processes for PLP and SBLC oversight. OLO created a
"Reviewer Guide" for personnel engaged in PLP reviews and does training
for all SBA staff involved in conducting preferred lender reviews. OLO
officials said that to effectively oversee and monitor SBA lenders,
they also evaluate lender-generated risk to the SBA portfolio, work
with SBA program offices to manage PLP oversight operations, and plan
to conduct regular and systematic portfolio analysis using a new loan
monitoring system. Additionally, to minimize the number of visits SBLCs
receive during a year, OLO combined PLP reviews with SBLC examinations
performed by FCA.
In another effort to improve the lender review process, SBA developed
an automated, 105-item checklist that is designed to make its analysis
more objective. The questionnaire addresses lender organizational
structure, policies, and controls, but the answers are provided in a
"yes-no" format and generally refer to the presence or absence of
specific documents. SBA noted that the format makes assessments of
lenders more consistent and objective. However, we note that without a
more substantive method of evaluating lender performance, this approach
does not provide a meaningful assessment.
SBA also has increased the number of PLP reviews performed. In June
1998, we reported that SBA had not reviewed 96 percent of 7(a) lenders,
including preferred lenders, in the districts we visited. SBA reviewed
385 reviews of 449 preferred lenders in its 2001--2002 review
year.[Footnote 8]
SBA's Lender Oversight Does Not Adequately Focus on Financial Risk:
While elements of SBA's oversight program touch on the financial risk
posed by preferred lenders, including SBLCs, weaknesses in the program
limit SBA's ability to focus on, and respond to, current and future
financial risk to their portfolio. Neither the PLP review process nor
SBA's off-site monitoring efforts adequately focus on the financial
risk posed by preferred and other lenders to SBA. SBA oversight of
SBLCs is charged with monitoring how SBLCs administer their credit
programs, identifying potential problems, and keeping SBA losses to an
acceptable level. However, SBA's progress in reporting examination
results in a timely manner and implementing other program improvements
limits the effectiveness of SBA's SBLC oversight.
SBA officials stated that PLP reviews are strict compliance reviews
that are not designed to measure the lenders' financial risk. Our
review and that of SBA's Inspector General (IG) confirmed this. The PLP
review serves as SBA's primary internal control mechanism to determine
whether preferred lenders are processing, servicing, and liquidating
loans according to SBA standards and whether such lenders should
participate in the programs. While the review has questions that touch
on the financial risk of a given loan, review staff are not required to
answer them; and SBA guidance explicitly states that the answers to the
questions are for research purposes only and are not to be considered
in making any determinations about the lender. By not including an
assessment of the financial risk posed by individual lenders during PLP
reviews, SBA is missing an opportunity to gather information that could
help predict PLP lenders' future performance, thereby better preparing
SBA to manage the risk to its portfolio. The SBA IG also suggested that
financial risk and lender-based risk should be considered as part of a
comprehensive oversight program.[Footnote 9]
SBA's off-site monitoring efforts do not adequately assess the
financial risk posed by PLP and other lenders. SBA currently uses loan
performance benchmarking and portfolio analysis to serve as its primary
tools for off-site monitoring. While SBA officials stated that loan
performance benchmarks are based on financial risk and serve as a
measure to address a lender's potential risk to the SBA portfolio, we
found that the benchmarks were not consistently used for this
purpose.[Footnote 10] In addition, we found that OLO does not perform
routine analysis of SBA's portfolio to assess financial risk. At the
time of our review, staff produced ad-hoc reports to analyze aggregate
lending data to look for trends and to try to anticipate risk.
SBA Has Not Eliminated Weaknesses in SBLC Oversight That Pose a Threat
to the SBA Portfolio:
Currently, FCA staff responsible for SBLC safety and soundness
examinations also perform PLP reviews at SBLCs--these reviews are the
same ones that SBA contractors perform at preferred lenders and employ
the same review checklist.[Footnote 11] Upon the completion of its
examinations, FCA provides a draft report to SBA for comment,
incorporates any changes, and then provides a final report to SBA,
which, in turn, issues a final report to the SBLC.
SBA has not eliminated weaknesses in SBLC oversight, which were cited
by us and the SBA IG. We, and the SBA IG, found that final SBLC
examination reports were not issued in a timely manner. SBA's IG
reported that final reports for fiscal year 2001 SBLC examinations were
not issued until February 2002, 10 months after OLO received the first
draft report from FCA.[Footnote 12] Our work confirmed these findings.
We found that OLO does not maintain standards for the timely issuance
of examination reports. However, OLO has recently developed draft
customer service goals calling for SBLC examination reports to be
finalized within 90 days of receipt of a draft report from FCA.
However, as of August 2002, none of the examination reports from fiscal
year 2002 had been issued. According to the IG, because of the delays
in finalizing the reports and SBA's policy to delay any necessary
enforcement actions until final reports are issued, two SBLCs were
allowed to continue operating in an unsafe and unsound manner, despite
early identification of material weaknesses during fiscal year 2001
examinations. The effectiveness of any examination program is measured,
to a large degree, on its ability to identify and promptly remedy
unsafe and unsound conditions. By delaying reporting and remedial
action, SBA has significantly limited the effectiveness of its SBLC
oversight program.
SBA has been slow to implement recommendations from FCA for improving
the SBLC examination program. In addition to examining SBLCs, FCA was
asked by SBA to provide recommendations for changes in the SBLC
program. Each year FCA provides its views in a comprehensive report.
FCA's September 1999 report made 15 recommendations, 12 of which SBA
agreed to implement.[Footnote 13] We reviewed the reports for fiscal
years 2000 and 2001, in which FCA made additional recommendations with
which SBA agreed. Yet, the 2001 report still lists 8 recommendations
from the 1999 report and 2 from the 2000 report. SBA officials
explained that limited resources have contributed to the delay in
implementation of many of these recommendations.
PLP Reviews Do Not Provide Adequate Assurance That Lenders Are
Sufficiently Assessing Eligibility and Creditworthiness:
Assessing whether a borrower is eligible for 7(a) assistance is
difficult because the requirements are broad and variable, making a
qualitative assessment of a lender's decision by a trained reviewer all
the more important. SBA regulations require a lender to attest to the
borrower's demonstrated need for credit by determining that the desired
credit is unavailable to the borrower on reasonable terms and
conditions from nonfederal sources without SBA assistance.[Footnote 14]
These "credit elsewhere" provisions are particularly difficult to
assess and must be determined prior to assessing other credit
factors.[Footnote 15] SBA guidance also requires preferred lenders to
certify that credit is not otherwise available and to retain the
explanation in the borrower file.[Footnote 16] SBA does provide
guidance on factors that may contribute to a borrower being unable to
receive credit elsewhere. Factors that lenders should consider include
the following:
* The business requires a loan with a longer maturity than the lender's
policy permits;
* The requested loan exceeds either the lender's legal limit or policy
limit, regarding amounts loaned to one customer;
* The lender's liquidity depends upon selling the guaranteed portion of
the loan on the secondary market;
* The collateral does not meet the lender's policy requirements because
of its uniqueness or low value;
* The lender's policy normally does not allow loans to new ventures or
businesses in the applicant's industry; and:
* Any other factors relating to the credit that in the lender's opinion
cannot be overcome except by receiving a guaranty.
Based on these criteria, the credit elsewhere test could always be
satisfied by structuring an SBA guaranteed loan so that its terms and
conditions differ from those available on the commercial market. As a
result, these loans could be made available to businesses that could
obtain credit elsewhere on reasonable market terms and conditions,
although not the same terms and conditions offered with the SBA
guarantee.
SBA officials stated that the credit elsewhere requirements are
designed to be broad so as to not limit a lender's discretion and allow
flexibility, depending upon geographic region, economic conditions, and
type of business. For example, SBA officials said that when credit is
more readily available, businesses that require SBA assistance might be
held to a different standard, thereby making it more difficult to
obtain the SBA guarantee than when credit is tighter. Nonetheless, the
flexibility that lenders have along with the difficulty in assessing
lenders' credit elsewhere decisions further support the need for
developing specific criteria for a credit elsewhere standard. These
changes would facilitate a more qualitative assessment of eligibility
decisions made by preferred lenders.
Moreover, because it is a cursory review of documents in the file, the
PLP review also does not qualitatively assess a lender's credit
decision. Preferred lenders are required to perform a thorough and
complete credit analysis of the borrower and establish repayment terms
on the loan in the form of a credit memorandum. SBA guidance requires,
at a minimum, discussion in the credit memorandum of a borrower's
capitalization or proof that the borrower will have adequate capital
for operations and repayment, as well as capable management
ability.[Footnote 17] SBA officials said that lender review staff focus
on the lender's process for making credit decisions rather than the
lender's decision. SBA officials said that it is unlikely that the
review would result in a determination that the loan should not have
been made. An SBA official stated that review staff would not perform
an in-depth financial analysis to assess the lender's credit decision
and that a lender's process would only be questioned in the case of
missing documentation. For example, review staff would cite a lender if
it did not document the borrower's repayment ability.
Some lenders we interviewed criticized the lack of technical expertise
of contract review staff. The lenders stated that review staff was
unable to provide additional insight into material compliance issues
during the review because of a lack of technical knowledge of the
underwriting process and requirements. For example, one lender said he
was cited for not signing a credit elsewhere statement, but the
reviewer did not evaluate a financial statement in the file
substantiating the credit elsewhere assessment.
To improve PLP and SBLC oversight, we recommended that SBA incorporate
strategies into its review process to adequately measure the financial
risk lenders pose to SBA, develop specific criteria to apply to the
credit elsewhere standard, and perform qualitative assessments of
lender performance and lending decisions. SBA stated that it believes
the existing statutes, regulations, policies, and procedures provide
sufficient guidance to lenders. These are the same sources we analyzed
and found to be broad, making a qualitative assessment of a lender's
decisions difficult. SBA has responded that it does measure financial
risk of SBLCs through the safety and soundness examinations conducted
by FCA and that the PLP lender reviews do estimate some degree of
financial risk. We had noted both of these measures in our December 9,
2002 report. We also noted that SBA had not acted on suggestions that
FCA had made to enhance SBA's oversight of SBLCs. Only 3 of 15
preferred lender review reports that we reviewed provided any evidence
of such an assessment. And, we note, SBA's review guidance does not
require such a review. Thus, our recommendations remain open.
SBA Has Not Developed Clear Enforcement Policies for Preferred Lenders
and SBLCs:
SBA has authority to suspend or revoke a lender's PLP status for
reasons that include unacceptable loan performance; failure to make
enough loans under SBA's expedited procedures; and violations of
statutes, regulations, or SBA policies.[Footnote 18] However, SBA has
not developed policies and procedures that describe circumstances under
which it will suspend or revoke PLP authority or how it will do so. SBA
guidance does not include specific follow-up procedures for PLP lenders
that receive poor review ratings, but it does discuss recommended
patterns of follow-up. SBA officials said that, in practice, they
request action plans to address deficiencies for any ratings of
"minimally in compliance" and "not in compliance." In addition, lenders
with ratings of not in compliance are to receive follow-up reviews. SBA
officials explained that because they want to encourage lenders to
participate in PLP, they prefer to work out problems with lenders, and
therefore rarely terminate PLP status. And, where a lender persists in
noncompliance, SBA will generally allow the status to expire, rather
than terminating it. However, without clear enforcement policies, PLP
lenders cannot be certain of the consequences of certain ratings and
they may not take the oversight program seriously.
In November 2000, we recommended that the SBLC examination program
could be strengthened by clarifying SBA's regulatory and enforcement
authority regarding SBLCs. Although it has the authority to do so, SBA
has yet to develop, through regulation, clear policies and procedures
for taking supervisory actions. By not expanding the range of its
enforcement actions--which it can do by promulgating regulations--SBA
is limited in the actions it can take to remedy unsafe and unsound
conditions in SBLCs. SBA regulations only provide for revocation or
suspension of an SBLC license for a violation of law, regulation, or
any agreement with SBA. Without less drastic measures, SBA has a
limited capability to respond to unsatisfactory conditions in an SBLC.
Unlike SBA, federal bank and thrift regulators use an array of
statutorily defined supervisory actions, short of suspension or
revocation of a financial institution's charter or federal deposit
insurance, if an institution fails to comply with regulations or is
unsafe or unsound.
We recommended that SBA provide, through regulation, clear policies and
procedures for taking enforcement actions against preferred lenders and
SBLCs in the event of continued noncompliance with SBA's regulations.
Most recently, SBA has responded that it does have clear policies and
procedures; however, the agency intends to expand upon them. We will
continue to followup and monitor SBA's response to this recommendation.
SBA's Process for Administering PLP Status Presents Lenders with
Challenges:
SBA's preferred lender certification process begins when a district
office serving the area in which a lender's office is located nominates
the lender for preferred status or when a lender requests a field
office to consider it for PLP status. The district will then request
performance data regarding the lender from SBA's Sacramento Processing
Center. The processing center then provides the district office with
data required to fill in part of a worksheet developed for the
nomination process. The district office sends the completed worksheet,
along with other required information, back to the processing center.
The processing center analyzes the nomination and sends it with a
recommendation to OFA for final decision.
According to SBA's SOP, in making its decision, OFA considers whether
the lender (1) has the required ability to process, close, service, and
liquidate loans; (2) has the ability to develop and analyze complete
loan packages; and (3) has a satisfactory performance history with SBA.
OFA also considers whether the lender shows a substantial commitment to
SBA's "quality lending goals," has the ability to meet the goals, and
demonstrates a "spirit of cooperation" with SBA.
OFA and district office staff said that although district offices do
not provide final approval of PLP status for lenders in their
districts, they generally play an important role and district input is
given significant weight. Most of the district office staff we
interviewed believed that they had considerable influence on OFA's
decision regarding a lender's PLP status.
A PLP lender may request an expansion of the territory in which it can
process PLP loans by submitting a request to the Sacramento Processing
Center. The processing center will obtain the recommendation of each
district office in the area into which the PLP lender would like to
expand its PLP operations. The processing center will forward the
district recommendations to OFA for a final decision.
Lenders we interviewed had varying experiences in gaining and
maintaining their PLP status. While some lenders expressed general
satisfaction with the process and their understanding of it, others
cited problems. For example, several PLP lenders we interviewed said
that they had their PLP status declined in a specific district,
although they had already achieved PLP status in other districts. In
some instances, lenders said that they did not understand why they had
been turned down, in light of their proven performance. These lenders
commented that some district offices were not open to working with
lenders from outside their districts while others were. In our
interviews with district offices, we sometimes heard differing
descriptions from district office officials on the level of commitment
required of a lender who wished to gain PLP status in their district.
Some district officials said that a lender had to maintain a physical
presence in the district, while others disagreed. However, all district
office officials expressed the need for some regular discussion with a
lender to understand the lender's commitment to the district.
Larger lenders, as well as the National Association of Government
Guaranteed Lenders (NAGGL), noted the administrative burden of
maintaining relationships with many of the 70 district offices to
maintain PLP status. The lenders noted that to receive and maintain PLP
status in a given district, it is generally necessary to meet at least
annually with district office staff to discuss status and plans for
future lending. For some large national lenders, this can amount to 40
or more visits per year. In response to this concern, NAGGL has
recommended a national PLP status based on a uniform national standard
to ease the administrative burdens on large national lenders that
account for the largest volume of PLP lending.
District office officials that we interviewed generally acknowledged
that they want to understand a lender's plans for their district before
agreeing to endorse a lender that wishes to gain PLP status in their
district. District officials explained that PLP status is an important
marketing tool for lenders. As advocates for the credit needs of small
businesses in their districts, the district office officials see PLP
status as a "carrot" to encourage lenders to make a sufficient volume
of loans to their district. They suggest that a "national" PLP lender
might make a large volume of PLP loans nationwide, but none in their
district. The officials reason that without a district-by-district PLP
status, district offices would lose an important tool for encouraging
lenders to respond to credit needs in their districts.
To hold lenders to a uniform national standard while maintaining
individual district office's preferences and reinforcing their
relationships with PLP lenders, SBA developed a formula-driven lender
evaluation worksheet to facilitate the nomination, expansion, and
renewal processes. The worksheet replaces the former procedure that
involved written recommendations from district officials; however, it
continues to award points based on sometimes subjective criteria, such
as the district office's assessment of the lender's SBA marketing and
outreach efforts, rather than the formulas in the spreadsheet. Where
this is the case, district office staff are required to provide written
justification for the points awarded.
SBA has a Lender Liaison program, managed by its Office of Field
Operations (OFO), to assist large national lenders in managing
relationships with SBA. The program involves the assignment of a single
SBA official, generally a district director, to act as a liaison to a
large national lender. In the event that a large lender should
experience difficulty in managing its PLP status, it would have a
single SBA official to call to assist in resolving any problems. OFO
staff said that feedback they have received from lenders indicated that
they like the program, finding it useful for resolving difficulties.
Two of the lenders we interviewed participated in the program, and both
expressed satisfaction with it. SBA has designated lender liaisons for
20 PLP lenders and, at the time of our review, intended to expand the
program to 50 additional lenders. OLO identified 70 lenders who have
PLP status in 6 or more districts and could benefit from the program.
We recommended that SBA continue to explore ways to assist large
national lenders to participate in the PLP. SBA has indicated that they
are reviewing the issues we identified with regard to large national
lenders and considering the best approach to address the issues. We
will continue to followup with SBA and monitor its response on this
matter.
SBA's Organizational Alignment Does Not Adequately Support SBA's Lender
Oversight Functions:
In our past work analyzing organizational alignment and workload issues
at SBA and other agencies' efforts to improve management and
performance, we have described the importance of tying organizational
alignment to a clear and comprehensive mission statement and strategic
plan. By organizational alignment, we mean the integration of
organizational components, activities, core processes, and resources to
support efficient and effective achievement of outcomes. For example,
we noted how agency operations can be hampered by unclear linkage
between an agency's mission and structure, but greatly enhanced when
they are tied together.[Footnote 19] We have identified human capital
management challenges in key areas, which include undertaking strategic
human capital planning and developing staffs whose size, skills, and
deployment meet agency needs.[Footnote 20] We have also noted the
importance of separating safety and soundness regulation and mission
evaluation from the function of mission promotion. While SBA's role
regarding PLP lenders is slightly different from that of a safety and
soundness regulator, two principles still apply to SBA. First,
oversight and program evaluation functions should be organizationally
separate and maintain an arm's-length relationship from program
promotion. And second, in evaluating program compliance, SBA needs to
weigh the financial risks to the federal government along with the 7(a)
program's mission to provide credit to those who cannot get it
elsewhere.
SBA officials have said and written that lender oversight is becoming
an increasing priority for SBA; however, the function is not housed in
an independent office with the exclusive role of providing lender
oversight. OLO was created within OCA in fiscal year 1999 to ensure
consistent and appropriate supervision of SBA's lending partners;
however, OCA has other objectives, including the promotion of PLP to
appropriate lenders. OFA, also part of OCA, is responsible for
providing overall direction for the administration of SBA's lending
programs, including working with lenders to deliver lending programs,
including 7(a), and developing loan policies and standard operating
procedures.
OFA's lender oversight role is to provide final approval of lenders'
PLP status and to take necessary enforcement actions against SBLCs.
Yet, in its promotion role, OFA works with lenders to deliver lending
programs. Thus the only explicit enforcement authority--the authority
to revoke PLP status--resides with OFA rather than OLO. The presence of
both OFA and OLO within OCA does not afford the oversight function an
arm's-length position from the promotion function. The organizational
arrangement presents a potential conflict, or at least the appearance
of a conflict, between the desire to encourage lender participation in
PLP and the need to evaluate lender performance (with the potential for
discontinuing lenders' participation in PLP).
Evidence of overlapping responsibilities and poorly aligned resources
also can be seen in delays SBA has experienced in completing certain
tasks associated with lender oversight. As noted previously, these
delays could hamper effective PLP and SBLC oversight by delaying
corrective action that might arise from review findings. Since some,
but not all, responsibility for the lender oversight function migrated
from OFA to OLO, both offices continue to mingle responsibilities for
certain functions. The division of responsibility between OFA and OLO
has created the need for more interoffice coordination to complete
certain tasks. For example, we found substantial delays in finalizing
PLP review reports and, as noted earlier, in SBLC examination reports.
SBA's IG concluded that the delays in completing SBLC reports were at
least partially due to poor coordination between OLO and OFA, both of
which were involved in reviewing the reports. OLO and OFA,
respectively, are responsible for oversight and management of the SBLC
program. OLO is responsible for SBLC on-site examination and off-site
monitoring, while OFA handles day-to-day program management,
policymaking, and enforcement of corrective actions. Coordination
between the two offices, however, was not formally established and
simply evolved over time. The IG said that this informal structure
contributed, in part, to the delays in issuing the fiscal year 2001
examination reports. OLO staff said that limited staffing also
contributed to delays. For example, OLO began operations with 3
headquarters staff in fiscal year 2000, a number that increased to 12
by December 2002.
We recommended that SBA separate lender oversight functions and
responsibilities from OCA, including those currently done by OFA. This
would provide an oversight office with greater autonomy within SBA to
match the growing importance of lender oversight in achieving SBA's
goal of ensuring that PLP lenders make loans to eligible borrowers
while properly managing the financial risk to SBA. While SBA did not
respond directly to this recommendation prior to the December 2002
publication of our report, it recently stated in a response to
congressional committees that it believes OLO has adequate
independence. In addition, SBA maintains there is an advantage to
having both OLO and OFA within the same office and working in concert.
SBA did state, in March 2003, that it was in the process of drafting
policies and procedures governing OLO program responsibilities. We plan
to follow-up with SBA on its response to this recommendation.
Madam Chair, Members of the Committee, this concludes my prepared
statement. I would be happy to answer any questions at this time.
Contacts and Acknowledgments:
For information on this statement, please contact Davi D'Agostino,
Director, Financial Markets and Community Investment, at (202) 512-8678
or Katie Harris, Assistant Director, at (202) 512-8415. You may also
reach them by E-mail at dagostinod@gao.gov or harrism@gao.gov. Other
individuals who made key contributions to this testimony include Toayoa
Aldridge, Tom Conahan, and Barbara Roesmann.
FOOTNOTES
[1] As of September 30, 2002.
[2] SBLCs, which make only 7(a) loans, are privately owned and managed,
nondepository, lending institutions that are licensed and regulated by
SBA but not generally regulated or examined by financial institution
regulators.
[3] Hector Barreto, SBA Administrator, letter to The Honorable Susan
Collins, Chair, Committee on Government Affairs, U.S. Senate, March 12,
2003.
[4] U.S. General Accounting Office, Small Business Administration: Few
Reviews of Guaranteed Lenders Have Been Conducted, GAO/GGD-98-85
(Washington, D.C.: June 1998).
[5] Since 1999, SBA has had an agreement with the Farm Credit
Administration (FCA) to conduct safety and soundness examinations of
the SBLCs. FCA is an independent agency within the executive branch; it
regulates Farm Credit System institutions. FCA also contracts with
other government agencies to provide examination services.
[6] 15 U.S.C. § 636 (2000).
[7] Other types of financial institutions, such as savings banks, are
lending partners. In this statement, we refer to all financial
institutions that make 7(a) loans as banks.
[8] SBA's review year runs from April 1 to March 31. SBA officials
explained that the initial date of its contract with the vendor that
conducts PLP reviews began on April 1, and they have since used this as
the beginning of their review year.
[9] The SBA Inspector General defines financial risk as the composite
risk posed by loans and guarantees actually booked to SBA's portfolio
and how they perform over time, and defines lender-based risk as the
potential financial injury due to the lender's failure to perform its
role properly. U.S. Small Business Administration, Office of Inspector
General, Audit Report PLP Oversight Process, Report Number 1-19,
(Washington, D.C.: September 27, 2001).
[10] The five benchmarks are ratios for currency, delinquency, default,
liquidation, and loss. Each is defined in SBA's SOP.
[11] FCA conducts broad-based examinations and evaluates each SBLC's
capital adequacy, asset quality, management, earnings, and liquidity.
The examinations are similar to safety and soundness examinations
performed by bank and government-sponsored enterprise regulators.
[12] U.S. Small Business Administration, Office of Inspector General,
Improvements Are Needed in the Small Business Lending Company Oversight
Process, Report No. 2-12 (Washington, D.C.: March 20, 2002).
[13] We listed the 15 recommendations in our November 2000 report. See
U.S. General Accounting office, Small Business Administration: Actions
Needed to Strengthen Small Business Lending Company Oversight, GAO-01-
192 (Washington, D.C.: November 2000).
[14] The SBA regulations do not further define "reasonable terms and
conditions." See also 13 C.F.R. Section 120.101.
[15] Section 7(a) of the Small Business Act states that "no financial
assistance shall be extended if the applicant can obtain credit
elsewhere." 15 U.S.C. Section 636(a).
[16] SBA SOP 50-10(4)(E).
[17] SBA SOP 50-10(4).
[18] 13 C.F.R. § 120.455 (2002).
[19] U.S. General Accounting Office, Small Business Administration:
Current Structure Presents Challenges for Service Delivery, GAO-02-17
(Washington, D.C.: October 2001).
[20] Also included are leadership continuity and succession planning,
and creating results-oriented organizational cultures. U.S. General
Accounting Office, Managing For Results: Next Steps to Improve the
Federal Government's Management and Performance, GAO-02-439T
(Washington, D.C.: February 15, 2002).
