Small Business Administration's Implementation of Administrative Provisions in the American Recovery and Reinvesment Act

Under the American Recovery and Reinvestment Act of 2009 (ARRA), Congress required the Small Business Administration (SBA) to implement a total of eight administrative provisions to help facilitate small business lending and enhance liquidity in the secondary markets. These administrative provisions include (1) temporarily requiring SBA to reduce or eliminate certain fees on 7(a) and 504 loans; (2) temporarily increasing the maximum 7(a) guarantee from 85 percent to 90 percent; and (3) implementing provisions designed specifically to facilitate secondary markets, such as extending existing guarantees in the 504 program and making loans to systemically important brokerdealers that operate in the 7(a) secondary market. Further, ARRA established deadlines for SBA to issue regulations that implement certain administrative provisions, such as those pertaining to facilitating secondary market activities. Specifically, ARRA required SBA to issue regulations extending the guarantee related to the 504 program within 15 days after enactment (March 4, 2009) and for making loans to systemically important broker-dealers within 30 days after enactment (March 19, 2009). ARRA also mandates that we report within 60 days after the date of enactment, April 17, 2009, on SBA's initial efforts to comply with these provisions. In response, this report (1) summarizes key activities undertaken by the Administrator of SBA to implement the administrative provisions including establishment of project plans with timelines for fulfilling responsibilities, and (2) analyze whether the Administrator is accomplishing the purpose of increasing liquidity in the secondary markets for SBA loans. Because SBA's efforts are still in their early stages, we agreed with the staffs of the House and Senate Committees on Small Business to focus our work on four key administrative provisions for the purposes of this report. These four provisions are eliminating or reducing fees on 7(a) and 504 loans, extending the existing guarantee on 7(a) loans, and taking two specific steps to facilitate activities in the secondary markets: extending the guarantee on 504 financing and making loans to systemically important broker-dealers. However, consistent with ARRA's requirements, we are also providing information on the status of SBA's implementation of the other four administrative provisions.

SBA has implemented two of the four key administrative ARRA provisions as defined for purposes of this report, and plans to have the two secondary market provisions finalized by June 2009. On March 16, 2009, SBA issued policy notices to eliminate certain fees on 7(a) and 504 loans and to extend the maximum guarantee on 7(a) loans from 85 percent to 90 percent. According to SBA officials, eliminating fees and extending lender protections on certain 7(a) loans should provide incentives for small businesses to apply for additional loans and lenders to originate them. However, SBA has not met its statutory requirement to issue regulations associated with extending existing guarantees on 504 projects (which were due by March 4, 2009) and making loans to systemically important broker-dealers that participate in the secondary market for 7(a) loans (which were due by March 19, 2009). According to SBA officials, issuing the regulations for these ARRA provisions is complicated and time consuming because it involves establishing new programs and related infrastructure, such as establishing policies and procedures, hiring and training staff, developing information systems, and establishing risk mitigation strategies as well as resolving critical policy issues. For example, an SBA official said that the agency must determine the extent to which broker-dealers and perhaps small business lenders would be required to share in the potential losses associated with extending the guarantee in the 504 program. While requiring broker-dealers and lenders to share in potential losses could help ensure sound loan underwriting and thereby limit SBA's potential exposure, it could also lessen their willingness to participate and thereby fail to facilitate secondary market activity as ARRA intended. SBA officials and trade groups we contacted also said that ARRA's array of requirements may also place strains on the agency's staff resources, and our previous work has also concluded that limited resources and pending retirements could affect its capacity to implement programs such as those specified in ARRA. To address these and other challenges, SBA has established an intra-agency process to implement ARRA's provisions, including the appointment of relevant project teams, and indicated it has consulted with Treasury and Federal Reserve officials on its responsibilities. According to SBA, the draft rules for the secondary market provisions are now undergoing internal SBA review, and those rules are expected to be sent to the Office of Management and Budget (OMB) for its review and finalized by June 2009.