Status of the Small Business Administration's Implementation of Administrative Provisions in the American Recovery and Reinvestment Act of 2009
Gao ID: GAO-10-298R January 19, 2010Due to recent turmoil in U.S. credit markets, many lenders have been reluctant to offer conventional loans--that is, loans not guaranteed by the federal government--to small businesses so that they can finance their operations and capital needs. While the Small Business Administration's (SBA) principal loan guarantee programs, the 7(a) and 504 programs, are intended to help small businesses raise critical financing that they may have difficulty obtaining from other sources, the availability of such loans has also declined. Under the 7(a) program, SBA traditionally has provided lenders guarantees on up to 85 percent of the value of loans to qualifying small businesses in exchange for fees to help offset the costs of the program. Under the 504 program, which generally applies to small business real estate and other fixed assets, SBA provides certified development companies with a guarantee on up to 40 percent of the financing of the projects' costs in exchange for fees--the small business borrowers and other lenders provide the remaining 60 percent of the financing on an unguaranteed basis. Traditionally, lenders, such as banks, that participate in the 7(a) or 504 programs often sell qualifying small business loans on the 7(a) and 504 secondary markets to raise funds necessary for additional lending. However, from mid-2008 to early-2009, investors that had typically purchased securities collateralized by the pools of 7(a) guaranteed small business loans and certain 504 loans largely withdrew from the secondary markets due to potential losses, and as a result, many such loans remained on the balance sheets of the broker-dealers that package the securities or on the balance sheets of the original lenders. According to SBA, the dollar volume of 7(a) loans sold as securities on the secondary market dropped from $425.4 million to $85.9 million, or 79.8 percent, from the end of the third quarter of 2008 to the end of the first quarter of 2009. Under the American Recovery and Reinvestment Act (ARRA), enacted on February 17, 2009, SBA was required to implement eight new authorities--referred to throughout this report, and by ARRA, as administrative provisions--to help facilitate small business lending and enhance liquidity in the secondary markets. The provisions included requirements for, among other things, (1) temporarily lowering or eliminating certain fees on 7(a) and 504 loans, as well as increasing the maximum guarantee on the former; (2) establishing new programs to facilitate secondary market activity; and (3) establishing a new, temporary guaranteed loan program for viable small businesses experiencing financial hardship, which SBA refers to as the America's Recovery Capital (ARC) Loan Program. The administrative provisions took effect when ARRA was enacted, with certain provisions granting SBA emergency rulemaking authority to hasten their implementation.
While SBA did not meet its internal June 2009 deadline for implementing all of the ARRA administrative provisions, all such provisions were implemented by November 2009. Of the three provisions that required the issuance of regulations using SBA's emergency rulemaking authority, SBA implemented Section 506 (ARC Loan Program) on June 15, 2009, but did not implement the Section 503 secondary market provision (504 first-lien guarantee) until October 30, 2009, and the Section 509 (loans to systemically important broker-dealers) until November 19, 2009. Consistent with the findings in our April 2009 report, we identified several factors that may have contributed to SBA's delay in implementing these administrative provisions, including: (1) challenges related to the creation of new and complex programs, including new systems and processes, regulations, policies, and procedures; (2) SBA's reduced staffing levels and loss of expertise through retirements and turnover in key positions; and (3) challenges associated with resolving key policy issues and addressing statutory language that, while designed to protect taxpayer interests, could limit acceptance of market participants. For example, implementation of Section 509 was delayed until SBA officials could 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 loan 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, in turn limiting the expansion of secondary market activity as ARRA intended. Under the interim final rule, which SBA published on October 30, 2009, broker-dealers retain 5 percent of the potential losses on 504 first-lien loans, lenders 15 percent, and SBA 80 percent. SBA data suggest that liquidity in 7(a) and 504 loan markets appears to have largely recovered. Specifically, SBA data show that lenders' origination of 7(a) loans in the primary market doubled from an average of about $650 million per month in the fourth quarter of 2008 to an average of about $1.4 billion per month in the third quarter of 2009, which is higher than second and third quarter 2008 average monthly originations of $1.1 billion and $1 billion, respectively. In addition, SBA 7(a) secondary market sales more than tripled between the fourth quarter of 2008 and the third quarter of 2009, from a monthly average of about $108.8 million to a monthly average of about $336.9 million. Furthermore, data indicate that the secondary market for the SBA-guaranteed, or debenture, portion of 504 loans has also improved. SBA officials and market participants we interviewed said there has been a significant recovery in the markets for 7(a) and 504 loans throughout 2009, although they also said that the secondary market for 504 first-lien loans remains limited.
GAO-10-298R, Status of the Small Business Administration's Implementation of Administrative Provisions in the American Recovery and Reinvestment Act of 2009
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GAO-10-298R:
United States Government Accountability Office:
Washington, DC 20548:
January 19, 2010:
The Honorable Nydia M. Velázquez:
Chairwoman:
Committee on Small Business:
House of Representatives:
Subject: Status of the Small Business Administration's Implementation
of Administrative Provisions in the American Recovery and Reinvestment
Act of 2009:
Dear Madam Chairwoman:
Due to recent turmoil in U.S. credit markets, many lenders have been
reluctant to offer conventional loans--that is, loans not guaranteed
by the federal government--to small businesses so that they can
finance their operations and capital needs. While the Small Business
Administration's (SBA) principal loan guarantee programs, the 7(a) and
504 programs, are intended to help small businesses raise critical
financing that they may have difficulty obtaining from other sources,
the availability of such loans has also declined. Under the 7(a)
program, SBA traditionally has provided lenders guarantees on up to 85
percent of the value of loans to qualifying small businesses in
exchange for fees to help offset the costs of the program. Under the
504 program, which generally applies to small business real estate and
other fixed assets, SBA provides certified development companies with
a guarantee on up to 40 percent of the financing of the projects'
costs in exchange for fees--the small business borrowers and other
lenders provide the remaining 60 percent of the financing on an
unguaranteed basis.[Footnote 1] Traditionally, lenders, such as banks,
that participate in the 7(a) or 504 programs often sell qualifying
small business loans on the 7(a) and 504 secondary markets to raise
funds necessary for additional lending.[Footnote 2] However, from mid-
2008 to early-2009, investors that had typically purchased securities
collateralized by the pools of 7(a) guaranteed small business loans
and certain 504 loans largely withdrew from the secondary markets due
to potential losses, and as a result, many such loans remained on the
balance sheets of the broker-dealers that package the securities or on
the balance sheets of the original lenders.[Footnote 3] According to
SBA, the dollar volume of 7(a) loans sold as securities on the
secondary market dropped from $425.4 million to $85.9 million, or 79.8
percent, from the end of the third quarter of 2008 to the end of the
first quarter of 2009.
Under the American Recovery and Reinvestment Act (ARRA), enacted on
February 17, 2009, SBA was required to implement eight new
authorities--referred to throughout this report, and by ARRA, as
administrative provisions--to help facilitate small business lending
and enhance liquidity in the secondary markets.[Footnote 4] The
provisions included requirements for, among other things, (1)
temporarily lowering or eliminating certain fees on 7(a) and 504
loans, as well as increasing the maximum guarantee on the
former;[Footnote 5] (2) establishing new programs to facilitate
secondary market activity;[Footnote 6] and (3) establishing a new,
temporary guaranteed loan program for viable small businesses
experiencing financial hardship, which SBA refers to as the America's
Recovery Capital (ARC) Loan Program.[Footnote 7] The administrative
provisions took effect when ARRA was enacted, with certain provisions
granting SBA emergency rulemaking authority to hasten their
implementation. Specifically, ARRA required SBA to issue regulations
implementing sections 503 (first-lien guarantee) and 506 (ARC Loan
Program) within 15 days of enactment, or by March 4, 2009, and to
issue regulations implementing Section 509 (loans to broker-dealers)
within 30 days of ARRA enactment, or by March 19, 2009.
In April 2009 we issued a report on SBA's development and
implementation of the ARRA administrative provisions, which found that
SBA had not completed required emergency regulations.[Footnote 8]
While SBA had taken key steps authorized by ARRA--such as temporarily
eliminating existing fees for 7(a) loans and increasing the guarantee
on such loans--it had not issued regulations for the secondary market
provisions or the ARC Loan Program. The report noted that SBA's
inability to implement these provisions was due to a variety of
factors, including the challenges associated with developing and
implementing new programs and the loss of key staff. However, the
report also stated that SBA planned to complete these administrative
provisions by June 2009.
Following the issuance of our report, you requested that we continue
to review SBA's efforts to implement the eight ARRA administrative
provisions. You asked that we pay particular attention to the
completion of emergency regulations that were due 15 and 30 days after
ARRA enactment, including reasons for any implementation delays. This
letter summarizes a November 2009 briefing we provided to your staff
on the results of this work (see enclosure I for the briefing slides).
Our objectives were to discuss the extent to which (1) SBA has
implemented the eight ARRA administrative provisions, with a focus on
those that granted SBA emergency rulemaking authority to issue
regulations; (2) ARRA administrative provisions and other actions are
enhancing liquidity in the markets for SBA 7(a) and 504 loans; and (3)
SBA has implemented the ARC Loan Program and how its program terms
appeal to market participants. We also updated the enclosed briefing
slides to include activities undertaken by SBA to implement the
provisions after the date of our briefing.
To address our objectives, we reviewed SBA's development of
regulations, policies, and procedures for implementing the ARRA
administrative provisions and interviewed SBA officials to obtain data
and determine the status of efforts underway, time frames, program
accomplishments, and planned activities. We also interviewed SBA
officials regarding steps taken to increase liquidity in the 7(a) and
504 primary and secondary markets and reviewed relevant documents.
Further, we interviewed market participants, such as primary SBA
lenders and broker-dealers, on their views regarding SBA's
implementation efforts and the effects of the ARRA provisions on the
7(a) and 504 primary and secondary markets. In addition, we
interviewed SBA officials, and obtained and analyzed data on SBA's
efforts to develop and implement the ARC Loan Program. We also
interviewed market participants on their views regarding the ARC Loan
Program, including their views on the attractiveness of program terms
and requirements.
We conducted this performance audit from July 2009 through December
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Under the 7(a) loan program, SBA guarantees loans made by commercial
lenders to small business borrowers for whom credit is not otherwise
available on reasonable terms from nonfederal sources and that do not
have the personal resources to provide financing themselves.[Footnote
9] The 7(a) program guarantee assures the lender that if a borrower
defaults on a loan, the lender will receive an agreed-upon portion of
the outstanding balance, generally between 50 percent and 85 percent.
Loan proceeds may be used for working capital and other general
business purposes. To be eligible for the 7(a) program, a business
must be an operating, for-profit small firm (according to SBA's size
standards) located in the United States. To offset some of the costs
of the program, SBA assesses lenders two fees on each 7(a) loan, an up-
front guarantee fee that may be passed on to the borrower and an
annual servicing fee.
The 504 loan program provides long-term, fixed-rate financing to small
businesses for expansion or modernization--primarily of real estate--
including land and new building construction, existing building
purchases or renovation, and machinery and equipment.[Footnote 10]
Financing is delivered through certified development companies (CDC),
which are private, nonprofit companies established to contribute to
the economic development of their communities. In a typical 504 loan
project, a third-party lender provides 50 percent or more of the
financing, pursuant to a first-lien mortgage; a CDC provides up to 40
percent of the financing through a debenture that is fully guaranteed
by SBA; and a borrower contributes at least 10 percent of the
financing. The borrower must meet eligibility requirements similar to
those for 7(a) program borrowers, and a project generally must create
or retain at least one job for every $65,000--increased from $50,000--
guaranteed by SBA. Like the 7(a) program, the 504 program requires
lenders, small business borrowers, and CDCs to pay various fees to
offset program costs.
Over the years, the development of secondary markets for 7(a) and 504
loans has helped lenders to originate such loans. By selling loans to
investors via secondary markets, lenders can receive additional funds,
or liquidity, to make more loans. In the 7(a) secondary market,
lenders sell the SBA-guaranteed portions of the loans to investors--
with the participation of broker-dealers and other market
participants--but generally retain the unguaranteed portion in their
portfolios. The broker-dealers assemble the guaranteed portions of
7(a) loans from lenders into securities and manage the sale of these
securities to investors. Lenders, broker-dealers, and other secondary
market participants make profits through various fees, the premiums
investors pay for the securities, and servicing the loans over time.
Due to the structure of 504 loans, there are two separate markets: one
for the SBA-guaranteed, or debenture, portion of the loan and another
for the first-lien mortgage portion.
On February 17, 2009, Congress enacted ARRA, which, among a variety of
other actions and programs across the federal government designed to
help the economy recover, included eight administrative provisions
designed to facilitate small business lending and liquidity in the
markets for SBA-guaranteed loans. Table 1 summarizes each ARRA
administrative provision and identifies those (in boldface type) that
granted SBA emergency rulemaking authority to issue regulations.
Table 1: Summary of ARRA Administrative Provisions and Primary
Requirements:
Provision number and title: 501: fee reductions;
Primary requirements and sunset provisions:
* Permits the temporary reduction or elimination of fees for 7(a) and
504 loans until September 30, 2010, or until funds appropriated are
expended ($375 million total for both sections 501 and 502).
Provision number and title: 502: Economic Stimulus Lending Program;
Primary requirements and sunset provisions:
* Permits SBA to guarantee up to 90 percent of qualifying 7(a) loans
made by SBA lenders. Only applies to loans approved within 12 months
of ARRA enactment or until funds appropriated are expended ($375
million total for both sections 501 and 502).
Provision number and title: 503: establishment of SBA secondary market
guarantee authority;
Primary requirements and sunset provisions:
* Allows SBA to establish a secondary market guarantee for pools of
first-lien 504 loans to sell to third-party investors;
* This provision terminates 2 years after the enactment of ARRA. Under
the emergency rulemaking authority, SBA must issue regulations within
15 days of enactment (March 4, 2009).
Provision number and title: 504: stimulus for community development
lending;
Primary requirements and sunset provisions:
* Authorizes SBA to refinance a limited number of certain existing
loans as new 504 loans;
* Eligibility criterion for 504 loans has changed from creating one
job for every $50,000 guaranteed to one job for every $65,000
guaranteed.
Provision number and title: 505: increasing small business investment;
Primary requirements and sunset provisions:
* Increases the maximum amount of outstanding leverage available to a
small business investment company (SBIC) to the lesser of 300 percent
of the SBIC's private capital or $150 million;
* Leverage allowed for two or more SBICs operated under common control
and that are financially sound cannot exceed $225 million.
Provision number and title: 506: business stabilization program (ARC
Loan Program);
Primary requirements and sunset provisions:
* Creates a new program that allows SBA to guarantee loans of $35,000
or less to small businesses suffering immediate financial hardship and
possess existing qualifying loans;
* Under emergency rulemaking authority, SBA must issue regulations
within 15 days of ARRA enactment (March 4, 2009).
Provision number and title: 508: surety bonds;
Primary requirements and sunset provisions:
* Increases the maximum contract amount for a SBA bond guarantee from
$2 million to $5 million (and under certain circumstances up to $10
million);
* Requires SBA to study and report on the program's current funding
structure.
Provision number and title: 509: establishment of SBA secondary market
lending authority;
Primary requirements and sunset provisions:
* Authorizes SBA to make loans to systemically important broker-
dealers that operate in the SBA 7(a) secondary market;
* Under emergency rulemaking authority, SBA must issue regulations
within 30 days of ARRA enactment (March 19, 2009).
[End of table]
Source: GAO analysis of ARRA data.
The Department of the Treasury (Treasury) and the Board of Governors
of the Federal Reserve System (Federal Reserve) have also initiated
programs to increase access to credit for consumers and small
businesses. As part of the Consumer and Business Lending Initiative,
Treasury announced plans on March 16, 2009, under the Troubled Asset
Relief Program (TARP), that it would directly purchase up to $15
billion in securities backed by the guaranteed portions of 7(a) loans,
securities packaged from the debenture portions of 504 loans, and 504
first-lien securities that may receive new SBA guarantees under ARRA.
Also under this initiative, the Federal Reserve, with Treasury
support, plans to lend funds to investors through the Term Asset-
Backed Securities Loan Facility (TALF) to provide up to $200 billion
in low-cost financing for investors to purchase a variety of consumer,
commercial, and small business securitizations (which include SBA-
guaranteed 7(a) and 504 loans), thereby opening the credit markets to
consumers and small businesses.[Footnote 11]
Summary:
While SBA did not meet its internal June 2009 deadline for
implementing all of the ARRA administrative provisions, all such
provisions were implemented by November 2009. Of the three provisions
that required the issuance of regulations using SBA's emergency
rulemaking authority, SBA implemented Section 506 (ARC Loan Program)
on June 15, 2009, but did not implement the Section 503 secondary
market provision (504 first-lien guarantee) until October 30, 2009,
and the Section 509 (loans to systemically important broker-dealers)
until November 19, 2009. Consistent with the findings in our April
2009 report, we identified several factors that may have contributed
to SBA's delay in implementing these administrative provisions,
including:
* challenges related to the creation of new and complex programs,
including new systems and processes, regulations, policies, and
procedures;
* SBA's reduced staffing levels and loss of expertise through
retirements and turnover in key positions; and;
* challenges associated with resolving key policy issues and
addressing statutory language that, while designed to protect taxpayer
interests, could limit acceptance of market participants.
For example, implementation of Section 509 was delayed until SBA
officials could 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
loan 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, in turn limiting the expansion of secondary market
activity as ARRA intended. Under the interim final rule, which SBA
published on October 30, 2009, broker-dealers retain 5 percent of the
potential losses on 504 first-lien loans, lenders 15 percent, and SBA
80 percent.[Footnote 12]
SBA data suggest that liquidity in 7(a) and 504 loan markets appears
to have largely recovered. Specifically, SBA data show that lenders'
origination of 7(a) loans in the primary market doubled from an
average of about $650 million per month in the fourth quarter of 2008
to an average of about $1.4 billion per month in the third quarter of
2009, which is higher than second and third quarter 2008 average
monthly originations of $1.1 billion and $1 billion, respectively. In
addition, SBA 7(a) secondary market sales more than tripled between
the fourth quarter of 2008 and the third quarter of 2009, from a
monthly average of about $108.8 million to a monthly average of about
$336.9 million. Furthermore, data indicate that the secondary market
for the SBA-guaranteed, or debenture, portion of 504 loans has also
improved. SBA officials and market participants we interviewed said
there has been a significant recovery in the markets for 7(a) and 504
loans throughout 2009, although they also said that the secondary
market for 504 first-lien loans remains limited. SBA officials and
some market participants cited three general reasons for the recovery
in 7(a) and 504 loan markets. First, the temporary reduction or
elimination of fees on 7(a) and 504 loans and the guarantee extension
on 7(a) loans were critical to igniting activity in the primary
markets for such loans. While the $375 million that Congress
appropriated under ARRA for the fee reductions and guarantee
extensions was exhausted by late November 2009, the Department of
Defense Appropriations Act of 2010 included an additional $125 million
in appropriations to continue the enhancements through February 28,
2010[Footnote 13]. Second, SBA officials and some market participants
cited the improvement in credit markets generally over the past
several months as contributing to the overall improvement in the
markets for SBA-guaranteed loans. Finally, SBA officials and some
market participants cited the TARP and TALF programs as helping to
revive the markets for SBA-guaranteed loans. While Treasury has not
yet purchased any SBA-guaranteed loans under TARP and TALF financing
of such loans got off to a slow start, SBA and market participants
said that the presence of these programs helped to boost investor
confidence in SBA-guaranteed loans and thereby generated market
activity for such loans.
While initial reports suggest that the ARC Loan Program began slowly,
more recent SBA data indicate that the number of loans SBA is
guaranteeing under this program is increasing. By September 30, 2009,
SBA had approved a total of 2,904 ARC loans for a total value of $94
million, or 37 percent of the $255 million appropriated to administer
the ARC Loan Program. According to SBA, the number of approved ARC
loans had increased to nearly 5,200 by January 1, 2010, with a total
value of $167 million, or 65 percent of appropriated funds. Some
market participants said that while interest in the ARC Loan Program
among many potential small business borrowers appears to be high,
there is significant confusion about the program's eligibility
requirements, which may have contributed to the slow start of the
program. In particular, many small businesses facing severe financial
problems have inquired about the program, even though they likely did
not qualify[Footnote 14]. Market participants we interviewed also
cited other factors that may have contributed to the ARC Loan
Program's relatively slow start. First, they said some lenders were
uncertain about the definition of a viable business, as defined by SBA
regulations, and how to determine immediate financial hardship. They
also stated lenders were concerned that if SBA found that a lender had
incorrectly approved an ARC loan for a small business, SBA would not
honor the guarantee on such a loan. In August 2009, SBA released its
new ARC Loan Program Procedural Guidance to provide lenders with
updated information and clarification about the ARC Loan Program. For
example, the guidance provided an expanded explanation of a viable
business experiencing immediate financial hardship. It is not clear to
what extent such guidance may have contributed to the ARC Loan
Program's growth in recent months. Second, market participants said
that many lenders may be reluctant to approve ARC loans because they
are likely to be unprofitable. Due to the relatively small size of ARC
loans--which cannot exceed $35,000 per business--the administrative
costs of processing such loans and complying with SBA requirements, as
well as potential audits, may be prohibitive in some cases.
Agency Comments and Our Evaluation:
We provided a draft of this letter and the attached briefing slides to
SBA for review and comment. In written comments, which are reprinted
in enclosure II, the Associate Administrator of SBA's Office of
Capital Access said that the draft report presented a thoughtful
review of the agency's progress in implementing ARRA's administrative
provisions. The Associate Administrator cited steps SBA has taken to
implement these provisions, including modifying old programs and
creating new programs to help expand access to capital for small
businesses while also managing risk. In addition, he stated that the
fee reductions and increased guarantees for 7(a) and 504 loans, which
were recently extended through February 2010, have been successful in
enhancing small business lending. The Associate Administrator also
provided statistics which he said show a significant improvement in
SBA's secondary markets for 7(a) and 504 loans. Furthermore, he stated
that as of January 1, 2010, SBA has approved 5,184 ARC loans totaling
more than $167 million. He added that SBA is engaged in continuing
discussions with staff, resource partners, lenders, and other
stakeholders to identify opportunities for program enhancements.
We are sending copies of this report to interested members of Congress
and the Administrator of the Small Business Administration. In
addition, this report will be available at no charge on the GAO Web
site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our
Office of Congressional Relations and Public Affairs may be found on
the last page of this report. Major contributors to this report were
Wes Phillips, Assistant Director; Michelle Bowsky; Ben Bolitzer; Tania
Calhoun; Jennifer Schwartz; and Jarrod West.
Sincerely yours,
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
Enclosures - 2:
[End of section]
Enclosure I: Briefing to House Small Business Committee:
Initial Results of SBA‘s Efforts to Implement Recovery Act
Administrative Provisions:
Briefing to the House Small Business Committee, November 02, 2009.
Note: slides have been updated since the November briefing.
Objectives:
Our objectives for this briefing are to discuss the extent to which:
1. SBA has implemented the eight American Recovery and Reinvestment
Act of 2009 (ARRA) administrative provisions, with a focus on those
that required SBA to issue regulations using emergency rulemaking
authority;
2. ARRA administrative provisions and other actions are enhancing
liquidity in the markets for SBA 7(a) and 504 loans; and;
3. SBA has implemented the America's Recovery Capital (ARC) Loan
Program and program terms appeal to market participants.
Background:
Due to recent turmoil in U.S. credit markets, many lenders have been
reluctant to offer conventional loans to small businesses so that they
can finance their operations and capital needs.
SBA's 7(a) and 504 loan guarantee programs are intended to provide
critical financing for small businesses that may have trouble finding
conventional loan financing. The markets for these loans also faced
constraints during the recent financial crisis.
* According to SBA, the dollar volume of 7(a) loans sold as securities
on the secondary market dropped from $425.4 million to $85.9 million,
or 79.8percent, from the end of the third quarter of 2008 to the end
of the first quarter of 2009.
As a result, under ARRA, Congress required SBA to implement a total of
eight administrative provisions to help facilitate small business
lending and enhance liquidity in the primary and secondary markets for
loans that the agency guarantees. ARRA also required GAO to report
within 60 days after enactment of ARRA on SBA's effort to comply with
the provisions.
On April 16, 2009,[Footnote 15] we reported on the status of SBA's
implementation efforts, focusing on four of the eight administrative
provisions.
* The report noted that SBA had implemented two key provisions to
temporarily lower or eliminate fees and to increase guarantees on SBA
7(a) loans. These provisions are generally intended to facilitate the
origination of such loans in the primary market.
* SBA had not implemented two provisions to make loans to systemically
significant broker-dealers of 7(a) loans and to extend the guarantee
on 504 loans. These provisions are generally intended to facilitate
activity in the secondary markets.
* SBA also had not implemented a provision to establish the ARC Loan
program, a pew program that would guarantee loans up to $35,000 for
financially viable small businesses in economic distress.
In addition to SBA's requirements under ARRA, the Department of the
Treasury (Treasury) and the Board of Governors of the Federal Reserve
System (Federal Reserve) also initiated programs to increase access to
credit for consumers and small businesses.
* Treasury announced that under the Troubled Asset Relief Program
(TARP), it would directly purchase up to 515 billion in securities
backed by SBA-guaranteed 7(a) and 504 loans.
* Also under TARP, the Federal Reserve created the Term Asset-Backed
Securities Loan Facility (TALF) to provide up to $200 billion in low-
cost financing for investors to purchase a variety of consumer,
commercial, and small business securitizations (which include SBA-
guaranteed 7(a) and 504 loans), thereby opening the credit markets to
consumers and small businesses.[Footnote 16]
Scope and Methodology:
To address our objectives, we took the following actions:
* We reviewed SBA's development of regulations, policies, and
procedures for implementing the ARRA administrative provisions, and we
interviewed SBA officials to obtain data and determine the status of
efforts underway, timeframes, program accomplishments and planned
activities.
* We interviewed SBA officials regarding steps taken to increase
liquidity in the primary and secondary markets and reviewed relevant
documents. We interviewed market participants, such as primary SBA
lenders and broker-dealers, on their views regarding SBA's
implementation efforts and the effects of the provisions on the
primary and secondary markets.
* We interviewed SBA officials and obtained data on the agency's
efforts to develop and implement the ARC Loan Program. We interviewed
market participants on their views regarding the program, including
views on the attractiveness of program terms and requirements.
SBA Recently Implemented Secondary Market Provisions:
SBA has recently completed implementation of the eight ARRA
administrative provisions (see slides 8-10).
On October 30, 2009, SBA implemented Section 503 to create a Secondary
Market Guarantee Program for 504 1st Mortgage Loan Pools.
* Under the new program, portions of eligible 504 1st mortgage loan
pools can be sold with an SBA guarantee to investors. Lenders will
retain at least 15 percent of each loan, broker dealers will retain 5
percent of the risk, and SBA will guarantee 80 percent. The program
will be in place until February 16, 2011, or until $3 billion in new
pools are created.
On November 19, 2009, SBA implemented Section 509 to establish a
secondary market lending authority for systemically important broker
dealers of 7(a) loans.
* Under the new program, SBA established a revolving line of credit to
systemically important broker-dealers at a variable interest rate not
to exceed the Federal Funds target rate plus 25 basis points.
Also subsequent to our April report, on June 15, 2009, SBA implemented
Section 506 to establish the ARC Loan Program.
Table: Status of ARRA Provisions:
Provision number and title: 501: Fee Reductions;
Primary requirements and sunset provisions: Permits temporary
reduction or elimination of fees for 7(a) and 504 loans until
September 30, 2010, or until funds appropriated are expended ($375
million for both Sections 501 and 502).
SBA's actions and related developments: Operational on March 16, 2009.
Published notice and request for comments on June 8, 2009. Completed
risk mitigation plan in July 2009. Published revised project plan on
July 29, 2009. Sections 501 and 502 funds appropriated expended on
November 23, 2009. Department of Defense fiscal year 2010
appropriations act included $125 million to fund sections 501 and 502
through February 28, 2010.
Provision number and title: 502: Economic Stimulus Lending Program:
Primary requirements and sunset provisions: Permits SBA to guarantee
up to 90 percent of qualifying 7(a) loans made by SBA lenders. Only
applies to loans approved within 12 months of enactment or until funds
appropriated are expended.
SBA's actions and related developments: Operational on March 16, 2009.
Issued a notice and request for comments on June 8, 2009. Completed
risk mitigation plan in July 2009. Published revised project plan on
July 29, 2009. Funds appropriated expended on November 23, 2009.
Defense appropriations act included $125 million to fund sections 501
and 502 through February 28, 2010.
Provision number and title: 503: Establishment of SBA Secondary Market
Guarantee Authority;
Primary requirements and sunset provisions: Allows SBA to establish a
secondary market guarantee for pools of first-lien 504 loans to sell
to third-party investors. The authority terminates 2 years after
enactment. Under emergency rulemaking authority, SBA must issue
regulations within 15 days of enactment (March 4, 2009).
SBA's actions and related developments: Missed March 4, 2009,
statutory deadline and SBA's revised August 31, 2009, deadline.
Completed risk mitigation plan in July 2009. Published revised project
plan on October 6, 2009. Published interim final rule and request for
comments on October 30, 2009.
Provision number and title: 504: Stimulus for Community Development
Lending;
Primary requirements and sunset provisions: Authorizes SBA to
refinance a limited amount of certain existing loans as new 504 loans.
Eligibility criterion for 504 loans has changed from creating one job
for every $50,000 guaranteed to one job for every $65,000 guaranteed.
SBA's actions and related developments: Published notice on April 10,
2009, explaining the new job creation eligibility criterion. Published
interim final rule implementing Section 504 on June 23, 2009. Risk
assessment and risk mitigation plan completed.
Provision number and title: 505: Increasing Small Business Investment;
Primary requirements and sunset provisions: Increases the maximum
amount of outstanding leverage available to a small business
investment company (SBIC) to the lesser of 300 percent of the SBIC's
private capital or $150 million. Leverage allowed for two or more
SBICs operated under common control and that are financially sound
cannot exceed $225 million.
SBA's actions and related developments: Completed risk mitigation plan
in July 2009. Published interim final rule and request for comments on
July 14, 2009. Published revised project plan on July 28, 2009. In
process of reviewing comments received.
Provision number and title: 506: Business Stabilization Program (ARC);
Primary requirements and sunset provisions: Creates a new program that
allows SBA to guarantee loans of $35,000 or less to small businesses
with existing qualifying loans that are suffering immediate financial
hardship. Under emergency rulemaking authority, SBA must issue
regulations within 15 days of enactment (March 4, 2009).
SBA's actions and related developments: Missed March 4, 2009,
statutory deadline. Published interim final rule and request for
comments on June 9, 2009. Operational on June 15, 2009. Posted notice
establishing the initial interest rate for ARC Loans at prime plus two
percentage points on June 10, 2009. Completed risk mitigation plan in
July 2009.
Provision number and title: 508: Surety Bonds;
Primary requirements and sunset provisions: Increases the maximum
contract amount for SBA bond guarantee from $2 million to $5 million
(and under certain circumstances up to $10 million). Requires SBA to
study and report on the program‘s current funding structure.
SBA's actions and related developments: Issued notice on March 27,
2009, to increase maximum contract amount for SBA bond guarantee to $5
million. Published interim final rule and request for comments on July
22, 2009.Published revised project plan July 29, 2009. Completed risk
mitigation plan July 2009.SBA submitted report to Congress studying
the program‘s current funding structure on August 17, 2009.
Provision number and title: 509: Establishment of SBA Secondary Market
Lending Authority:
Primary requirements and sunset provisions: Authorizes SBA to make
loans to systemically important broker-dealers that operate in the SBA
7(a) secondary market. Under emergency rulemaking authority, SBA must
issue regulations within 30 days after enactment (March 19, 2009).
SBA's actions and related developments: Missed March 19, 2009,
statutory deadline and SBA‘s revised September 30, 2009, deadline.
Published revised project plan on October 6, 2009.Published interim
final rule on November 19, 2009.
Source: GAO.
[End of table]
Factors That Affect SBA's Efforts to Implement Secondary Market
Provisions:
SBA's implementation of Section 503 and Section 509 were delayed 7 and
8 months, respectively. In our April 2009 report we identified several
factors that contributed to SBA's delay in implementing ARRA secondary
market provisions.
Our recent work also identified several of these key factors, such as:
* challenges related to the creation of new and complex programs,
including new systems and processes, regulations, policies, and
procedures;
* SBA's reduced staffing levels and loss of expertise through
retirements and turnover in key positions; and;
* challenges associated with resolving key policy issues and
addressing statutory language that, while designed to protect taxpayer
interests could also limit acceptance of market participants (e.g.,
SBA determining 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).
SBA-Guaranteed Loan Markets Appear To Have Largely Recovered:
The primary markets for 7(a) and 504 loans appear to have recovered.
* As shown on slide 13, 7(a) loan volumes doubled between the 4th
quarter of 2008 and 3rd quarter of 2009 from an average of about $650
million per month to an average of about $1.4 billion per month, which
is higher than 2nd and 3rd quarter 2008 average monthly volumes of
$1.1 billion and $1 billion, respectively.
* Also, according to SBA data, 504 loan volumes more than doubled
since the enactment of ARRA, from an average of about $205 million per
month in the 1st quarter of 2009 to an average of about $474 million
per month in the 3rd quarter of 2009.
Figure: SBA 7(a) Loan Volume in Primary Market (dollars in millions):
[Refer to PDF for image: horizontal bar graph]
2008:
October: $673.0;
Monthly increase or decrease: NA.
November: $569.9;
Monthly increase or decrease: -15%.
December: $703.0;
Monthly increase or decrease: 23%.
2009:
January: $484.4;
Monthly increase or decrease: -31%.
February: $530.9;
Monthly increase or decrease: 10%.
March: $570.5;
Monthly increase or decrease: 7%.
April: $720.4;
Monthly increase or decrease: 26%.
May: $750.9;
Monthly increase or decrease: 4%.
June: $1,004.1;
Monthly increase or decrease: 34%.
July: $1,030.7;
Monthly increase or decrease: 3%.
August: $1,370.0;
Monthly increase or decrease: 33%.
September: $1,900.0;
Monthly increase or decrease: 39%.
Source SBA data.
[End of figure]
As shown on slide 15, 7(a) secondary market sales more than tripled
between the 4th quarter of 2008 and 3rd quarter of 2009, from a
monthly average of about $108.8 million to a monthly average of about
$336.9 million.
Some market participants also indicated that the secondary market for
7(a) loans is showing signs of improvement, including low inventory
levels and higher premiums paid for securities backed by pools of 7(a)
loans. However, the participants stated that SBA loan markets are not
back to levels that existed two years ago.
SBA data and the views of some market participants suggest that
secondary 504 debentures also appear to be doing well--providing
historically low interest rate to borrowers. However, the secondary
market for the unguaranteed portion of 504 loans remains limited.
Figure: SBA 7(a) Loan Volume in Secondary Market:
[Refer to PDF for image: horizontal bar graph]
2008:
October: $117.2;
Monthly increase or decrease: NA.
November: $112.9;
Monthly increase or decrease: -4%.
December: $96.5;
Monthly increase or decrease: -14%.
2009:
January: $85.9;
Monthly increase or decrease: -11%.
February: $138.2;
Monthly increase or decrease: 61%.
March: $183.6;
Monthly increase or decrease: 33%.
April: $184.8;
Monthly increase or decrease: 1%.
May: $324.6;
Monthly increase or decrease: 76%.
June: $359.1;
Monthly increase or decrease: 11%.
July: $323.8;
Monthly increase or decrease: -10%.
August: $313.6;
Monthly increase or decrease: -3%.
September: $373.3;
Monthly increase or decrease: 19%.
Source SBA data.
[End of figure]
Condition of Secondary Market for SBA Loans:
While SBA implemented one ARRA secondary market provision in late
October and the other secondary market provision in mid-November, SBA
and some market participants cite other key reasons for improvement in
the markets in recent months.
* SBA and some market participants cite ARRA provisions that reduced
or eliminated fees (Section 501) and extended guarantees (Section 502)
as being critical to generating primary market activity. While the
$375 million that was appropriated under ARRA for the fee reductions
and guarantee extensions were exhausted by late November 2009, the
2010 U.S. Defense Department appropriation act included an additional
$125 million in appropriations to continue the enhancements through
February 28, 2010.[Footnote 17]
* Some market participants indicated that credit market conditions
have generally improved, which has also led to an improvement in SBA
loan markets.
* As of September 2009, Treasury had not utilized an of the $15
billion available under TARP to purchase securities backed by SBA-
guaranteed 7(a) and 504 loans. Also, TALF got off to a slow
start and the Federal Reserve only recently began providing TALF small
business loans (see slide 17). However, SBA officials, and some market
participants believe just the presence of TARP and TALF have increased
investor confidence and helped to spur activity in the markets for SBA
loans.
Table: Status of TALF Small Business Loans (Dollars in millions):
Small Business Loans[A]:
March: $0;
April: $0;
May: $86;
June: $81;
July: $102;
August: $149;
September: $162;
October: $342;
Total: $922.
Total all TALF Loans[B]:
March: $4,707;
April: $1,708;
May: $10,600;
June: $11,453;
July: $6,081;
August: $9,160;
September: $7,943;
October: $4,597;
Total: $56,249.
[A] Small business loans include SBA-guaranteed 7(a) and 504 loans,
debentures or pools originated on or after January 1, 2008.
[B] Includes auto, credit card, student loan, small business,
equipment, insurance premium finance, floorplan, servicing advances,
and commercial mortgage-backed securities.
Source: Federal Reserve Bank of New York.
[End of table]
Status of SBA's ARC Loan Program:
Early reports show that the ARC Loan Program started slowly, but ARC
loan approval numbers are slowly increasing.
As shown on slide 19, by September 30, 2009, SBA had approved a total
of 2,904 ARC loans with a total value of $94 million, or 37 percent of
the $255 million appropriated to administer the program.
Market participants we contacted noted that while interest in the ARC
Loan Program is relatively high, some confusion also exists among
potential borrowers regarding eligibility requirements (i.e., the
program is not for every small business enduring a hardship, only
those that can meet certain criteria, such as demonstrating
profitability in one of the last two years).
* In August 2009, SBA released its new ARC Loan Program Procedural
Guidance to provide lenders with updated information and clarification
about the ARC Loan Program. It is not clear to what extent such
guidance may have contributed to the ARC Loan Program's growth in
recent months.
Table: Status of SBA's ARC Loan Program
Volume by month: June (June 15-30);
Dollar Amount Approved: $6,243,600.00;
Number of Loans Approved: 187.
Volume by month: July;
Dollar Amount Approved: $25,838,300.00;
Number of Loans Approved: 799.
Volume by month: August;
Dollar Amount Approved: $28,007,500.00;
Number of Loans Approved: 866.
Volume by month: September;
Dollar Amount Approved: $34,080,900.00;
Number of Loans Approved: 1,052.
Volume by month: Total;
Dollar Amount Approved: $94,170,300.00;
Number of Loans Approved: 2,904.
Source: SBA data.
[End of table]
Market participants we spoke with noted two main issues that may have
contributed to the slow start of the ARC Loan Program:
* Some lenders expressed concern over the definition of a viable
business and how to determine immediate financial hardship, and
believe if they make loans to businesses that are not viable and such
borrowers default, SBA will not honor its guarantee.
* Some lenders also indicated that ARC loans are unprofitable, the
loan amount is too small to help many businesses, and the paperwork
and process are burdensome. As a result, lenders are offering very few
ARC loans, and likely only approving the loans for existing customers.
[End of Enclosure I]
Enclosure II: Comments from the Small Business Administration:
U.S. Small Business Administration:
Washington, D.C. 20416:
January 6, 2010:
Mr. William Shear:
Director:
U.S. Government Accountability Office:
Financial Markets and Community Investment:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Shear,
Thank you for the opportunity to comment on your recent report.
"Status of the Small Business Administration's Implementation of
Administrative Provisions in the American Recovery and Reinvestment
Act of 2009" (GAO 10-298R). We appreciate your thoughtful review of
the progress we have made in the implementation of Recovery Act
programs.
The Agency has indeed worked diligently to implement its small
business recovery initiatives. As noted in your report, SBA has
successfully implemented the administrative provisions included in the
Recovery Act. We modified old programs, and created new programs, to
help expand access to capital for small businesses while also
appropriately managing risk for the Agency.
The fee reductions and higher guarantee programs included in the
Recovery Act have been very successful, and on December 19, these
initiatives were extended through additional funding provided in the
Department of Defense Appropriations Act, 2010. As of January 1, 2010,
the SBA has supported $18.2 billion in Recovery Act lending to small
businesses.
The secondary market for the 7(a) program is now operating with both
volume and pricing restored to historic levels. Over the past seven
months, the average monthly loan volume settled from lenders to broker-
dealers in the 7(a) secondary market has been $357 million, which is
above pre-credit crisis averages. In December 2009. S475 million
settled in this market, which is the highest amount settled since
December 2007. Premiums have also recovered in the 7(a) secondary
market, and for the past five months have been at or above 2007 levels.
In addition, the market for 504 debentures is now settling with
historically low interest rates for borrowers. SBA and industry
participants believe these low rates are at least partially due to the
positive effect; of the TAU program, as well as the Treasury
Department's $15 billion commitment as a standby source of liquidity.
As mentioned in your report, SBA has published regulations to
establish a new secondary market program for guaranteed pools of 504
first mortgage liens, and to provide back-up financing to systemically
important broker-dealers in the secondary market.
At the same time, through January 1, SBA has approved 5,184 ARC loans
totaling over $167 million to help viable, struggling businesses
across the country. SBA's field network continues to train lenders and
counsel borrowers regarding how to best utilize this new program, and
the Agency is engaged in continuing discussions with staff, resource
partners, lenders and other stakeholders to identify opportunities for
program enhancements.
Thank you for the opportunity to comment on this report and briefing
materials. We look forward to continuing to work with you further.
Sincerely,
Signed by:
Eric Zarnikow:
Associate Administrator:
Office of Capital Access:
GAO-10-298R SBA's Economic Stimulus Provisions
[End of Enclosure II]
Footnotes:
[1] In the financing of a typical 504 loan project, the small business
borrower provides at least 10 percent of the funds; a third-party
lender originates a mortgage, referred to as a first-lien mortgage, to
provide 50 percent of the funds; and a nonprofit certified development
company provides the remaining 40 percent of the funding through an
SBA-guaranteed debenture.
[2] As described in this report, secondary markets have developed for
the guaranteed portions of 7(a) loans and the guaranteed and
unguaranteed portions of primarily real estate projects (including
machinery and equipment) financed pursuant to the 504 program.
[3] The guaranteed portions of 7(a) loans may be bundled into
guaranteed securities, referred to as pools of 7(a) guaranteed loans
and 7(a) guaranteed securities. The term broker-dealer is commonly
used to describe the person or firm that trades securities on behalf
of others (i.e., broker) or on its own account (i.e., dealer).
[4] Pub. L. No. 111-5, Division A, Title V, 123 Stat. 115, 151-161
(2009).
[5] The guarantee fees for 7(a) loans and the third-party
participation fees and certified development company processing fees
for 504 loans were temporarily eliminated. The maximum guarantee for
7(a) loans was temporarily increased from 85 to 90 percent.
[6] The SBA guarantee was extended to the first-lien portion of 504
loans, and a new program was established to make loans to systemically
important broker-dealers that operate in the SBA 7(a) secondary
market. A systemically important SBA Secondary Market broker-dealer is
routinely engaged in the purchase and sale of the guaranteed portion
of 7(a) loans or pools of guaranteed portions originated,
underwritten, and closed under the Small Business Act.
[7] The ARC Loan Program is a new, temporary loan program that allows
SBA to guarantee loans of $35,000 or less to small businesses with
existing qualifying loans that are suffering immediate financial
hardship.
[8] As required under Section 507, Pub. L. No. 111-5, Division A,
Title V, 123 Stat. 115, 151-161 (2009), we reported within 60 days of
ARRA enactment. See GAO, Small Business Administration's
Implementation of Administrative Provisions in the American Recovery
and Reinvestment Act of 2009, GAO-09-507R (Washington, D.C.: Apr. 16,
2009).
[9] Section 7(a) of the Small Business Act, as amended, codified at 15
U.S.C. § 636(a); see also 13 C.F.R. Part 120.
[10] 15 U.S.C. §§ 695 et seq.
[11] TALF is under the Consumer and Business Lending Initiative of
Treasury's Financial Stability Plan. Accordingly, Treasury provides
$20 billion in support to TALF.
[12] ARRA requires that the seller of the pools purchasing a guarantee
retain no less than 5 percent of the dollar amount of the pools being
sold to third-party investors. During the rulemaking process, SBA
officials said they were considering whether it would be appropriate
to require broker-dealers to retain more than 5 percent of the
potential losses. There is no statutory requirement for lender
retention.
[13] Section 1006 of the Department of Defense Appropriations Act,
2010, Pub. L. No. 111-118 (Dec. 19, 2009).
[14] To be eligible for an ARC loan, the small business must be an
established small business, have financial statements demonstrating it
was profitable in one of the past 2 years, and be able to project
sufficient cash flow to meet current and future loan payments over a 2-
year period from loan approval.
[15] [hyperlink, http://www.gao.gov/products/GAO-09-507R].
[16] TALF was launched by the Federal Reserve and Treasury under the
Consumer and Business Lending Initiative. Treasury provides $20
billion in support to TALF.
[17] Section 1006 of the Department of Defense Appropriations Act,
2010, Pub. L. No. 111-118 (Dec. 19, 2009).
[End of section]
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