GAO Says While SBA 7(a) Loan Program Faces `Ongoing Challenges,' Overall, Agency Making Progress Addressing Other Issues

WASHINGTON - While the U.S. Small Business Administration has implemented many recommendations from the Government Accountability Office, the agency has experienced "mixed success" with the management of its 7(a) loan program. This is according to William Shear, GAO director of financial markets and community investment, who testified at an April 6 hearing, bringing with him a 25-page study on the SBA titled Improvements Made, but Loan Programs Face Ongoing Management Challenges. Shear testified on the changes in SBA's oversight of the 7(a) business loan program, steps the agency has taken to improve its management of information technology, human capital, financial reporting for business loans and the administration of its disaster loan program after the September 11, 2001 terrorist attacks and last year's Gulf Coast hurricanes. The findings were based on a number of reports GAO has issued since 1998, Shear said. Since the mid-1990s, when the GAO found that SBA had virtually no oversight program for its 7(a) guaranteed loan program, the agency established a program and developed some enhanced monitoring tools, Shear said, which led to the establishment of the agency's Office of Lender Oversight or OLO in 1999. With respect to using information technology to monitor loans made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in developing its own system to establish a risk management database as required by law. However, SBA awarded a contract to Dun and Bradstreet in April 2003 to obtain loan-monitoring services. Prior to December 1997, SBA's procedures required annual on-site reviews of lenders with more than three outstanding guaranteed loans. But in a June 1998 study, Shear said the GAO could not determine from the district offices' files which lenders met this criterion and should have been reviewed. In the five SBA district offices the GAO visited, about 96% of the lenders had not been reviewed in the past five years and that some lenders participating in the program for more than 25 years had never been reviewed. At the time, the SBA was in the midst of implementing a central review program for its "preferred" lenders, which allows them to make loans without preapproval. The GAO's most recent review of SBA's oversight efforts, completed in June 2004, focused on the agency's risk management needs and its acquisition and use of a new loan monitoring service. Shear recommended the agency base its capabilities for monitoring its loan portfolio and lender partners on a credit risk management program. "Largely because SBA relies on lenders to make its guaranteed loans, it needs a loan and lender monitoring capability that will enable it to efficiently and effectively analyze various aspects of its overall portfolio of loans, its individual lenders, and their portfolios, Shear said. "While SBA must determine the level of credit risk it will tolerate, it must do so within the context of its mission and its programs' structures. Since SBA is a public agency, its mission obligations will drive its credit risk management policies." For example, Shear said, different loan products in the 7(a) program have different levels of guarantees and these and other differences influence the mix of loans in SBA's portfolio and, consequently, would impact how SBA manages its credit risk. In its January 2003 report, the GAO said SBA "lacked reliable" data to determine the overall financial results of its loan sales and because the agency did not analyze the effect of loan sales on its remaining portfolio, its credit program cost estimates for the budget and financial statements may have contained "significant errors." In response, SBA developed a new cash-flow model to estimate the costs of its disaster loan program, and implemented standard operating procedures for annually revising the cost estimates for its credit programs. SBA also revised its approach to determine the results of loan sales and found that loans were sold at losses, which was contrary to the original determination that the sales generated gains. These findings prompted SBA to eventually discontinue its loan sales program, the GAO said. "We reviewed the improvements made by SBA and reported in April 2005 that the loan accounting issues we previously identified were resolved, and that the new cash-flow model improved its ability to prepare more reliable cost estimates and to determine the results of prior loan sales," Shear said. But GAO recommended additional steps that would improve the long-term reliability of the cost estimates, such as routine testing of the model. According to SBA officials, Shear said steps have been taken to address GAO's recommendations including the development of policies and procedures on how to operate and test the model. "These improvements helped SBA achieve an unqualified audit opinion on its fiscal year 2005 financial statements, which represents significant progress from prior years," Shear said. Still, for fiscal year 2005, SBA's auditor continued to note weaknesses in SBA's overall internal controls, according to Shear. The agency still needs to improve its funds management such as canceling loan amounts not disbursed and closing out grants, its review process for accounting transactions, and its financial statement preparation process, the study showed. -msamaad@cutimes.com