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WASHINGTON – The news from two GAO studies couldn’t have come at a worse time for the Small Business Administration. At a time when the agency is facing potential cuts to its annual budget and the reauthorization of its programs, the SBA now has to deal with findings from two studies by the General Accounting Office that question the reliability of the agency’s lender oversight program and the formula the SBA uses to determine the progress and effects of its loan asset sales. Both GAO studies were conducted at the request of Missouri Sen. Kit Bond, the former Chairman and currently a senior Republican on the Senate Small Business and Entrepreneurship Committee. Craig Orfield, communications director for the Committee said the Committee requested the studies “as part of its general oversight of the SBA’s lending programs.” He explained that the Committee plans to hold hearings in early spring or summer on the SBA’s programs, in anticipation of the agency’s programs coming up for reauthorization, and the studies “are an extension of the Committee’s examination of the SBA’s lending performance and accountability “. In its first study, “Progress Made, but Improvements Needed in Lender Oversight” the GAO recognized that the SBA “has changed the approach in its lending programs to delegating more authority to lenders for making loans that it guarantees rather than approving loans that lenders make.” Looking at the SBA’s 7(a) business loan program and its policy of giving Preferred Lenders (PLP) authority to make loans without prior SBA approval based on their own assessments of borrowers’ eligibility and creditworthiness, GAO found that while the SBA “has made progress” in developing its lender oversight program, it “conducts only a cursory review of lenders’ processes rather than a qualitative assessment of their decisions with regard to borrowers’ creditworthiness and eligibility. ” GAO alleges that the `credit elsewhere’ standard’ – a test used by the SBA to determine if the borrowers can obtain credit without the SBA guarantee- “ is broad, making a meaningful assessment of lenders’ decisions difficult.” “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 assist it in predicting PLP lenders’ future performance, thereby better preparing SBA to manage the risk to its portfolio.” Although SBA has identified appropriate elements for an effective lender oversight program, the GAO found the SBA “has been slow to implement program improvements for its oversight of SBLCs,” referring to small business lending companies. In addition, stated GAO, SBA “hasn’t developed clear enforcement policies for preferred lenders or SBLCs, specifically describing its response in the event that its reviews uncover noncompliance. SBA is also not consistent in how it funds the cost of its lender oversight, resulting in questionable funding arrangements that could limit SBA’s flexibility in managing its program and its overall accountability.” GAO blamed the lack of organizational independence and inadequate resources for the SBA’s oversight problems. “Split responsibilities within the Office of Capital Access, and limited resources, have impeded SBA’s ability to complete certain oversight responsibilities, such as the completion of review reports, which could result in increased risk to its portfolio,” the GAO wrote. More than half of the $10 billion in SBA 7(a) loans approved in fiscal 2001 were made by preferred lenders, primarily banks. The federal government guarantees up to 85% of the amount of these loans. To remedy the problems, GAO recommended the SBA should: include strategies into its review process that adequately measure the financial risk SBA lenders pose to the SBA and develop specific criteria for the `credit elsewhere’ standard; issue clear policies and procedures for enforcement actions against preferred lenders and SBLCs; and separate the lender oversight function from the OCA and provide it with clear authority and guidance. The SBA refuted the report findings. It argued that it has already implemented improvements in its lender oversight program and that SBA regulations and SBA Standard Operating Procedures “already contain such criteria and guidance.” SBA further responded that it is in the process of reviewing issues regarding large national PLP lenders, and the agency has already separated the lender oversight function from the Office of Financial Assistance. As for SBA’s lender oversight responsibility, SBA spokesman Mike Stamler further told Credit Union Times “the SBA should not be held responsible for things bank regulatory agencies are already doing. On the SBA’s budget, we can’t go into banks and do a full review of their safety and soundness. That’s the job of the banking regulator.” Stamler explained that the SBA’s lender oversight program is currently a time consuming, manual process that the agency is in the process of replacing with a more technologically advanced loan monitoring process. In January 2002, SBA contracted with KPMG to conduct a study of an advanced loan processing system, and it is currently working with Soza & Co. to provide project management for the implementation of KPMG’s recommendations. “We consider it our responsibility to protect the interests of taxpayers,” said Stamler. The SBA’s accounting practices were further examined by GAO in a second study, “Accounting Anomalies and Limited Operational Data Make Results of Loan Sales Uncertain.” In that study, the GAO went so far as to stress that, “It would be imprudent to continue SBA loan asset sales in the absence of reliable and complete information on the accounting and budgetary effects.” GAO said it conducted this study because similar sales are expected for other government agencies as a way for them to reduce loan assets and servicing costs. GAO wanted to describe the process for selling loans; identify how lenders and borrowers have reacted to loan sales; determine whether SBA is properly accounting for its loan sales and their impact on credit subsidy estimates; and assess whether loan sales resulted in operational benefits for SBA. Looking at loan asset sales SBA held from August 1999 through January 2002, $4.4 billion of which SBA disposed of in disaster assistance home and business loans and regular business loans, GAO found that while SBA “relies on borrower inquiries and complaints to determine whether purchasers of the loans are using prudent loan servicing practices, as required in the loan sale agreements. information on borrowers’ reactions to loan sales is incomplete because SBA does not have a comprehensive process to capture the inquiries and complaints it receives.” In addition, the GAO wrote, “because SBA did not analyze the effect of loan sales on its remaining portfolio, its reestimates of loan program costs for the budget and financial statements may contain significant errors.” GAO emphasized that “until SBA corrects these errors and determines the cause of the precipitous decline in the loss allowance account, SBA’s financial statements will likely be misstated, and the audit opinion on past financial statements may be incorrect.” Stamler said the SBA recognizes that loan asset sales “are a difficult accounting problem, one that is not easy to figure out.” He noted that the Federal government began loan asset sales in 1999, and “the SBA is breaking new ground.” “Even GAO couldn’t identify the cause of the anomalies,” said Stamler. As for the SBA’s postion, Stamler said, “Budget decisions that are to be made for the SBA are independent of the GAO reports. Congress wants to make sure SBA is doing it right, and so do we.” Pending resolution of the budgetary and accounting issues GAO raised in the report, the SBA asked GAO to hold off publishing a final version of the report. The GAO denied the request, stating that “it is not our policy to delay issuance of our reports until problems we have identified are resolved.” Whether or not – and just how much – the GAO report findings will affect Congress’ decisions on the SBA’s budget remains to be seen. Craig Orfield, communications director for the Senate Small Business and Entrepreneurship Committee said “the budget deficit will probably have more impact on the SBA budget than the reports’ findings.” He added that he “doesn’t anticipate the study findings will precipitate changes in SBA funding, however they will be considered as part of the reauthorization process.” Asked whether the Committee planned to request GAO to conduct additional studies of the SBA, Orfield said “other reports are currently in the pipeline.” He said these report findings “will come out before reauthorization takes place. “The GAO report findings on the SBA are an item for deliberation,” said Orfield. Orfield’s comments may sound ominous, but Mary Dunn, CUNA’s Associate General Counsel said some of the reports’ findings “are dated.” “While the reports raise some concerns, the SBA has already tried to correct some of the problems cited in them. In our dealing with the SBA, CUNA has found the agency to be very professional and demonstrating a high level of competency,” she said. Dunn emphasized that the GAO’s report findings “are not the death knell for the SBA’s 7(a) program. There is still considerable interest in the program, and it will continue to be viable,” she said, noting that the reports’ recommendations concern management and accounting issues, not program changes. “Despite the reports’ findings, the SBA’s 7(a) program still has an important role in providing loans to small businesses. There is a need for the program. Congress supports it, and the White House seems to want more funding for small businesses,” said Dunn. -

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