The U.S. Small Business Administration (SBA) is learning a lesson in sound credit management in the wake of a Government Accountability Office (GAO) report that illuminated the agency's inadequate lender oversight.
The lenders can be viewed as the SBA's customers; they receive guaranteed loan portfolios, which basically amount to money they can distribute in the form of loans to small businesses. While the report noted that the administration had made improvements to its lender oversight, the GAO's research showed that the SBA hadn't been following common industry standards when it came to validating its Loan and Lender Monitoring System (L/LMS). The SBA relies on the system to judge the health of the lenders, but without regular validation, the system is consistently behind economic and industry changes, making it a far more ineffective judge of lender worthiness.
Although the agency uses the system to focus their off-site monitoring of lenders, it does not use it to target risky lenders for on-site reviews or to determine the scope of those reviews, unlike fellow regulators like the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve bank. "SBA uses its risk rating system to monitor lenders and portfolio trends but does not rely on it to target the riskiest 7(a) and 504 lenders for on-site review," said the report. The 7(a) and 504 programs that it refers to are the agency's two largest small business loan programs.
"Instead, SBA focuses on what it thinks is the most important risk indicator-portfolio size-and targets for review those lenders with the largest SBA-guaranteed loan portfolios-that is, 7(a) lenders with at least $10 million in their guaranteed loan portfolio and 504 lenders with balances of at least $30 million," said the GAO. "Of the 477 reviews SBA conducted from 2005 through 2008, 380 (80%) were of large lenders that, based on its lender risk rating system, posed limited risk to SBA. The remaining 97 reviews (20%) were of lenders that posed significant risk to the agency."
As a result of the SBA's decision to rely on portfolio size, rather than risk, 97% of established high-risk lenders did not receive on-site reviews, putting a great deal of the SBA's potential credit at risk. Furthermore, the reviews conducted were not scaled according to potential risk, nor did they even include an assessment of the lenders' credit decisions.
"Just as it is important to ensure small businesses have access to capital, we must ensure that lender oversight promotes proper underwriting, establishes effective standards and safeguards for SBA loans while maintaining reasonable and proportional fees assessed to the lenders for this oversight," said Senator Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship. "Ultimately, robust oversight of the SBA loan programs will enhance the ability of the SBA to complete their mission of supporting our nation's small businesses."
Landrieu, along with committee ranking member Olympia Snowe (R-ME), originally asked the GAO to conduct the report in June 2008, following an Inspector General's report that revealed the SBA's oversight of merely four lenders had created a loss of $329 million for the agency's 7(a) loan program, which is its largest. Snowe noted that she would re-introduce legislation, cosponsored by Landrieu, aimed at improving SBA lender oversight.
A full copy of the GAO's report can be found here.
Jacob Barron, NACM staff writer