Report 10-12 - Assessment of the Community Express Pilot Loan Program

This report presents the results of our assessment of SBA's Community Express pilot loan program. The program was designed to increase SBA lending to predesignated geographic areas and to New Market borrowers (i.e., women, minorities, and veterans). SBA, aware that the program's historical credit performance had generally been worse than that experienced by other SBA loan programs, requested that the Office of Inspector General determine whether the program is properly structured to ensure success and to minimize the risk of fraud, waste, and abuse. We were also asked to consider the effectiveness of recent program changes.

To respond to the request, we determined whether: (1) the Community Express program has increased the number and dollar amount of loans provided to select New Market groups, while keeping credit risk at an acceptable level; (2) small businesses receiving Community Express loans benefited from lower interest rates and fees than that of other SBA loan programs, and if lenders adequately justified their fees; (3) technical assistance was provided by lenders to increase the potential success for Community Express borrowers; and (4) the most appropriate measures have been established by which to evaluate program success.

To assess program results, we compared the volume, dollar value, geographic distribution, and other characteristics of Community Express loans to that of other 7(a) loans of $250,000 or less that were approved between May 1, 1999 and June 30, 2009. We also interviewed six lenders who had either stopped or reduced their participation in the Community Express program, and discussed lender participation rates with SBA and the National Association of Government Guaranteed Lenders.

To evaluate the risk of the program, we compared the l2-month Community Express purchase and charge-off rates reported for October 2004 to June 2009 to that of the other 7(a) programs. We also compared the l2-month purchase and charge-off rates for the two most active Community Express lenders, who were responsible for 71 percent of the loan volume (and 33 percent of the dollars loaned), to the rates charged to SBA's 7(a) portfolio averages. We determined whether the rates were uniformly high for all Community Express lenders. We also reviewed lender loan files and interviewed lender personnel to determine if lender underwriting practices increased credit risk. Further, we obtained information on the overall subsidy rates and the net cash flow for the Community Express program and other 7(a) programs.

To evaluate interest rates, we compared the average interest rates that each of the 11 most active lenders charged for their Community Express loans to the rates they charged for their other 7(a) loans. We also compared lender information on loan packaging fees for the Community Express program to the fees they charged for other 7(a) and non-SBA loans, which was available for only 7 of the 11 lenders.

To determine whether borrowers received technical assistance, we reviewed a sample of 99 loans that were disbursed between February 2005 and December 2008, and a sample of 31 loans disbursed from October 2008 (when program changes went into effect) to June 2009. We reviewed the loans for evidence that the technical assistance requirements were met. To corroborate data in the loan files, we interviewed 63 of the 130 borrowers we were able to reach, and 59 of 70 technical assistance providers. Our audit scope and methodology is further detailed in Appendix I, and a listing of the sampled loans is provided in Appendix II.

Finally, to determine whether SBA established the most appropriate performance measures for the program, we interviewed Office of Capital Access (OCA) personnel, and reviewed the FY 2008 and 2009 Federal Government Performance Reports. We conducted the audit between January 2009 and March 2010 in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States.