Audit of SBA’s Oversight of High-Risk Lenders

This report presents the results of our audit of the Small Business Administration’s (SBA’s) oversight of high-risk lenders. Our objective was to determine whether SBA performed effective oversight of high-risk lenders to identify and mitigate risks. The Small Business Act and Small Business Investment Act authorized SBA to provide financial assistance to small businesses through government-guaranteed loans and debentures. SBA’s Office of Credit Risk Management (OCRM) is responsible for the oversight of SBA lenders and its $120 billion 7(a) and 504 loan portfolio. OCRM’s mission is to maximize the efficiency of SBA’s lending programs by effectively managing program credit risk, monitoring lender performance, and enforcing lending program requirements.

We found that OCRM did not always perform effective oversight of high-risk lenders to identify and mitigate risks. Specifically, OCRM did not always conduct planned high-risk lender reviews, recommend adequate and consistent risk mitigation actions, or communicate loan deficiencies they noted during their high-risk lender reviews to SBA approval and purchase loan centers. Several factors contributed to these conditions. OCRM did not have policies and procedures requiring them to document their justification for not conducting planned reviews and identifying and prioritizing additional lenders for review, a comprehensive database to manage its oversight of high-risk lenders, or clear and specific guidance to outline adequate corrective and enforcement actions. Further, OCRM did not conduct an overall assessment of the high-risk lender review results to ensure analysts recommended adequate and consistent actions or have a requirement to communicate significant lender review findings and loan deficiencies to SBA’s loan centers.

As a result, there is an increased risk that lenders with repeated identified systemic deficiencies will continue to participate in SBA’s 7(a) and 504 loan programs, which could jeopardize the integrity of the programs and increase the risk of financial loss to the $120 billion loan portfolio. For example, OCRM identified material deficiencies in 21 defaulted loans, for which SBA honored its guaranty by purchasing the defaulted loans. However, we did not find evidence that SBA validated whether the lenders had corrected the deficiencies. Therefore, we question SBA’s guaranty purchases of these 21 defaulted loans totaling $13.3 million. Additionally, five lenders that did not receive planned reviews had an average default rate of 19 percent for loans approved and disbursed in FYs 2015–2017. These lenders originated and disbursed $1 billion in loans in which $112.5 million was transferred to liquidation because the loans defaulted.

We made and management agreed with six recommendations that, if implemented, will improve SBA’s internal controls, enhance communication, and mitigate losses incurred on loans with material deficiencies. SBA management’s proposed actions resolve all six of our recommendations.