White Paper: 7(a) Loan Program During SBA’s Response to the COVID-19 Pandemic

We prepared this white paper to report on the U.S. Small Business Administration’s (SBA) 7(a) loan program performance during SBA’s response to the Coronavirus Disease 2019 (COVID-19) pandemic and address potential risks SBA should consider in managing the program.

We identified factors that could impact the 7(a) loan program and should be considered in SBA’s program risk strategy. Specifically, in FY 2021, the total amount of loans increased to $31.4 billion from $19.4 billion in FY 2020 (62 percent increase) and $20.6 billion in FY 2019 (53 percent increase), as did the average loan amount. Loan approvals decreased in FY 2020 and returned to pre-pandemic levels in FY 2021. Default and charge-off rates also significantly declined after implementation of the CARES Act.

The relief payments likely attributed to declining default and charge-off rates. Small businesses also had access to additional support during the COVID-19 pandemic, which included the Paycheck Protection Program, the Restaurant Revitalization Fund, Economic Injury Disaster Loans, and deferred 7(a) loan payments. However, variable interest rates for 7(a) loans increased because the base prime rate increased from 3.25 percent to 6.25 percent in 2022. The effects of the pandemic combined with the rising interest rates could increase the risk for subsequent defaults and charge-offs. These program trends could increase SBA’s liability and have a negative impact on its ability to achieve its zero-subsidy rate goal.

To ensure 7(a) loan program integrity, reduce the risk of financial loss and facilitate meeting its zero-subsidy rate goal, SBA should consider potential risks related to higher loan amounts, rising interest rates, staffing shortages, delayed defaults, and charge-offs in its 7(a) risk strategy.

SBA management generally agreed with our findings and key considerations, stating that they believed the relief payments helped to prevent loan defaults. They acknowledged that the lasting impact of the relief payments, the effects of the higher loan amounts, and rising interest rates were unknown. Management stated they will continue to consider our key considerations in their risk strategy.