Background

SBA was created in 1953 to assist and protect the interests of small  businesses, in part by addressing constraints in the supply of credit for  these firms. The 7(a) program, named after the section of the Small  Business Act that authorized it, is SBA’s largest business loan program.  The program is intended to serve creditworthy small business borrowers  who cannot obtain credit through a conventional lender at reasonable  terms and do not have the personal resources to provide financing  themselves. Under the 7(a) program, SBA guarantees loans made by  commercial lenders to small businesses for working capital and other  general business purposes. These lenders are mostly banks, but some  are nondepository lenders, including small business lending companies  (SBLC). The guarantee assures the lender that if a borrower defaults on  a loan, SBA will purchase the loan and the lender will receive an agreed- upon portion (generally between 50 percent and 85 percent) of the  outstanding balance. For a majority of 7(a) loans, SBA relies on lenders  with delegated authority to process and service 7(a) loans and to ensure  that borrowers meet the program’s eligibility requirements. To be eligible  for the 7(a) program, a business must be an operating for-profit small firm  (according to SBA’s size standards) located in the United States and  meet the “credit elsewhere” requirement, including the personal resources  test.
Within the 7(a) program, there are several delivery methods—including  regular 7(a), the Preferred Lenders Program (PLP), and SBA Express.  Under the regular (nondelegated) 7(a) programs, SBA makes the loan  approval decision, including the credit determination. Under PLP and SBA  Express, SBA delegates to the lender the authority to make loan approval  decisions, including credit determinations, without prior review by SBA.  The maximum loan amount under the SBA Express program is $350,000  (as opposed to $5 million for 7(a) loans). This program allows lenders to  utilize, to the maximum extent possible, their respective loan analyses,  procedures, and documentation. In return for the expanded authority and  autonomy provided by the program, SBA Express lenders agree to accept  a maximum SBA guarantee of 50 percent. Regular (nondelegated) 7(a)  loans and delegated 7(a) loans made by PLP lenders generally have a  maximum guarantee of 75 or 85 percent, depending on the loan  amount.
In June 2007, under its own authority, SBA established the Patriot  Express pilot loan program, which has features that are similar to those of  the SBA Express and other 7(a) loan programs. Like the SBA Express  program, the Patriot Express program allows lenders to use their own  loan analyses and documents to expedite loan decisions for eligible  borrowers. However, the Patriot Express has a different guarantee rate  than SBA Express and different eligibility requirements. Patriot Express  borrowers must have a business that is owned and controlled (51 percent  or more) by the following members of the military community:  veterans (other than dishonorably discharged), active duty military participating in the military’s Transition Assistance  reservists or National Guard members, spouse of any of these groups, a widowed spouse of a service member who died while in service, or a widowed spouse of a veteran who died of a service-connected  disability.
Like the 7(a) program, the Patriot Express program provides the same  loan guarantee to SBA-approved lenders on loan amounts up to  $500,000, and the loan proceeds can be used for the same purposes.  SBA initially intended to operate the Patriot Express pilot for about 3  years, after which it would evaluate the program. However, SBA  announced on December 14, 2010, that it would continue to operate the  program for at least 3 more years to allow the agency to evaluate the  program. SBA determined that it was premature to assess the results of  the pilot because most of the loans were made in the previous 2 years  and there had not been enough time to measure their performance.  Appendix II compares the key features of the Patriot Express program to  those of the regular 7(a) and SBA Express programs. Figure 1 depicts the  Patriot Express loan process, including the roles played by the lender and  SBA in the transaction and the fees associated with the loans.
A lender may request that SBA honor its guarantee by purchasing the  loan if a borrower is in default on an SBA loan for more than 60 calendar  days and if the borrower is unable to cure the loan after working with the  lender. The lender is required by regulation to liquidate all business  personal property collateral before demanding that SBA honor the  guarantee. As shown in figure 2, after the lender has liquidated all  business personal property collateral, it submits the purchase request to  one of SBA’s Office of Financial Program Operation’s centers, which  processes loan guarantee requests. The center reviews the lender’s  package to determine if it has complied with SBA rules and regulations. If  SBA finds that the lender has complied with the agency’s rules and  regulations and conducted proper due diligence when originating the  loan, SBA honors the guarantee and pays the lender the guaranteed  portion of the outstanding loan amount.
According to SBA officials, the 7(a) program—including its subprograms,  such as SBA Express and Patriot Express—is projected to be a “zero  subsidy” program in fiscal year 2014, meaning that the program does not  require annual appropriations of budget authority for new loan  guarantees.costs of purchasing defaulted loans, SBA assesses lenders two fees on  each 7(a) loan, including Patriot Express loans. The guarantee fee must  be paid by the lender at the time of application for the guarantee or within  90 days of the loan being approved, depending upon the loan term. This  fee is based on the amount of the loan and the level of the guarantee,  and lenders can pass the fee on to the borrower. The ongoing servicing  fee must be paid annually by the lender and is based on the outstanding  balance of the guaranteed portion of the loan.
To offset some of the costs of the program, such as the  SBA’s Office of Credit Risk Management is responsible for overseeing  7(a) lenders, including those with delegated authority. SBA created this  office in fiscal year 1999 to better ensure consistent and appropriate  supervision of SBA’s lending partners.  The office is responsible for  managing all activities regarding lender oversight, including lender risk  ratings and lender activities, and preparing written reports based on such  oversight.

	Patriot Express Loans Default at a Higher Rate Than Other SBA Loans, and Costs Have Exceeded Overall Program Income Since 2007

From 2007 through 2012, SBA made 8,511 Patriot Express loans. The  majority of these loans were valued below $150,000, and close to half  were uncollateralized loans valued below $25,000. Although Patriot  Express loans represent a fraction of SBA’s larger loan portfolio and are  concentrated among 11 lenders, these loans have defaulted at higher  rates compared to similar SBA loans made in the same time frame. At the  current default and recovery rates, the costs of the Patriot Express  program will likely continue to exceed overall program income.
Prior to reorganization in May 2007, the office was called the Office of Lender Oversight.

		Lenders Have Made 8,511 Patriot Express Loans Since 2007

From the start of the program through the fourth quarter of 2012, lenders  made a total of 8,511 Patriot Express loans. Taken together, these loans  are valued at $702,753,406, with an average of about $82,570 per loan.  As shown in figure 3, after a rapid expansion in the first 2 years of the  program from 2007 through 2009, the number of Patriot Express loans  declined from 2,176 approved in 2009 to 869 approved in 2012. Similarly,  the total loan amounts of Patriot Express loans approved each year grew  from approximately $67 million in 2007 to over $150 million in 2008 and  2009, but have since decreased. The higher numbers of Patriot Express  loans approved in 2009 and 2010 may be attributable, in part, to the  American Recovery and Reinvestment Act of 2009 (ARRA) and  subsequent legislation, which provided funding to temporarily subsidize  the overall 7(a) guarantee program’s fees and to increase the maximum  loan guarantee percentage from 75 or 85 percent to 90 percent, with the exception of loans approved under the SBA Express 7(a) subprogram.With a 5 to 15 percent increase in the maximum allowed guarantee  through ARRA, lenders had a greater incentive to approve SBA loans in  general (including Patriot Express loans), knowing that SBA would  guarantee a higher percentage of the loan. Figure 3 also shows that  average loan amounts have varied over the years. For loans approved in  2007, the average loan amount was for about $100,000, decreasing to  about $70,000 in 2009, and increasing since then to just under $100,000  in 2012.
Based on our analysis of SBA data from 2007 through 2012, about 67  percent of borrowers used Patriot Express loans for working capital, and  about half of these loans funded businesses that were either new or had  been in existence for less than 2 years. The majority of Patriot Express  loans approved since the program’s inception are valued at 30 percent of  the maximum loan limit, and about half are small enough that they do not  require collateral. Although SBA allows Patriot Express loans of up to  $500,000, about 84.2 percent of the loans made since 2007 (7,166) were  below $150,000. Further, 41.2 percent of Patriot Express loans (3,509)  were $25,000 or less. More than 64 percent of loans up to $25,000 were  provided by one lender and this lender accounted for about 26 percent of  total loans in the program. This lender primarily provided loans between  $5,000 and $25,000, and its average Patriot Express loan made from  2008 through 2012 was $9,759. As noted previously, loans under the  Patriot Express program below $25,000 do not require collateral.
The Patriot Express program is highly concentrated in a small number of  lenders. For example, the top 11 lenders (in terms of number of loans  made) represent 52 percent of the Patriot Express loans made since the  program’s inception (see table 1). These top 11 lenders accounted for  27.55 percent of the total amount approved for the Patriot Express  program. This concentration is explained, in part, by one lender that  focuses on providing low-dollar loans to veteran-owned businesses and  represents about 26 percent of the Patriot Express program, as discussed  previously. In contrast, the remaining 782 lenders that participate in  Patriot Express have approved fewer loans. For example, 246 of these  782 lenders approved one loan each since the program began in 2007.
As previously discussed, in addition to reviewing data on the Patriot  Express program from 2007 through 2012, we also reviewed similar data  from two other SBA loan programs: the SBA Express program and SBA’s  7(a) program. SBA Express and the 7(a) program, which are not limited to  borrowers in the military community, are significantly larger than the  Patriot Express program. Since 2007, the SBA Express program has  surpassed Patriot Express in total number of loans (156,280) and total  amount ($10.9 billion) approved, but the average loan amounts for Patriot  Express are larger than those for SBA Express. SBA Express has seen a  decline in loan numbers and amounts approved since 2007 (see fig. 4).  The number of SBA Express loans approved each year declined by about  50 percent from 2007 through 2008, and that number has remained at  lower levels since then. SBA officials told us that part of the decline from  2007 through 2008 may have been due to the economic downturn, which  prompted lenders to cut back on these loans. Figure 4 also shows the  total value of SBA Express loans peaked in 2007 ($2.9 billion) but then  decreased by nearly half in 2008 ($1.7 billion). The total value of SBA  Express loans then increased to about $2 billion in 2011 before falling to  about $1.3 billion in 2012.
The 7(a) program is also significantly larger than the Patriot Express  program in all measures, including total numbers of loans approved,  average loan amounts, and total loan amounts approved. Annually, the  total numbers of 7(a) loans approved have declined since peaking in  2010 at 19,131, while the average loan amount for 7(a) approvals  annually has steadily increased from about $470,784 in 2007 to $716,489  in 2012 (see fig. 5). The total value of 7(a) loans approved within each  year has been relatively steady, as shown in figure 5, ranging from  around $7.7 billion to around $9.2 billion, with the exception of 2010,  when the total value of loans approved was around $12 billion.
Table 2 shows the total numbers of loans, total dollar values, and average  loan amounts approved for Patriot Express, SBA Express, and 7(a) from  June 2007 through 2012. Additionally, the table shows the relative  percentage of loans made and dollar values for each program when  compared among all three programs. When comparing the three  programs since the inception of Patriot Express in June 2007 through the  end of 2012, Patriot Express is significantly smaller than SBA Express  and 7(a) in terms of number of total loans approved (3.76 percent) and  dollar amount (1.15 percent). However, the average loan amount for  Patriot Express is larger than the average loan approved under SBA  Express.
When comparing loans approved in each year from the inception of  Patriot Express through December 31, 2012, Patriot Express loans (with  the exception of 2007) defaulted at a higher rate than SBA Express or  7(a) loans (see fig. 6). For loans approved in 2009, the default rate for  Patriot Express was 17 percent, approximately three times that of SBA  Express and 7(a) loans. Additionally, the default rate for Patriot Express  loans approved in 2010 was 7.4 percent, again more than three times that  of SBA Express and 7(a) loans. Loans approved in more recent years  have had a shorter amount of time during which to observe defaults,  which may at least partially explain lower default rates in more recent  years of the program. The higher default rates for Patriot Express are  generally consistent with one of the key measures of creditworthiness that  SBA collects, the Small Business Portfolio Solutions (SBPS) scores. For  example, 61.6 percent and 52.1 percent of 7(a) and SBA Express loans  approved from 2007 through 2012 had SBPS scores of 180 or greater,  compared to just 48.3 percent of Patriot Express loans approved in the  same time period. Finally, although the economic downturn may account  for some of the overall higher default rates in all three programs from  2007 through 2009, Patriot Express has maintained a higher default rate  compared to SBA Express and 7(a) since 2008.
The default rates for the Patriot Express program are generally higher for  the smaller loan amounts. For example, as shown in figure 7, loans under  $10,000, which represent 21.3 percent of all Patriot Express loans from  2007 through 2012, had an overall 22 percent default rate. Additionally,  Patriot Express loans under $25,000, which represent 41.2 percent of  loans made in the same period, had a default rate of 20 percent.
Our analysis of SBA data identified a concentration of low-dollar,  uncollateralized Patriot Express loans with significantly higher default  rates (compared to other Patriot Express loans) that were approved by a  single lender. In 2009, the peak year for Patriot Express, this lender  accounted for about 39 percent of Patriot Express loans approved, as  shown in figure 8. Patriot Express loans approved by this lender have  been defaulting at rates as high as 38 percent for loans approved in 2008  and 25 percent for loans approved in 2009, approximately 13 percentage  points higher than loans approved by other lenders in the same years,  also shown in figure 8. Although overall default rates have decreased  since 2008, the default rates for this lender remain significantly higher  than those of all other lenders. For example, in 2009, at 25 percent, the  default rate of the one lender was more than double that of the remaining  lenders, at 12 percent. In May 2013, SBA decided not to renew this  lender’s delegated authority to make SBA loans, which includes its  authority to make Patriot Express loans.
Figure 9 shows the default rates of Patriot Express, SBA Express, and  7(a) by loan amounts. When comparing default rates with different loan  amounts based on program requirements, the performance of Patriot  Express loans improves as loan amounts increase. For example, the  largest improvement in performance for Patriot Express loans was  between loans of less than $25,000 and loans valued from $25,000 to  $150,000; for loans in this range, the default rate drops by almost half,  from 20 percent to 12 percent. As mentioned earlier, more than 64  percent of loans up to $25,000 were provided by one lender. However,  even when loans approved by this one lender were excluded, the default  rate for loans up to $25,000 did not change significantly.
Consistent with overall SBA lending through Patriot Express, SBA  Express, and 7(a), available data suggest that the number of loans made  to veterans through these programs are currently at similar levels, but  overall lending to veterans through these programs has decreased over  the past 8 years. Although some SBA loans made to veterans may not be  identified, the available data using the veteran status field in SBA’s  database show that the differences in levels of lending to veterans across  the 7(a), SBA Express, and Patriot Express programs have been lower  over the last 2 years, as shown in figure 10. For example, in 2012, 664  loans were made to veterans through the Patriot Express program, 551  loans through the SBA Express program, and 391 loans through the 7(a)  program. In comparison, there were more than twice as many Patriot  Express loans made to veterans compared to SBA Express loans and   The trends shown in figure 10 are consistent with  7(a) loans in 2009.overall lending from 2007 through 2012 in terms of total loans made  under Patriot Express, SBA Express, and 7(a).
Although veterans have been able to access capital through the Patriot  Express, SBA Express, and 7(a) loan programs, overall lending to  veterans peaked in 2004—at which time only the 7(a) and SBA Express  programs existed—and has continued to decrease since then, even after  the Patriot Express program started in 2007. Between 2004 and 2012, the  number of loans made to veterans decreased 77 percent, from about  7,000 loans in 2004 to 1,600 loans in 2012. Further, even with the  introduction of the Patriot Express program in 2007, the overall levels of  lending to veterans through all three SBA programs has remained lower  than the overall level of lending to veterans before the program’s  inception. A number of factors could have contributed to this decrease in  overall lending to veterans through SBA programs, including more  conservative lender credit standards and the economic downturn in 2008.
In addition, as mentioned previously, veteran status information is self- reported by 7(a) and SBA Express borrowers, and the veteran status field  may not accurately and consistently capture all veterans who have  received a loan through these programs.
In addition to a decrease in the total number of loans, the total dollar  amount of loans made to veterans through Patriot Express, SBA Express,  and 7(a) and also decreased from 2007 through 2012. As shown in figure  11, the overall dollar amount of loans to veterans through these three  programs decreased from 2007 through 2009 before spiking in 2010 and  continuing to decline again through 2012. The trends shown in figure 11  are consistent with overall lending in terms of total value of loans made  under the Patriot Express, SBA Express, and 7(a) programs from 2007  through 2012. In May 2013, SBA announced a new initiative to increase  lending to veteran entrepreneurs by $475 million over the next 5 years  across all SBA loan programs.
Figure 12 shows the default rates of Patriot Express, SBA Express, and  7(a) loans made to veterans by approval year. Loans made to veterans  through these programs in 2007 and 2008 had higher default rates than  those in more recent years, which may be at least partially explained by  the longer time periods these loans have had in which to observe  defaults. While the default rates for veteran loans for SBA Express and  7(a) have decreased for more recent loan cohorts, the Patriot Express  default rates for veteran loans remained relatively high. For example,  Patriot Express loans made to veterans in 2009 and 2010 defaulted more  than twice as often as loans made to veterans through SBA Express and  7(a).
According to our analysis of SBA’s data on Patriot Express, program  costs exceed the fees collected, funds recovered from borrowers in  default, and other funds collected by SBA to offset the costs of the  program. SBA’s costs for the Patriot Express program are primarily based  on the guaranteed portion of the purchased loan. As described earlier,  when a loan defaults, the lender asks SBA to honor the guarantee (that  is, purchase the loan). For the Patriot Express program, as indicated  previously, the guaranteed portion is 85 percent for loans of $150,000 or  less and 75 percent for loans over $150,000. The exact amount that  SBA purchases is offset by any proceeds of sale of collateral prior to  purchase. Following default, if SBA determines that it will honor the  guarantee, SBA purchases these loans from the lender at either 85  percent or 75 percent, depending on the approved value of the loan.  These costs are partially offset by guarantee fees that SBA collects at  origination and annual fees it collects from lenders. Additional offsets are  based on recoveries in the form of borrower payments following purchase  or from proceeds from the liquidation of collateral that was not liquidated  within 60 days following default of the loan. According to SBA officials,  Patriot Express lenders are required to liquidate non-real-estate collateral  prior to purchase, unless situations arise that would prevent them from  liquidating, such as a bankruptcy or stay on liquidation. In these  situations, SBA will purchase a loan prior to full liquidation.
As shown in table 3, from fiscal years 2007 through 2012, SBA purchased  $45.3 million in Patriot Express loans. These default costs were offset by  $12.9 million in collected fees and $1.3 million in recoveries, resulting in  $31.1 million in losses for this period (excluding future revenues from fees  and potential additional recoveries). Based on these cash flows, the  Patriot Express program has had an overall recovery rate of 2.87 percent  since 2008—that is, of $45.3 million in Patriot Express loans that SBA  purchased from 2008 through 2012, SBA has recovered almost $1.3  million (2.87 percent) of the funds.Express makes it more likely that the program will continue operating at a  loss. In addition, SBA provided projected cash flows for the Patriot  Express program, which show projected losses of $36 million including  future revenues from fees and potential recoveries.

	Stakeholders Reported Benefits and Challenges, but SBA Has Not Evaluated the Effects of the Patriot Express Pilot

Selected loan recipients and lenders, as well as veteran service  organizations we met with, identified various benefits and challenges to  Patriot Express, but SBA has not evaluated the effects of the Patriot  Express pilot. Lenders and borrowers we met with most frequently  identified supporting veteran businesses and providing veterans with a  streamlined application process as benefits of the program. Low  awareness among veterans of the program and participating lenders were  among the most frequently cited challenges by selected lenders,  borrowers, and veteran service organizations. In addition to Patriot  Express, veterans also access capital through alternate SBA-guaranteed  loan products and other means. SBA provides optional training and  counseling through a variety of resources to help veteran entrepreneurs  navigate the options available to them. However, as with some of its  previous pilot loan programs, SBA has not conducted an evaluation of the  Patriot Express program to assess the extent to which it is achieving its  objectives, including an assessment of its effect on eligible borrowers.  Our previous work has shown that an evaluation gives an agency the  opportunity to refine the design of a program and determine whether  program operations have resulted in the desired benefits for participants.

		Helping Veterans Expand Their Business and Providing a Streamlined Loan Process Were among the Cited Benefits of the Program

Participating loan recipients and lenders, as well as veteran service  organizations we met with, identified supporting veteran businesses as a  top benefit of the Patriot Express program. Specifically, 21 of the 24  Patriot Express loan recipients we met with said that the loan had  enabled them to start their business, expand operations, or keep their  business open during challenging times. In addition, four of the six  recipients we spoke with who received a line of credit through the  program said that having available credit increased their attractiveness as  a potential contractor because it signaled to other businesses that they  could pay for the costs to complete projects. Ten loan recipients believed  that if they had not received the loan, they would currently not be in  business because the loan provided capital at a critical point in time. The  remaining 14 loan recipients believed that they would still be in business if  they had not received the loan but would have faced difficult decisions to  cover the costs, including firing staff and foregoing key projects. All loan  recipients we met with said that they would apply for the program again  based on their experience, and 6 recipients had pursued and received  another Patriot Express loan. Likewise, the three veteran service  organizations that we met with stated that the program benefited veterans  who obtained Patriot Express loans.
The Patriot Express program provides veterans with a streamlined  application process, and loan recipients and lenders we met with noted  that this was a benefit of the program. Six of the eight lenders and one  veteran service organization we met with said that the program provided  veterans with a less onerous application process and reduced SBA  paperwork requirements, particularly when compared to SBA’s 7(a) loan  program. For example, SBA requires borrowers to submit additional  documents to apply for a 7(a) loan, such as monthly cash-flow  projections, income statements, and balance sheets for the last 3 years.  Further, since 7(a) borrowers must pledge all available collateral up to the  loan amount, SBA requires borrowers to complete a schedule of collateral  of all real estate and personal property used to secure the loan and  provide supporting documents for such collateral, including real estate  appraisals and environmental investigation reports. Almost all loan  recipients we met with reported that they had a positive experience with  the Patriot Express loan application process, including satisfaction with  the amount of documentation required. In addition, nearly all loan  recipients said that they received the loan proceeds in a timely manner,  ranging from a few days to 3 months from the time they applied for the  loan.
Selected loan recipients, lenders, and veteran service organizations also  identified other benefits to the program, such as providing veterans with  favorable loan terms. For example, nearly all lenders, one veteran service  organization, and officials from the National Association of Government  Guaranteed Lenders (NAGGL) said that the program provided veterans  with more favorable loan terms than an SBA Express loan, such as lower  interest rates or higher maximum loan amounts. In addition, seven loan  recipients we met with said that the Patriot Express loan terms provided a  more cost-effective credit alternative to fund their small business  expenses compared to other financing options. For instance, four  recipients stated that receiving a Patriot Express loan saved them from  using credit cards and other expensive lines of credit to obtain the  necessary capital for their business.
Finally, borrowers, lenders, and veteran service organizations we met  with said that having a dedicated program solely for those in the military  community was a benefit. For example, 10 Patriot Express loan recipients  said that they appreciated that the program targeted veterans specifically  and noted that it played a large role in their decision to obtain the loan. In  addition, one lender said that having a loan program that also targets the  business needs of spouses of service members or reservists is valuable,  particularly if the business is jointly owned by the couple, because it  provides access to capital to expand the business if one spouse is  deployed. Further, two veteran service organizations we met with  stressed that having a program for veterans also helped to initiate  conversations between the veteran entrepreneur and the lender about  other small business resources and financing options available.

		Low Awareness of the Program and Its Participating Lenders Were Reported as Challenges, among Others

			Lack of Awareness of the Program

Selected loan recipients, lenders, and veteran service organizations said  that a low awareness of the Patriot Express program among the military  community was among the most frequently cited challenges. Specifically,  over half of the Patriot Express loan recipients, six of the eight lenders,  and two veteran service organizations we met with said that SBA could  do more to increase outreach to veteran entrepreneurs and better market  the program to the military community. In addition, five loan recipients did  not know about the program until they approached a lender for financing  and were notified about it. Further, awareness of the program among  selected veteran entrepreneurs who have not participated in the program  was also low. For example, 11 of the 16 veterans that received 7(a) loans  and all 15 SBA Express veteran loan recipients that we were able to  contact were unaware that Patriot Express existed.
SBA officials said the agency tries to increase awareness of the program  through district offices, resource partners, and lenders. For example, SBA  officials noted that there is a veteran loan specialist at each SBA district  office who could recommend specific small business resources, including  the Patriot Express program, to veteran entrepreneurs. Additionally, SBA  officials said that their resource partners, such as Small Business  Development Centers (SBDC) and SCORE (formerly the Service Corps  of Retired Executives) chapters, could advertise the program through  hosted events that discuss potential options for financing small business  needs. Five loan recipients we met with said that they learned about the  program through an SBA resource partner, including SBDCs and SCORE  counselors, and two noted that these resources further helped them to  find a participating lender. For example, one loan recipient said that the  SBDC staff member who told him about the program also recommended  a lender, assisted him with his loan application, and followed up with him  after the loan was approved.
SBA officials also said that they have reached out to NAGGL to increase  marketing of the program at the lender level. According to NAGGL  officials, NAGGL hosted roundtables at its 2013 Lender Leadership  Summit and Lending Technical Conference to discuss ways that lenders  can better serve veteran entrepreneurs, including the Patriot Express  program. Although NAGGL does not participate in marketing SBA  programs to borrowers, NAGGL officials said that individual lenders  typically advertise certain SBA loans based on their involvement with  those programs. For example, some lenders we met with noted that they  try to increase awareness by marketing themselves as Patriot Express  lenders, particularly if they have branches in locations with large  concentrations of veterans. These lenders also partnered with veteran  groups at their branch locations and presented their loan products,  including Patriot Express loans, to interested members at events hosted  by veteran groups. One lender, however, noted that it was difficult to  market SBA loan products at their branches because identifying  borrowers who can qualify for SBA loans can be challenging. According  to this lender, pursuant to SBA’s “credit elsewhere” requirement, the  lender needs to first evaluate a borrower’s ability to obtain credit against  their own lending policies for conventional loans in order to determine if  an SBA loan product is appropriate for the borrower. This approach is  consistent with what we have previously reported regarding how lenders  make credit elsewhere decisions.
Patriot Express and 7(a) loan recipients we met with stated that low  awareness of which lenders make Patriot Express loans is also a  challenge to the program. For example, 7 of the 24 Patriot Express  recipients and 3 of the 4 7(a) veteran loan recipients we met with reported  that SBA could provide better information about which lenders currently  participate in the program. A majority of these 10 recipients found that the  search for a participating lender was difficult and required many phone  calls and visits to lenders. Three recipients also noted that the SBA  resources they used incorrectly identified banks as participating lenders.  For example, one veteran said that he spent significant time away from  his business to contact six banks—which the district SBA office said were  participating lenders—and found that none of them participated in Patriot  Express. Additionally, two 7(a) veteran loan recipients said they initially  sought financing through the Patriot Express program but they said that  they settled for a 7(a) loan when they could not find a participating lender.  Further, two Patriot Express loan recipients told us that they paid fees to  a third-party entity that could identify lenders that made Patriot Express  loans. All 10 of these recipients stated that having a consolidated and up- to-date list of participating lenders would have been helpful to their search  for a loan.
SBA officials said that they did not have a list of participating lenders on  their website because the agency did not want to appear to be steering  borrowers toward financing their businesses through loans, especially  loans from particular lenders. Rather, SBA officials stated that prospective  veteran borrowers interested in the program should first contact an SBA  district office or SBDC to determine if financing through a loan would be  suitable for their business. Further, SBA officials said that if financing  through a loan was the best solution for the veteran, SBDCs would then  give the veteran a list of local lenders that participate in the program. As  mentioned previously, two of the loan recipients we met with found a  lender through these SBA resources, such as SBDCs and SCORE  counselors.
Other challenges reported by selected borrowers, lenders, and veteran  service organizations included high fees associated with the loan,  stringent collateral requirements, and limited maximum loan amount.
High Fees: Six Patriot Express loan recipients and five lenders we  met with said that the SBA guarantee fees were unaffordable for  some veterans and suggested that they should be reduced or waived.  These six Patriot Express loan recipients also noted that the lender  packaging fees were unaffordable and suggested that they should be  reduced or waived as well. According to SBA officials, the guarantee  fee plays an important role in the continuation of the loan guarantee  program because fees are collected to offset potential losses from  defaulted and purchased loans. SBA officials also noted that the  guarantee fee is ultimately the responsibility of the lender, though  often it is passed on to the borrower. In addition, SBA guidance  establishes limits to the amount of packaging and other fees a lender  can charge based on a percentage of the loan amount. SBA officials  said that issues regarding potentially excessive fees charged at  origination could be identified either through complaints from the SBA  OIG’s hotline or during SBA’s 7(a) lender on-site examinations, which  are discussed in the next section of this report. According to SBA  officials, there has only been one complaint about fees, which was  reported to the SBA OIG hotline. SBA officials said they resolved the  issue by confirming that the fees were inconsistent with SBA guidance  and working with the lender to compensate the borrower.
Stringent Collateral Requirements: Three Patriot Express loan  recipients noted that they struggled to meet the collateral  requirements for their loans. Additionally, three lenders felt that the  SBA collateral requirement for Patriot Express loans above  $350,000—for which the borrower must make all collateral available  to the lender up to the loan amount— was excessive and a  disincentive for prospective veteran borrowers to participate in the  program. According to SBA officials, the agency is considering some  modifications to the collateral requirements for regular 7(a) that would  still maintain a strong underwriting process. To the extent those  changes are adopted, they would apply as well to Patriot Express  loans in excess of $350,000.
Limited Maximum Loan Amount: Two Patriot Express loan recipients,  two veteran service organizations, and one lender we met with said  that the current maximum loan amount for the program was  challenging because certain projects and contracts require more than  $500,000. For example, one veteran service organization we met  with noted that veterans who are federal contractors often need a loan  for more than $500,000 to win a contract. SBA officials noted that the  agency has not considered changing the maximum loan amount for  Patriot Express loans.

		Veterans Also Access Capital through Alternate SBA Programs and Other Means

Veterans access capital through other SBA-guaranteed loan products,  including 7(a), SBA Express, and Small Loan Advantage (SLA) loans.  These loan products have some terms that are similar to those of Patriot  Express and some that are different, as shown in figure 14.
As shown above, there are several similarities and differences between  the programs, and three lenders we met with reported that deciding which  SBA loan products to offer veteran borrowers was challenging. For  example, Patriot Express loans offer veteran recipients lower maximum  interest rates, but higher guarantee percentages and fees compared to  SBA Express. Additionally, while regular 7(a) loans can provide veterans  with similar loan terms and fees, these loans typically have longer  processing times than Patriot Express loans due to the increased SBA  paperwork requirements previously discussed. While Patriot Express and  SLA have some similar loan terms, SBA officials identified other  differences in the programs. Three of the eight lenders we met with said  that deciding what product to offer a veteran entrepreneur was difficult  because the loan terms and underwriting process for a Patriot Express  loan were similar to those of other SBA loans they offered. Additionally,  seven of the eight lenders believed that if the Patriot Express program  were not available, veterans could still access capital through these other  SBA loan programs.
While 7(a) and SBA Express are alternatives to Patriot Express, loan  recipients noted that other ways veterans could access capital were less  advantageous and all loan recipients we met with were not aware of any  veteran-specific loan guarantee programs aside from Patriot Express. For  example, nine recipients said that veterans could finance their small  business needs through conventional loans or credit cards, but they  stated these options may be more expensive than a Patriot Express loan  because they typically have higher interest rates. Two recipients  considered bringing on an investor, which would inject capital into their  business, but would require the recipient to give up ownership of a part of  the business to the new investor. Finally, five recipients thought about  financing their business through their personal savings accounts, but said  that this option could have depleted their savings and a few noted that it  might not have been enough to cover the amount of capital needed.

		SBA Offers Several Veteran-Specific Training and Counseling Efforts

SBA provides training and counseling to veteran entrepreneurs through a  variety of resources, although Patriot Express loan recipients are not  required to use them. According to SBA officials, the agency delivers  training and counseling to veterans through the following ways:
Cooperative agreements: SBA has cooperative agreements with 16  organizations that serve as Veteran Business Outreach Centers  (VBOC), which offer services such as business plan preparations and  veteran entrepreneur counseling for service-disabled veterans.  Additionally, SBA has cooperative agreements with other resource  partners through which veteran entrepreneurs can receive training  and counseling, including SBDCs, SCORE chapters, and Women’s  Business Centers (WBC). According to SBA data on veteran  participation in training and counseling offered by the aforementioned  resource partners (VBOCs, SBDCs, SCORE chapters, and WBCs)  from fiscal year 2008 through fiscal year 2012, overall veteran  participation remained steady from 2008 through 2010. However, it  increased over 40 percent from approximately 115,000 veterans in  2010 to about 163,000 veterans in 2012. Further, veteran participation  in training and counseling offered through VBOCs also increased in  2011, from about 45,000 veterans in 2010 to about 90,000 veterans in  2012. As of June 2013, about 36,000 veterans had received training  and counseling through SCORE, SBDCs, and WBCs.
SBA-sponsored activities: According to SBA officials, some SBA- sponsored activities may be provided in coordination with the  previously mentioned resource partners, and veterans can also  receive training and counseling through these efforts. For example,  Operation Boots to Business leverages SBA’s resource partner  network—VBOCs, SBDCs, SCORE chapters, and WBCs—and SBA’s  partnership with, among other entities, Syracuse University’s Institute  for Veterans and Military Families to provide an entrepreneurship  training program for transitioning service members. Operation Boots to Business consists of several phases, including a 2-day training  session on creating a feasibility analysis for a business plan and an 8- week online course on the fundamentals of small business ownership,  including marketing, accounting, and finance. As of March 2013, a  total of 1,390 veterans (1,309 for the 2-day session and 81 for the  online course) had participated in this effort.
SBA participation in third-party activities: Veteran entrepreneurs can  access training and counseling services provided through SBA’s  participation in third-party activities, including events hosted by other  federal agencies and nonprofit entities. For example, SBA awarded a  3-year grant to Syracuse University to create the Entrepreneurship  Bootcamp for Veterans with Disabilities (EBV), which provided small  business management training to post-9/11 veterans with  disabilities. According to SBA, 463 veterans participated in EBV  during this 3-year grant period. In 2010, SBA provided Syracuse  University with funding for two additional programs that support  veteran entrepreneurship: Veteran Women Igniting the Spirit of  Entrepreneurship (V-WISE), which focuses on the training and  mentorship of women veterans and spouses, and Operation Endure  and Grow (OEG), which features an 8-week online course geared  toward National Guard and Reserve members, their families, and their  business partners. As of April 2013, 857 women veterans, female  spouses and partners of active service members, and transitioning  female members of the military community had participated in V- WISE, and 168 reservists had received training through OEG.
Veterans who have participated in certain training and counseling efforts  have generally found them to be helpful. For example, SBA’s Office of  Veterans Business Development (OVBD) conducts an annual VBOC  client satisfaction survey, which shows that client satisfaction with VBOC  services had increased from 85 percent in 2008 to 93 percent in 2012.  According to these SBA officials, the survey results are used to, among  other things, identify areas for improvement and new training topics.  OVBD officials said they are responsible for collecting feedback surveys  for the VBOC program only. Veterans whom we met with who participated  in these efforts also found them to be helpful. Specifically, 14 of the 28  loan recipients we met with—Patriot Express loan recipients as well as  7(a) veteran loan recipients—participated in an SBA-sponsored training  or counseling session, and the most commonly used resources among  these recipients were SBDCs and SCORE counselors. Eight of the  recipients said these sessions were helpful in starting and growing their  business, such as assisting in the development of business plans and  marketing strategies, and they noted that these sessions were free. Two  loan recipients suggested that SBA develop more advanced workshops  for seasoned entrepreneurs, but acknowledged that these training and  counseling resources would be helpful for first-time business owners.

		As with Some of Its Previous Pilot Programs, SBA Has Not Evaluated Patriot Express

SBA has not evaluated the Patriot Express program’s performance or its  effect on eligible borrowers. GAO’s guide for designing evaluations states  that an evaluation gives an agency the opportunity to refine the design of  a program and provides a useful tool to determine whether program  operations have resulted in the desired benefits for participants. In  addition, evaluations can inform future program decisions. Program  evaluations are individual, systematic studies that use research methods  to assess how well a program, operation, or project is achieving its  objectives and the reasons why it may or may not be performing as  expected. Program evaluations are distinct from routine monitoring or  performance measurement activities in that performance measurement  entails the ongoing monitoring of a program’s progress, whereas program  evaluation typically assesses the achievement of a program’s objectives  and other aspects of performance in the context in which the program  operates. At a minimum, a well-developed and documented program  evaluation plan includes measurable objectives, standards for  performance, methods for data collection, and time frames for completion.
Incorporating these elements and executing the plan can help ensure that  the implementation of a pilot generates performance information needed  to make effective management decisions about the future of the program.  In addition, recent legislation has highlighted the importance of program  evaluation for federal agencies. Specifically, Congress updated the  Government Performance and Results Act of 1993 (GPRA) with the  GPRA Modernization Act of 2010 (GPRAMA), which requires agencies to  describe program evaluations that were used to establish or revise  strategic goals.
When Patriot Express was created in 2007 under SBA’s authority to  initiate pilots, SBA indicated that it would evaluate the program’s  performance and make a decision whether to modify or continue the  program after December 31, 2010. In December 2010, SBA announced  through a Federal Register notice that it would extend the pilot through  2013 in order to have more time to evaluate the effect of the program and  determine whether any changes need to be made.officials, they have not established any measurable goals for the pilot, but  have begun to hold meetings on what information they will need to assess  the performance of Patriot Express loans. However, although SBA  officials said that they have begun to hold meetings, the program  extension ends in only a few months on December 31, 2013. As of  August 2013, SBA had not established a plan for the evaluation of the  program, and such a plan should include clear and measurable  objectives, standards for performance, methods for data collection, and  time frames for completion. In addition, SBA has taken several actions in  an attempt to increase lending to veterans across its programs, but these  initiatives have not been substantiated by findings from an evaluation of  the Patriot Express program or the current state of SBA lending to  veterans.
As mentioned previously, SBA announced a new initiative to increase  loans to veteran entrepreneurs by $475 million over the next 5 years  across all SBA loan programs. Because SBA had not conducted an  evaluation of the pilot, the agency had little information available to inform  such decisions, such as a comparison of benefits that veterans receive  from Patriot Express in relation to those received by veterans participating  in other SBA loan programs. SBA has conducted performance  measurement and monitoring activities—such as internally reporting the  number of Patriot Express loans made each quarter and deciding not to  renew a top lender’s delegated authority to make Patriot Express loans  based on ongoing monitoring, as previously mentioned—but these   Because there are  activities are not the same as program evaluation.many more 7(a) loans, which therefore pose a greater risk to SBA than  the smaller volume of Patriot Express loans, SBA officials told us that  they have focused more resources on evaluating the performance of 7(a)  loans.
In addition to Patriot Express, SBA has authorized other pilot loan  programs that it has subsequently not evaluated when making decisions  about the future of the program. For example, in 2010, SBA’s OIG  conducted an assessment of the Community Express program, which  was established in 1999, to determine, among other things, whether the  program was properly structured to ensure success and minimize the risk  of fraud. presented by SBA to the SBA OIG regarding poor performance of the  Community Express program. In this assessment, the SBA OIG found  that SBA did not establish measurable performance goals and outcomes  for evaluating the Community Express program until 9 years after the  pilot’s inception. Further, though the OIG determined that these  performance measures were adequate, SBA had extended the pilot  without using the measures to assess the program’s effectiveness.  Similarly, in 2006 the OIG found that SBA had not reviewed the SBA  Express program—which was initiated in 1995 as a pilot—to determine,  This assessment was completed in response to a concern  among other things, if final rules and regulations would be developed.
SBA, Office of Inspector General, Assessment of the Community Express Pilot Loan  Program, Report No. 10-12 (Washington, D.C.: Aug. 25, 2010). The Community Express  program authorized approved lenders to adopt streamlined and expedited loan  procedures to provide financial and technical assistance to borrowers in the nation’s  underserved communities.
Rather than evaluate the program to develop regulations, SBA continued  to extend the program as a pilot for 9 years until Congress made it  permanent in 2004. Because of this lack of review and establishment of  regulations, the OIG recommended in 2006 that the agency issue  regulations to, among other things, ensure that that SBA has legally  enforceable rules to manage the program. SBA agreed that regulations  were needed for the program, but did not establish such regulations,  according to OIG officials.
The Administrator of SBA has the authority to suspend, modify, or waive  rules for a limited period of time to test new programs or ideas through  pilot programs, but this authorization does not include a specific  requirement for SBA to conduct a pilot evaluation. Congress has  established an annual limit for the number of loans made through pilots  within the 7(a) program. Specifically, no more than 10 percent of all 7(a)  loans guaranteed in a fiscal year can be made through a pilot program.According to SBA officials, a pilot program’s duration and the number of  times the agency can extend it depend on the length of time needed to  complete testing of the pilot. However, as shown by SBA’s experience  with the Patriot Express, Community Express, and SBA Express pilots,  SBA does not always test pilots or evaluate their effects when initiating  pilot programs under its own authority.
Without designing and conducting evaluations of the pilot programs it  conducts under its own authority, SBA has little information to assess the  performance of the programs and their effects on eligible borrowers,  which could be used in decisions on the future of these pilots, including  the Patriot Express program. For example, information on the financial  performance of veteran-owned businesses participating in various SBA  loan programs could help inform policy decisions. Further, the information  drawn from an evaluation of Patriot Express could also be used to inform  training and counseling resources for veterans. In turn, input from veteran  borrowers participating in SBA loan programs and from counselors at  SBA resource partners assisting veteran borrowers could provide a basis  for improvements in existing SBA loan programs.

	SBA’s Internal Controls May Not Provide Assurance of Borrower Eligibility

SBA has two primary internal control activities to ensure lender  compliance with borrower eligibility requirements—on-site examinations  and purchase reviews. However, these reviews may not provide the  agency with reasonable assurance that Patriot Express loans are only  made to eligible borrowers. SBA only reviews a small number of Patriot  Express loans for eligibility as part of on-site examinations, and although  it examines eligibility as part of purchase reviews, these reviews occur  only for loans that have defaulted, in some cases long after an ineligible  borrower may have received proceeds from a Patriot Express loan. In  addition, although SBA officials told us that they expect borrowers to  maintain their eligibility throughout the term of the loan, SBA has not  developed procedures to provide reasonable assurance that Patriot  Express loans continue to serve eligible borrowers after a loan is  disbursed. Internal control standards for federal agencies and GAO’s  fraud-prevention framework state that oversight programs should be  designed to ensure that ongoing monitoring occurs in the course of   Furthermore, the intent of the Patriot Express  normal operations.program is to support eligible members of the military community. Without  greater review of Patriot Express transactions during on-site examinations  of lenders and requirements for lenders to ensure that borrowers remain  eligible after disbursement, there is an increased risk that the proceeds of  Patriot Express loans will be provided to or used by borrowers who do not  qualify for the program.

		SBA Has Reviewed Few Patriot Express Loans during On-Site Examinations of the Largest Participating Lenders

GAO’s fraud-prevention framework identifies three elements needed to  minimize fraud: (1) up-front preventive controls, (2) detection and   For Patriot  monitoring, and (3) investigations and prosecutions.Express, SBA addresses the first element of the framework through the  steps lenders are required to take under their delegated authority to  ensure borrower eligibility at loan origination. It addresses the third  element by the steps it must take to refer potential cases of fraud to its  OIG for investigation and possible prosecution. However, we found that  SBA’s detection and monitoring—the second element of the framework— could be strengthened. One of SBA’s primary monitoring activities to  provide reasonable assurance that Patriot Express loans are made only  to eligible borrowers is the reviews it performs as part of its on-site  examinations of lenders. However, since the program’s inception in 2007,  SBA has reviewed only a small number of Patriot Express loans for the  10 largest Patriot Express lenders.
SBA does not conduct specific Patriot Express program examinations.  Instead, it reviews a lender’s compliance with Patriot Express program  eligibility requirements as part of its examination of the lender’s 7(a)  program or as part of a safety and soundness examination of an SBLC. These examinations are known as risk-based reviews or safety and  soundness examinations for SBLCs. During these reviews, SBA draws  a sample of loans from a lender’s files to assess, among other things,  whether the loans met specific program eligibility requirements at the time  of approval. For example, if an SBA examiner selects a Patriot Express  loan, the examiner is expected to review the lender’s documents to  determine whether that loan was provided to a veteran or other eligible  member of the military community. The lenders must document in their  files how they determined the borrower’s eligibility for the Patriot Express  program, including what Department of Defense and Department of  Veteran Affairs documents they used to verify veteran status. Additionally,  the examiner is expected to review lender documentation to determine  whether the veteran or other eligible borrower owned 51 percent or more  of the small business at the time of loan approval. As part of the risk- based review, SBA’s examiners are required to compile a list of all  eligibility deficiencies by issue type and errors, and identify any trends of  deficiencies that warrant lender attention.
In this context, 7(a) refers to (1) regular (nondelegated) 7(a) loans, (2) delegated 7(a)  loans made by PLP lenders, and (3) all subprograms including Patriot Express and SBA  Express.
We reviewed the most recent 7(a) risk-based examination and an SBLC  safety and soundness examination for the 10 largest Patriot Express  lenders and found that with the exception of 3 lenders, SBA examined  few Patriot Express loans. As table 4 shows, for the first 3 lenders, SBA  sampled at least six Patriot Express loans during the examination.  However, for the remaining lenders, SBA sampled one or two loans at  two of the lenders and did not sample any Patriot Express loans at the  other 5 lenders. For the 5 lenders in table 4 for which SBA sampled at  least one Patriot Express loan, 4 lenders were found by SBA to be in  compliance with eligibility requirements. For the remaining lender, SBA  did not report on its assessment of eligibility requirements in the  examination.
SBA officials said SBA examined few or no Patriot Express loans for 7 of  these 10 lenders because Patriot Express comprised a small percentage  of these lenders’ overall lending. At six of the 7 lenders, the Patriot  Express loan volume as of the program’s inception to the year prior to the  examination ranged from 1 percent to 8 percent of their overall SBA  lending activities. However, while these percentages are relatively  small, in a program that has a specific target population—veterans and  other eligible members of the military community—assessing lenders’  compliance with eligibility requirements is particularly important to help  ensure that the guaranteed loans are assisting only eligible veteran  entrepreneurs as intended. The monitoring of borrower eligibility that  occurs through on-site examinations is a key internal control and fraud- prevention element for Patriot Express because the loan program serves  a specific population with loan provisions intended only for this population  of borrowers.
Another primary internal control that SBA uses to monitor borrower  eligibility is the purchase reviews that it conducts for loans that have  defaulted and for which the lender is seeking the guarantee payment. As part of the purchase review, an SBA official must review  documentation relied upon by the lender to determine whether the  borrower was eligible for the program. However, purchase reviews are  only conducted for loans that have defaulted and would not identify  ineligible borrowers who continue to make their loan payments.  Additionally, ineligible borrowers may have the loan for years before  ultimately defaulting. Because SBA conducts so few on-site examinations  of Patriot Express loans, opportunities to identify these ineligible  borrowers prior to a default are limited. For a program with a specific  target population, an increased emphasis on reviewing borrower eligibility  is important. Without sampling more Patriot Express loans during  examinations, SBA may have difficulty identifying deficiencies related to  eligibility. This, in turn, could increase the risk to SBA of Patriot Express  loans being provided to borrowers who do not qualify for the program.

		SBA Has Not Provided Clarity to Lenders Regarding Borrowers’ Ongoing Ownership Requirements

Although SBA requires lenders to assess borrowers’ eligibility for Patriot  Express at the time of loan approval, it does not require them to reassess  eligibility, including the 51 percent ownership requirement, after the loan  has been disbursed. SBA does not have a stated requirement for  borrowers to maintain their eligibility after the loan has been disbursed,  but SBA officials told us that they do expect borrowers to maintain 51  percent ownership after a loan has been disbursed to remain eligible for  the program. SBA requires that borrowers certify that they will not change  the ownership structure or sell the business without the consent of the  lender. Additionally, SBA officials told us that in the event of a borrower  default, a lender could lose the SBA guarantee if the borrower had sold  his or her business to an individual who does not qualify for a Patriot  Express loan. However, in the examples below, lenders may not be  aware of changes in ownership structure or sale of the business if the  borrower has not informed lenders of such actions and the lender is not  periodically reassessing Patriot Express eligibility after the loan has been  disbursed. Borrowers may initially be approved as meeting Patriot  Express eligibility requirements at the time of loan approval, but  subsequent events may affect their eligibility and result in the loan being  used by an ineligible borrower. For example, according to SBA OIG  officials, a business may recruit a veteran to pose as the majority  business owner in order to be eligible for a Patriot Express loan and add  the veteran to legal ownership documents that would be provided to the  lender when applying for the loan. Once the loan is disbursed, however,  the business could reduce the ownership interest or remove the veteran  as an owner of the business. Such cases could also involve the  businesses giving the veteran a kickback after the loan was disbursed. In  another example, after the loan has been disbursed, an eligible Patriot  Express borrower might sell all or part of his or her ownership interest in  the qualifying business. In these examples, an ineligible party benefits  from the Patriot Express loan proceeds.
These examples illustrate the importance of effective monitoring and  detection activities, which are key internal controls and an element of the  fraud-prevention framework. Detection and monitoring controls include  activities such as periodically evaluating lender procedures to provide  reasonable assurance that only eligible borrowers obtain loans and  benefit from the program as intended. Such assurance is particularly  important in a program that has specific eligibility requirements and was  created to serve a specific population. Four of six lenders we spoke with  thought that borrowers needed to remain eligible for the loan after  disbursement, but these four lenders stated that they did not think that  they needed to check on borrowers to make sure that they remain eligible  after loan disbursement. The other two lenders we spoke with told us that  they did not think ongoing borrower eligibility was a requirement of the  program. In the absence of formal SBA eligibility procedures to ensure  that only borrowers who maintain 51 percent ownership receive  assistance after a loan has been disbursed, Patriot Express loan  proceeds may ultimately be used by those other than the intended  program beneficiaries. As a result, SBA may not have reasonable  assurance that Patriot Express loans are serving the intended population.

	Conclusions

Prior to 2007, SBA served the small business needs of veteran  entrepreneurs through its 7(a) and SBA Express programs. SBA  established the Patriot Express Pilot Loan initiative in 2007 as a targeted  effort to provide veterans and other eligible members of the military  community access to capital to establish or expand small businesses.  However, the effect this initiative has had on the small business financing  needs of veterans and other entrepreneurs in the military community is  unknown. While SBA recently announced an initiative to increase overall  lending to veteran small businesses by $475 million over the next 5 years,  the role of the Patriot Express pilot initiative is unclear given that SBA has  yet to evaluate the effectiveness of the program. Based on our analysis,  with the exception of 2007, Patriot Express loans made to veterans have  had a relatively high default rate, and losses for the initiative have  exceeded its income. Moreover, SBA has not conducted an evaluation of  the pilot initiative that would include standards for pilot performance,  comparative measures with other programs that may also serve veterans,  methods for data collection, evaluation of data on the performance of the  loans, data and analysis from external reports and evaluations, and time  frames for completion. Although SBA officials said that they have begun  to hold meetings on what information they will need to assess the  performance of Patriot Express loans, SBA has not established a plan to  evaluate the program, and only a few months remain before the current  extension of the program is set to end. Program evaluations can be useful  in informing future program decisions, including SBA’s planned efforts to  expand lending to veterans.
In addition, the lack of an evaluation or an evaluation plan for Patriot  Express follows a pattern for SBA pilot loan programs. As with the Patriot  Express pilot initiative, SBA has authorized other pilot loan programs in  the past that it has subsequently not evaluated when making decisions  about the future of those programs. SBA’s past experience with pilots  raises questions about its commitment and capacity to fully implement  pilots that include a rigorous evaluation. Without evaluations of pilot  initiatives, SBA lacks the information needed to determine if a pilot  program is achieving its intended goals and whether it should be  cancelled, modified, or expanded.
Finally, SBA’s reliance on lenders to assess borrowers’ eligibility for  Patriot Express highlights the importance of strong internal controls over  lenders to ensure that only eligible borrowers are served by the program.  Federal internal control guidance and GAO’s fraud-prevention framework  indicate that program controls should include monitoring and detection.  However, SBA currently samples few Patriot Express loans during on-site  examinations. In addition, while SBA expects borrowers to maintain 51  percent ownership after a loan has been disbursed, SBA has not  developed procedures to require lenders to verify that the 51 percent  ownership requirement is maintained, nor does it monitor the lenders’  activities to ensure eligibility after disbursement. As a result, SBA’s  internal controls may not provide the necessary assurance that Patriot  Express loans are made to and used by only eligible members of the  military community—the intended mission of the program.

	Recommendations for Executive Action

As SBA considers whether or not to extend the Patriot Express Pilot Loan  program, we recommend that the Administrator of SBA design and  implement an evaluation plan for the pilot program that assesses how  well the Patriot Express pilot is achieving program goals and objectives  regarding its performance and its effect on eligible borrowers. The  evaluation plan should include information such as evaluation of SBA data on performance of Patriot Express loans; evaluation of borrowers served by Patriot Express in relation to  veteran borrowers served by other SBA loan programs; and review of relevant SBA OIG reports and other external studies.
To help ensure that SBA makes informed decisions on the future of pilot  programs it creates under its own authority, we recommend that the  Administrator of SBA require the agency to design an evaluation plan for  any such pilot program prior to implementation—including an assessment  of the program’s performance and its effect on program recipients—and  to consider the results of such an evaluation before any pilot is extended.
To help ensure that Patriot Express loans are only provided to members  of the military community eligible to participate in the program, we  recommend that the Administrator of SBA strengthen existing internal  controls, including  sampling a larger number of Patriot Express loans during  examinations; developing a requirement in SBA’s Standard Operating Procedures  for lenders to verify the eligibility of the borrower, including the 51  percent ownership requirement, after the loan has been disbursed;  and periodically monitoring the lenders’ implementation of this eligibility  requirement.

	Agency Comments

We provided the Administrator of the Small Business Administration with  a draft of this report for review and comment. On August 26, 2013, the  SBA liaison—Program Manager, Office of Congressional and Legislative  Affairs—provided us with the following comment via email on the draft. He  stated that the agency will consider the findings from this report as it  reviews the extension of the Patriot Express Pilot Loan Program. SBA  also provided technical comments, which we incorporated into the report  where appropriate.
We are sending copies of this report to SBA, appropriate congressional  committees and members, and other interested parties. The report also is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) trends in the Patriot Express program  and related Small Business Administration (SBA) guarantee programs,  including performance of these loans, and what is known about the costs  of the Patriot Express program, (2) the benefits and challenges of the  Patriot Express program for members of the military community eligible to  participate as well as training and counseling opportunities available to  them, and (3) what internal controls SBA has in place to ensure that the  Patriot Express program is available only to eligible members of the  military community.
To describe trends in the Patriot Express program, including how Patriot  Express loans approved from 2007 through 2012 have performed, we  obtained SBA loan-level data on loans approved from the second quarter  of 2007 through the fourth quarter of 2012 for Patriot Express and from  the first quarter of 2007 through the fourth quarter of 2012 for the 7(a),  and SBA Express programs. We took a number of steps to develop a  dataset we could use for our analyses. We excluded loans with missing  disbursement dates unless they had positive balances at some point in  their history, which to us indicated loan activity. Additionally, we excluded  loans that in December 2012 were indicated to have been cancelled.  Once we arrived at our final dataset, we analyzed it for various   A loan was defined as  performance measures, including default rates.defaulted (purchased) if it had a purchase date on or after the approval  date. Specifically, we analyzed the default rates by the following  categories:
Cohort analysis—Using the loan approval date data field, we identified  loans for all three programs and grouped them in calendar year  cohorts reflecting loans approved from 2007 through 2012. Once  these loans were identified, we calculated the default rates, total  number of loans, and total loan values approved from 2007 through  2012 for all three programs.
Loan amount—Using the gross amount approved data field, we  identified the number of loans by loan amounts that were approved for  all three programs from 2007 through 2012. We grouped these loans  into major categories based on requirements of the programs. For  example, we focused on loans below $25,000 because the Patriot  Express and SBA Express programs require no collateral for these  loans. We selected the next category, loans valued between $25,001  and $150,000, based on the guarantee percentage change from 85  percent to 75 percent for Patriot Express and 7(a) that occurs at  $150,000. We selected the next two categories of loans valued  between $150,001 and $350,000 and between $350,001 and  $500,000 to capture the maximum allowable loans for SBA Express  and Patriot Express, respectively. Additionally, we focused on loans  valued between $500,001 and $1,000,000 and between $1,000,001 to  $5,000,000 to account for the larger loan amounts for 7(a). Once  these loans were identified by loan amounts, we calculated the default  rates for all three programs based on loans approved from 2007  through 2012.
Lender concentration—Using the main bank data field, we identified  the top 11 lenders based on the number of approved Patriot Express  loans from 2007 through 2012. Once these lenders were identified,  we calculated the default rates, average loan amounts, and total loan  amounts approved from 2007 through 2012. Additionally, we  calculated the relative percentage of loans made by each of the top  11 lenders compared to the overall number of Patriot Express loans  approved from 2007 through 2012. After we identified that one lender  accounted for 26 percent of all Patriot Express loans approved, we  calculated the relative percentage and default rates of this one lender  compared to all other lenders from 2007 through 2012.
Veteran status—Using a data field that identifies borrowers based on  their veteran status, we identified borrowers that self-identified as  either a veteran, service-disabled veteran, or Vietnam-era veteran  from each of the three programs. Once these loans were identified,  we calculated the default rates, total number of loans, and total loan  values approved from 2001 through 2012 for SBA Express and 7(a),  and 2007 through 2012 for Patriot Express.
New Business—Using the new or existing business data field and  information provided by SBA, we identified new businesses that had  been in operation 2 years or less prior to loan approval, and existing  businesses that had been in operation for more than 2 years at time of  loan approval. Once these loans were identified, we calculated the  relative percentage of new businesses for loans approved from 2007  through 2012.
Use of Proceeds—Using the loan proceeds data field and information  provided by SBA, we identified the most common use of loan  proceeds for Patriot Express loans approved from 2007 through 2012.
Small Business Portfolio Scores (SBPS)—Using a data field that  identifies borrowers by their SBPS scores, based on available data,  we grouped businesses based on having a low (139 or lower),  medium (140-179) or high (180 or greater) SBPS score. We then  calculated the default rates, total number of loans, total value of loans,  and relative percentage of loans for Patriot Express, SBA Express  and 7(a).
For all of our analyses on the performance of Patriot Express, 7(a), and  SBA Express loans, we did not weight default rates by loan amount. In  addition, for each analysis we did not include loans with missing values.  To assess data reliability, we interviewed SBA representatives from the  Office of Performance and Systems Management and the Office of Credit  Risk Management about how they collected data and helped ensure data  integrity. We also reviewed internal agency procedures for ensuring data  reliability. In addition, we conducted reasonableness checks on the data  to identify any missing, erroneous, or outlying figures, and when  necessary, submitted follow-up questions to SBA officials at the Office of  Performance and Systems Management and the Office of Credit Risk  Management to clarify our understanding of the data. Through our  electronic data testing, we identified irregularities in the data in a small  percentage of cases, such as loans with approval amounts in excess of  what we understood to be the limits of the program or loans with disbursal  dates, but zero dollars disbursed. However, SBA was able to explain  these cases as being due to periods in which the limits of the program  were temporarily expanded, or provided other explanations. We did not  find more than a minimal amount of missing values in fields relating to  approved amount, approval year of purchase, and key variables for our  analysis of performance. As such, we determined that the data were  sufficiently reliable for our purposes.
To describe what is known about the costs of the Patriot Express program  from 2007 through 2012, we obtained and analyzed SBA cash-flow data  on SBA purchases of defaulted loans, as well as data on offsets, which  include the following three categories: (1) upfront fees generated by the  program at time of approval, (2) annual fees based on loans in a lender’s  portfolio in good standing, and (3) recoveries either from the proceeds of  attached collateral to the defaulted loans or subsequent payments on  loans following purchase by SBA. Additionally, we reviewed SBA  guidance, the agency’s standard operating procedures, and inspector  general reports to obtain more information on cash-flow data. To assess  data reliability, we interviewed SBA representatives from the Office of  Financial Analysis and Modeling, the Office of Performance and Systems  Management, and the Office of Credit Risk Management to understand  how they collect data and help ensure the integrity of the cash-flow data,  as well as how they use these data for budgetary purposes. We also  submitted follow-up questions to SBA officials at both the Office of  Financial Analysis and Modeling and the Office of Credit Risk  Management to clarify our understanding of the data. We determined that  the data were sufficiently reliable for our purposes.
To assess the effect of the Patriot Express program on members of the  military community eligible to participate in the program, we conducted  semi-structured interviews with a sample of 24 Patriot Express loan  recipients about how the Patriot Express loan affected their businesses  and their views on how the program could be improved. We selected this  nongeneralizable, stratified random sample of loan recipients to reflect  two factors: the recipient’s loan amount and the number of Patriot  Express loans their lender has made since the program’s inception to  2012. While the results of these interviews could not be generalized to all  Patriot Express loan recipients, they provided insight into the benefits and  challenges of the program. Table 5 below highlights selected  characteristics of the Patriot Express loan recipients we interviewed.
To obtain the perspectives of veteran entrepreneurs who were aware of  the Patriot Express program and appeared to meet the eligibility  requirements for a Patriot Express loan but instead obtained an SBA  Express or 7(a) loan, we attempted to contact a nongeneralizable sample  of veterans who participated in these two other programs. Of the 15 SBA  Express veteran loan recipients and 16 7(a) veteran loan recipients whom  we were able to contact, we interviewed 4 veteran entrepreneurs who  obtained a 7(a) loan.inquire about their experiences with the 7(a) loan and to obtain their views  on the Patriot Express program.
We conducted interviews with these recipients to  We also interviewed a sample of lenders to obtain their perspectives on  the benefits and challenges of the Patriot Express program. We selected  the top 10 lenders that made the greatest number of Patriot Express  loans from 2007 through 2012. The selected lenders made  approximately 48 percent of the Patriot Express loans over this period  and consisted of various types of lending institutions, including large  banks, a credit union, and a small business lending company (SBLC).  While the results of these interviews could not be generalized to all  lenders participating in the Patriot Express program, they provided insight  into the key differences in administering the program as compared to  other SBA loan programs. To obtain a broader set of lender perspectives  on the program, we interviewed representatives from the National  Association of Government Guaranteed Lenders (NAGGL), a trade  organization representing SBA 7(a) lenders. We also interviewed  representatives from three veteran service organizations with an interest  in veteran entrepreneurship, namely the Veteran Entrepreneurship Task  (VET) Force, Veteran Chamber of Commerce, and American Legion, to  gather information on the benefits and challenges of the program that  their members have experienced. Finally, we interviewed SBA officials  from the Offices of Capital Access and Veterans Business Development  who are responsible for managing and promoting the program. We  interviewed these officials to obtain their perspectives on identified  benefits and challenges to the program, promotion of the program and its  lenders, and efforts to evaluate the program’s effect on members of the  military community eligible to participate.
To describe other ways in which veteran entrepreneurs accessed capital,  as part of our interviews with Patriot Express and 7(a) loan recipients, as  well as selected lenders and veteran service organizations, we also  inquired about other ways in which veterans can gain access to capital.  To describe the training and counseling efforts SBA has in place for  veteran entrepreneurs, we obtained and reviewed reports by the  Interagency Task Force on Veterans Small Business Development from  2011 and 2012. We also reviewed SBA documents related to training  and counseling resources and SBA information on the number of  veterans that have used these resources from 2008 through 2012. We  also interviewed SBA officials responsible for these efforts. To describe  the perspectives of veteran entrepreneurs on the effectiveness of SBA’s  training and counseling efforts, we reviewed results from SBA’s annual  Veteran Business Outreach Center client satisfaction survey from 2008  through 2012. We also interviewed the selected veteran service  organizations and Patriot Express and 7(a) loan recipients on their  perspective on the quality of training and counseling efforts sponsored by  SBA.
To determine SBA’s prior experience with pilots initiated under its own  authority, we obtained and reviewed pertinent regulations on SBA’s  authority to initiate pilots and applicable limitations. We also reviewed two  SBA Office of Inspector General (OIG) reports pertaining to SBA’s  experience with the Community Express and SBA Express pilot  programs. To assess how well SBA has conducted pilot programs,  including Patriot Express, we reviewed components identified in our  previous work as key features of a program evaluation and an evaluation  plan.
To evaluate SBA’s internal controls related to ensuring that the Patriot  Express program is available only to members of the military community  eligible to participate in the program, we reviewed SBA’s standard  operating procedures related to borrower eligibility requirements. Also, as  part of our interviews with the selected lenders and borrowers previously  discussed, we inquired about the documentation used to establish  eligibility for the program. To determine how SBA oversees lenders to  ensure they are complying with the Patriot Express eligibility  requirements, we reviewed SBA’s standard operating procedures related  to lender oversight. We also obtained copies of examination reports for  the top 10 Patriot Express lenders (based on the number of loans made)  from 2007 through 2012. We reviewed these reports to determine the  number of Patriot Express loans sampled during the examination and  SBA’s disposition on whether the lender was complying with SBA rules  and regulations related to borrower eligibility. Additionally, we interviewed  officials from the Office of Credit Risk Management to inquire about  SBA’s oversight of its lenders as it relates to the Patriot Express program.  To determine how SBA reviews defaulted loans as part of its purchase  review, we reviewed SBA’s standard operating procedures related to  these reviews, as well as an SBA OIG report on improper payments,  which also described the purchase reviews. We also met with officials from SBA’s Office of Financial Program Operations to understand how  SBA staff review submissions from lenders requesting that SBA purchase  defaulted loans. Finally, to help assess the extent to which the Patriot  Express program could be susceptible to fraud and abuse, we reviewed  SBA’s internal control standards related to ensuring that Patriot Express  loans were made to eligible members of the military community. We  compared these internal controls to federal internal control standards, as  well as to GAO’s Fraud Prevention Framework. We also interviewed  officials from SBA’s Office of Inspector General to learn about scenarios  under which the Patriot Express program could be susceptible to fraud  and abuse.
We conducted this performance audit from November 2012 to September  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Comparison of SBA’s 7(a), SBA Express, and Patriot Express Loan Programs

In addition to the Patriot Express pilot program, there are several delivery  methods within the SBA 7(a) program, including regular (nondelegated)  7(a), delegated 7(a) loans made by lenders in the Preferred Lenders  Program (PLP), and SBA Express loans. While all delivery methods  provide a borrower with an SBA-guaranteed loan, there are several  similarities and differences between these three programs, such as  eligibility restrictions, maximum loan amounts, and percent of guarantee.  Table 6 below compares the key features of these three loan programs  discussed throughout this report.

Appendix III: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the contact named above, Andrew Pauline (Assistant  Director), Benjamin Bolitzer, Daniel Kaneshiro, José R. Peña, Christine  Ramos, Jessica Sandler, Jennifer Schwartz, Jena Sinkfield, and Andrew  Stavisky made key contributions to this report.

Summary:
Why GAO Did This Study

In June 2007, SBA established the Patriot Express Pilot Loan Program within its 7(a) loan guarantee program to provide small businesses owned and operated by veterans and other eligible members of the military community access to capital. Through Patriot Express, SBA guarantees individual small business loans that lenders originate. GAO was asked to evaluate the program. This report examines (1) trends in the volume and performance of Patriot Express and related SBA loan programs; (2) the effect of the program on eligible members of the military community; and (3) SBA internal controls to ensure that only eligible borrowers participate. GAO analyzed data on performance and costs of Patriot Express and other similar SBA loan programs from 2007 through 2012; interviewed selected borrowers, lenders, and veteran service organizations; and reviewed SBA internal control guidance on borrower eligibility.

What GAO Found

Patriot Express loans valued at about $703 million have defaulted at a higher rate than loans under the Small Business Administration's (SBA) other related loan guarantee programs, and losses for Patriot Express have exceeded its income. With the exception of loans approved in 2007, Patriot Express loans have defaulted at a higher rate than loans made under SBA's main 7(a) program or loans made under SBA's streamlined loan guarantee program (SBA Express). The Patriot Express program's overall default rate was significantly higher for smaller loans, especially for loans below $25,000 (20 percent). Additionally, one lender accounted for more than 64 percent of these smaller loans and experienced higher default rates than the remaining lenders. From 2007 through 2012, losses in the Patriot Express program exceeded income by $31.1 million (not accounting for future fee revenues or funds recovered from loans in default).
Selected borrowers and lenders, as well as veteran service organizations GAO met with, reported various benefits and challenges to the Patriot Express program, but SBA has yet to evaluate the effect of this pilot program on eligible members of the military community. Borrowers and lenders said that some benefits of the program were that it helped veterans expand their businesses and allowed them to take advantage of the streamlined application process. Some challenges they identified were low awareness of the program and which lenders participated in the program. In 2010, SBA extended the Patriot Express pilot through 2013 to allow time to evaluate the effect of the program. To date, SBA has not evaluated the program or established a plan of what it intends to do to evaluate it. SBA officials told us that they focused their resources on evaluating 7(a) loans because there are many more of them and, therefore, they pose a greater risk to SBA than Patriot Express loans. In addition to Patriot Express, SBA has previously initiated other pilot programs that it has not evaluated. GAO has found that a program evaluation gives an agency the opportunity to refine program design, assess if program operations have resulted in the desired benefits, and, for pilots, determine whether to make the programs permanent. Without conducting evaluations of pilot programs, SBA lacks the information needed to assess their performance and their effects on eligible participants and decide whether to extend these programs, including Patriot Express.
SBA's internal controls over lenders may not provide reasonable assurance that Patriot Express loans are only made to eligible members of the military community and that only these members benefit from loan proceeds. SBA relies on lenders to verify and document borrower eligibility at the time of loan approval. One of SBA's controls over lenders' compliance with eligibility requirements consists of sampling loan files during examinations of the 7(a) program, but few Patriot Express loans are reviewed. Patriot Express is intended to assist only eligible members of the military community and SBA officials told us that they expect borrowers to maintain eligibility after the loan is disbursed. But SBA has not developed procedures for lenders to provide reasonable assurance that borrowers maintain this eligibility. Federal internal control standards and GAO's fraud-prevention framework indicate that ongoing monitoring is an important component of an effective internal control system. Without enhanced internal controls, particularly with respect to monitoring of borrowers, SBA lacks assurance that Patriot Express loans are serving only eligible borrowers.

What GAO Recommends

SBA should design and implement an evaluation plan to assess how well the Patriot Express pilot is achieving program objectives and goals and serving the needs of veterans and eligible borrowers. Going forward, SBA should include an evaluation plan as part of any pilot programs initiated under its own authority and consider the results of the evaluation when deciding whether to extend or terminate a pilot. Further, SBA should enhance internal controls over borrower eligibility requirements. SBA said that it will consider the findings from this report as it reviewed the extension of the Patriot Express pilot.