United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, and 

International Security, Committee on Homeland 

Security and Governmental Affairs, U.S. Senate 

SMALL BUSINESS 

ADMINISTRATION 

Improvements Made, but 

Loan Programs Face 

Ongoing Management 

Challenges 

Statement of William B. Shear, Director 

Financial Markets and Community Investment 

For Release on Delivery

Expected at 2:30 p.m. EDT

Thursday, April 6, 2006

 

GAO-06-605T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 6, 2006

SMALL BUSINESS ADMINISTRATION

Improvements Made, but Loan Programs 

Highlights of GAO-06-605T, a testimony to Face Ongoing Management Challenges 

the Subcommittee on Federal Financial 

Management, Government Information, 

and International Security, Committee on 

Homeland Security and Governmental 

Affairs, U.S. Senate 

The Small Business

Administration’s (SBA) purpose 

is to promote small business 

development and 

entrepreneurship through 

business financing, government 

contracting, and technical

assistance programs. SBA’s 

largest business financing 

program is its 7(a) program, 

which provides guarantees on 

loans made by private-sector 

lenders to small businesses that 

cannot obtain financing under 

reasonable terms and conditions 

from the private sector. In

addition, SBA’s Office of Disaster 

Assistance makes direct loans to 

households to repair or replace 

damaged homes and personal 

property and to businesses to 

help with physical damage and 

economic losses. 

This testimony, which is based on 

a number of reports that GAO 

issued since 1998, discusses (1)

changes in SBA's oversight of the 

7(a) business loan program; (2) 

steps SBA has taken to improve 

its management of information 

technology, human capital, and 

financial reporting for business 

loans; and (3) SBA's 

administration of its disaster loan 

program. 

Since the mid-1990s, when GAO found that SBA had virtually no oversight 

program for its 7(a) guaranteed loan program, SBA has, in response to GAO 

recommendations, established a program and developed some enhanced 

monitoring tools. The oversight program is led by its Office of Lender 

Oversight, which was established in 1999. Strong oversight of SBA’s lending 

partners is needed to protect SBA from financial risk and to ensure that 

qualified borrowers get 7(a) loans. In addition to its bank lending partners, 

loans are made by Small Business Lending Companies (SBLC)—privately 

owned and managed, non-depository lending institutions that are licensed 

and regulated by SBA. Since SBLCs are not subject to safety and soundness 

oversight by depository institution regulators, SBA has developed such a 

program under a contract with the Farm Credit Administration. Over the 

years, SBA has implemented many GAO recommendations for lender 

oversight and continues to make improvements toward addressing others. 

Since the late 1990s, SBA has experienced mixed success in addressing other 

management challenges that affect its ability to manage the 7(a) loan 

program. With respect to using information technology to monitor loans 

made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in 

developing its own system to establish a risk management database as 

required by law. However, SBA awarded a contract in April 2003 to obtain 

loan monitoring services. Regarding SBA’s most recent workforce 

transformation efforts begun in 2002, GAO found that SBA applied some key 

practices important to successful organizational change but overlooked 

aspects that emphasize transparency and communication. SBA has 

implemented some related GAO recommendations for improvements in 

those areas. SBA has also made good progress in response to GAO 

recommendations addressing financial management issues. 

With respect to SBA’s administration of its disaster loan program after the 

September 11, 2001, terrorist attacks, GAO found that SBA followed 

appropriate policies and procedures for disaster loan applications in 

providing approximately $1 billion in loans to businesses and individuals in 

the disaster areas, and to businesses nationwide that suffered economic 

injury. GAO’s preliminary findings from ongoing evaluations of SBA’s 

response to the 2005 Gulf Coast hurricanes indicate that SBA’s workforce 

and new loan processing system have been overwhelmed by the volume of 

loan applications. GAO identified three factors that have affected SBA’s 

ability to provide a timely response to the Gulf Coast disaster victims: (1) the 

volume of loan applications far exceeded any previous disaster; (2) although 

SBA’s new disaster loan processing system provides opportunities to 

streamline the loan origination process, it initially experienced numerous 

outages and slow response times in accessing information; and (3) SBA’s 

planning efforts to address a disaster of this magnitude appear to have been 

inadequate. 

www.gao.gov/cgi-bin/getrpt?GAO-06-605T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William B. 

Shear at (202) 512-8678 or shearw@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to be here today as you consider the 

effectiveness of the Small Business Administration (SBA). Established by 

Congress in 1953 to fulfill the role of several previous agencies, SBA’s 

purpose is to promote small business development and entrepreneurship 

through business financing, government contracting, and technical 

assistance programs. In addition, SBA’s Office of Disaster Assistance 

(ODA) makes loans to households to repair or replace damaged homes 

and personal property, and to businesses to help with physical damage 

and economic losses. For over a decade, SBA has been centralizing some 

functions to improve efficiency and has moved more toward partnering 

with outside entities, such as private-sector lenders, to provide direct 

services to small businesses. Significant changes in SBA’s management of

its loan programs, information technology, human capital, and financial 

resources have occurred, and we have studied various aspects of these 

changes. 

My statement today is based on a number of reports that we have issued 

over the past decade addressing SBA’s administration of its major loan 

guarantee and disaster loan programs. I will discuss (1) changes in SBA’s 

oversight of the 7(a) business loan program; (2) steps SBA has taken to 

improve its management of information technology, human capital, and 

financial reporting for business loans; and (3) SBA’s administration of its 

disaster loan program after the September 11, 2001, terrorist attacks and 

the recent Gulf Coast hurricanes. 

In summary: 

• Since the mid-1990s, when we found that SBA had virtually no oversight 

program for its 7(a) guaranteed loan program, SBA has, in response to our 

recommendations, established a program and developed some enhanced 

monitoring tools. The oversight program is led by its Office of Lender 

Oversight (OLO), which was established in 1999. Strong oversight of SBA’s 

lending partners is needed to protect SBA from financial risk and to 

ensure that qualified borrowers get 7(a) loans. In addition to its bank 

lending partners, loans are made by Small Business Lending Companies 

(SBLC)—privately owned and managed, non-depository lending 

institutions that are licensed and regulated by SBA. Since SBLCs are not 

subject to safety and soundness oversight by depository institution 

regulators, SBA has developed such a program under a contract with the 

Farm Credit Administration. Although we have not comprehensively 

reviewed the 7(a) program in some time, over the years, SBA has 

Page 1 GAO-06-605T 
implemented many of our recommendations for lender oversight and 

continues to make improvements toward addressing others. 

• Since the late 1990s, SBA has experienced mixed success in addressing 

other management challenges that affect its ability to manage the 7(a) 

program. With respect to using information technology to monitor loans 

made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in 

developing its own system to establish a risk management database as 

required by law. However, SBA awarded a contract in April 2003 to obtain

loan monitoring services. Regarding SBA’s most recent workforce 

transformation efforts begun in 2002, we found that although SBA applied

some key practices important to successful organizational change, it 

overlooked aspects that emphasize transparency and communication. SBA 

has implemented some related recommendations for improvements in 

those areas. SBA has made good progress in response to our 

recommendations addressing financial management issues. 

• With respect to SBA’s administration of its disaster loan program after the 

September 11, 2001, terrorist attacks, we found that SBA followed 

appropriate policies and procedures for disaster loan applications in 

providing approximately $1 billion in loans to businesses and individuals 

in the disaster areas, and to businesses nationwide that suffered economic 

injury. Our preliminary findings from ongoing evaluations of SBA’s 

response to the 2005 Gulf Coast hurricanes indicate that SBA’s workforce 

and new loan processing system have been overwhelmed by the volume of 

loan applications. We identified three factors that have affected SBA’s 

ability to provide a timely response to the Gulf Coast disaster victims: (1) 

the volume of loan applications far exceeded any previous disaster; (2) 

although SBA’s new disaster loan processing system provides 

opportunities to streamline the loan origination process, it initially 

experienced numerous outages and slow response times in accessing 

information; and (3) SBA’s planning efforts to address a disaster of this 

magnitude appear to have been inadequate. 

SBA was established in 1953, but its basic mission dates to the 1930s and 

1940s when a number of predecessor agencies assisted small businesses 

affected by the Great Depression and, later, by wartime competition. The 

first of these, the Reconstruction Finance Corporation, was abolished in 

Background 

Page 2 GAO-06-605T 
the early 1950s; SBA was established by the Small Business Act of 1953,1

 to 

continue the functions of the previous agencies. By 1954, SBA was making 

business loans directly to small businesses and guaranteeing loans banks 

made, making loans directly to victims of disasters, and providing a wide 

range of technical assistance to small businesses. 

Today, SBA’s stated purpose is to promote small business development 

and entrepreneurship through business financing, government contracting, 

and technical assistance programs. SBA also serves as a small business 

advocate, working with other federal agencies to, among other things, 

reduce regulatory burdens on small businesses. Most SBA financial 

assistance is now provided in the form of guarantees for loans made by 

private and other institutions, but the agency’s disaster program remains a 

direct loan program and is available to homeowners and renters that are 

affected by disasters of any kind; and to all businesses, regardless of their 

size, to cover physical damages. 

At the end of fiscal year 2005, SBA had authority for over 4,000 full-time 

employees and budgetary resources of approximately 1.1 billion.2

Providing small businesses with access to credit is a major avenue through 

which SBA strives to fulfill its mission. The 7(a) loan program, which is 

SBA’s largest business loan program, is intended to serve small business 

borrowers who cannot obtain credit elsewhere.3 Because SBA guarantees

up to 85 percent of each 7(a) loan made by its lending partners, there is 

risk to SBA if the loans are not repaid. 

SBA is to ensure that lenders provide loans to borrowers who are eligible

and creditworthy. Therefore, strong oversight of lenders by SBA is needed 

to ensure that qualified borrowers get 7(a) loans and to protect SBA from 

financial risk. As of September 30, 2005, SBA’s portfolio of 7(a) loans 

totaled $43 billion. In administering the 7(a) program, SBA has evolved 

from making loans directly to depending on lending partners, primarily 

SBA Has Developed 

and Continues to 

Improve an Oversight 

Program for Its 

Business Loan 

Program 

 1

Pub. L. No. 83-163, tit. II, 67 Stat. 232 (July 30, 1953), as amended, which was withdrawn as 

part of that Act and made a separate Act known as the “Small Business Act” by Pub. L. No.

85-536, 72 Stat. 384 (July 18, 1958) (codified at 15 U.S.C. §§ 631 – 657e). 

2

Budgetary resources include new budget authority and unobligated balances of previous 

budget authority. 

3

15 U.S.C. § 636(a). 

Page 3 GAO-06-605T 
banks that make SBA guaranteed loans.4

 SBA’s other lending partners are 

Small Business Lending Companies (SBLC)—privately owned and 

managed, non-depository lending institutions that are licensed and 

regulated by SBA and make only 7(a) loans. Unlike SBA’s bank lending 

partners, SBLCs are not generally regulated by financial institution 

regulators.5

Since the mid-1990s, when SBA had virtually no oversight program for its 

7(a) guaranteed loan program, the agency has established a program and 

developed some enhanced monitoring tools. We have conducted four 

studies of SBA’s oversight efforts since 1998 and made numerous 

recommendations related to establishing a lender oversight function and 

improving it. Although we sometimes repeated recommendations in more 

than one report because SBA had not acted to address them, SBA has now 

addressed many of the outstanding recommendations and is in the process 

of addressing others. 

Prior to December 1997, SBA’s procedures required annual on-site reviews 

of lenders with more than three outstanding guaranteed loans. But in a 

June 1998 study, we could not determine from the district offices’ files 

which lenders met this criterion and should have been reviewed.6 In the 

five SBA district offices we visited, we found that about 96 percent of the 

lenders had not been reviewed in the past 5 years and that some lenders 

participating in the program for more than 25 years had never been 

reviewed. When we did our study, SBA was implementing a central review

program for its “preferred” lenders (those SBA certifies to make loans 

without preapproval).7

 The Small Business Programs Improvement Act of 

 4

Within the 7(a) program, there are three classifications of lenders—regular, certified, and 

preferred lenders. The Small Business Administration continues to provide final approval 

of loans made by its regular lenders. Certified lenders have the authority to process, close,

service, and may liquidate SBA guaranteed loans. Preferred lenders are given full authority 

to make loans without prior SBA approval. 

5

Small Business Lending Companies that are subsidiaries of bank holding companies are 

subject to Federal Reserve Board oversight. 

6

See GAO, Small Business Administration: Few Reviews of Guaranteed Lenders Have

Been Conducted, GAO-98-85 (Washington, D.C.: June 11, 1998). 

7

The percentage of loans accounted for by preferred lenders represented about 30 percent

of 7(a) loan approvals and 50 percent of loan volume in 1997. 

Page 4 GAO-06-605T 
1996 required SBA to review preferred lenders either annually or more 

frequently.8

In our 1998 report, we recommended that SBA establish a lender review 

process for all of its 7(a) lenders, including the SBLCs. In 1999, SBA 

established OLO and charged it with, among other duties, managing lender 

reviews, including safety and soundness examinations of SBLCs. In the 

same year, SBA contracted with the Farm Credit Administration—the 

safety and soundness regulator of the Farm Credit System—to perform 

examinations of SBLCs. Numerous deficiencies were identified in those 

first examinations, but the SBLCs and SBA responded positively to 

address the recommendations. SBA continues its contracting arrangement 

with FCA. 

It was during our 2000 study on oversight of SBLCs that we first 

recommended that SBA clarify its authority to take enforcement actions, if 

necessary, against SBLCs, and to seek any statutory authority it might 

need to do so.

9

 We made this recommendation again in 2002 and in 2004 

and included a call to clarify procedures for taking actions against 

preferred lenders as well. We recommended that SBA provide, through 

regulation, clear policies and procedures for taking enforcement actions 

against preferred lenders or SBLCs in the event of continued

noncompliance with its regulations. During this time, SBA sought 

appropriate authority from Congress to take enforcement actions against 

SBLCs similar to those of other regulators of financial institutions, such as 

cease-and-desist and civil money penalty powers. Congress provided SBA 

enforcement authority over non-bank lenders in late 2004, and SBA 

announced related delegations of authority in the Federal Register in April 

2005 to clarify responsibilities within the agency.10 SBA officials have told 

us that they will issue related regulations in 2006. 

 8

The assessments are to include, among other things, defaults, loans, and recoveries of 

loans made by the lender. Pub. L. No. 104-208, div. D, title 1, § 103(h), 110 Stat. 3009, 3009-

728 (Sept. 30, 1996) (codified at 15 U.S.C. § 634 note).

9

GAO, Small Business Administration: Actions Needed to Strengthen Small Business

Lending Company Oversight, GAO-01-192 (Washington, D.C.: Nov. 17, 2000). 

10See Small Business Reauthorization and Manufacturing Assistance Act of 2004 (Pub. L.

No. 108-447, div.K, § 161, 118 Stat. 2809, 3458 (Dec. 8, 2004) (codified at 15 U.S.C. § 650); 

and 70 Fed. Reg. 21262, 21263 (Apr. 25, 2005). 

Page 5 GAO-06-605T 
Our 2002 study focused more broadly on the relatively new OLO and found 

that the agency had made more progress in developing its lender oversight 

program.11 OLO had developed guidance, centralized the lender review 

processes, and was performing more reviews of its lenders. We did, 

however, find some shortcomings in the program and made 

recommendations for improving it. For example:

• While elements of the oversight program touched on the financial risk 

posed by preferred lenders, weaknesses limited SBA’s ability to focus on, 

and respond to, current and future financial risk to its portfolio. Neither 

the lender review process nor SBA’s off-site monitoring adequately 

focused on the financial risk lenders posed. The reviews used an 

automated checklist to focus on lenders’ compliance with SBA’s 7(a) 

processing, servicing, and liquidation standards. The reviews did not 

provide adequate assurance that lenders were sufficiently assessing 

borrowers’ eligibility and creditworthiness. We recommended that SBA 

incorporate strategies into its review process to adequately measure the 

financial risk lenders pose to SBA, develop specific criteria to apply to the 

“credit elsewhere” standard, and perform qualitative assessments of 

lenders’ performance and lending decisions.12 By 2004, as I will discuss in a 

moment, we found that SBA had made progress in its ability to monitor 

and measure the financial risk lenders pose but had not developed criteria 

for its credit elsewhere standard. 

• Although SBA had taken a number of steps to develop its lender oversight 

function, the placement of its OLO within the Office of Capital Access 

(OCA) did not give OLO the necessary organizational independence it

needed to accomplish its goals. OCA has other objectives, including 

promoting the lending program to appropriate lenders. We recommended 

that SBA make lender oversight a separate function and establish clear 

authority and guidance for OLO. SBA has taken several steps to address 

this recommendation but has not made OLO an independent office. In the 

2005 delegations of authority published in the Federal Register, SBA 

specified that a Lender Oversight Committee (comprised of a majority of 

senior SBA officials outside of OCA) would have responsibilities for 

reviewing reports on lender-oversight activities; OLO recommendations 

 11See GAO, Small Business Administration: Progress Made but Improvements Needed in

Lender Oversight, GAO-03-90 (Washington, D.C.: Dec. 9, 2002). 

1215 U.S.C. § 636(a)(1)(A) prohibits SBA from providing financial assistance to an applicant 

that can obtain credit elsewhere. 13 C.F.R. § 120.101 states, in part, “SBA provides 

business loan assistance only to applicants for whom the desired credit is not otherwise 

available on reasonable terms from non-Federal sources.”

Page 6 GAO-06-605T 
for enforcement action; and OLO’s budget, staffing, and operating plans.

SBA officials believe that these and other measures will ensure sufficient 

autonomy and authority for OLO to independently perform its duties. 

These measures appear to provide the opportunity for more independence 

for OLO, but we have not evaluated how the measures are actually 

working. 

Our most recent review of SBA’s oversight efforts, completed in June 2004, 

focused on the agency’s risk management needs and its acquisition and 

use of a new loan monitoring service.13 Using an assessment of best 

practices, we determined that SBA would need to base its capabilities for 

monitoring its loan portfolio and lender partners on a credit risk 

management program.14 Largely because SBA relies on lenders to make its 

guaranteed loans, it needs a loan and lender monitoring capability that will

enable it to efficiently and effectively analyze various aspects of its overall 

portfolio of loans, its individual lenders, and their portfolios. While SBA 

must determine the level of credit risk it will tolerate, it must do so within 

the context of its mission and its programs’ structures. Since SBA is a 

public agency, its mission obligations will drive its credit risk management 

policies. For example, different loan products in the 7(a) program have 

different levels of guarantees. These and other differences influence the 

mix of loans in SBA’s portfolio and, consequently, would impact how SBA 

manages its credit risk. 

Such a credit risk management program would likely include a 

comprehensive infrastructure—including, skilled personnel, strong 

management information systems, and functioning internal controls 

related to data quality—along with appropriate methodologies and policies 

that would ensure compliance with SBA criteria. 

In 2003, SBA contracted with Dun and Bradstreet for loan monitoring 

services. These services could enable the agency to conduct the type of 

monitoring and analyses typical of “best practices” among major lenders, 

and are recommended by financial institution regulators. The services SBA 

obtained reflect many best practices, particularly those related to 

infrastructure and methodology, and can facilitate a new level of 

 13See GAO, Small Business Administration: New Service for Lender Oversight Reflects 

Some Best Practices, but Strategy for Use Lags Behind, GAO-04-610 (Washington, D.C.: 

June 8, 2004). 

14“Credit risk” is the risk of financial loss due to borrower default. 

Page 7 GAO-06-605T 
sophistication in SBA’s oversight efforts.15 The services also give SBA a 

way to measure the financial risk posed by its lending partners, and 

analyze loan and lending patterns efficiently and effectively. However, 

SBA did not develop the comprehensive policies it needed to implement 

the best practices as we recommended. 

SBA officials have told us that they have taken steps to address this 

recommendation. For example, the management plan governing the 

agency’s relationship with Dun and Bradstreet addresses a process for 

continuous improvement. SBA has also established the Lender Oversight 

Committee and a Portfolio Analysis Committee to review portfolio 

performance. SBA officials told us that these committees meet frequently. 

They also described the type of analyses of the loan portfolio and 

individual lenders made available for review and discussion by the 

committees, and provided examples of these analyses. Although these 

developments could provide the tools for risk management that we 

envisioned, we have not evaluated them. 

Since the late 1990s, SBA has taken steps to address other management 

challenges that affect its ability to manage its business loan program and 

the technical assistance it provides small businesses. Information 

technology, human capital, and financial management have posed 

challenges for SBA, as we have noted in special reports to Congress.16

SBA Has Experienced 

Mixed Success in 

Addressing Other 

Management 

Challenges to Its 7(a) 

Loan Program 

 15The best practices include continuous improvements in the service and its tools, frequent

and routine portfolio reviews, and active involvement of senior managers in reviewing how 

the information from the service is used. 

16GAO, Major Management Challenges and Program Risks: Small Business 

Administration, GAO-03-116 (Washington, D.C.: Jan. 2003); see www.gao.gov/pas/2005 for 

a 2005 update. We first addressed these management challenges in 2001. See GAO, Major 

Management Challenges and Program Risks: Small Business Administration, 

GAO-01-260 (Washington, D.C.: Jan. 2001).

Page 8 GAO-06-605T 
SBA has now acquired the ability to monitor its portfolio of business loans 

through its arrangement with Dun and Bradstreet, as mentioned earlier. 

SBA took this positive step after an unsuccessful attempt to establish a 

risk management database as required by the Small Business Programs 

Improvement Act of 1996.

17 We monitored the agency’s progress as it 

attempted to meet this challenge on its own. When we reviewed SBA’s 

plans in 1997, we found that it had not undertaken the essential planning

needed to develop the proposed system.18 We periodically reported on 

SBA’s progress in planning and developing the loan monitoring system 

since 1997.19 From 1998 to 2001, SBA’s estimate for implementing the 

system grew from $17.3 million to $44.6 million. By 2001, SBA had spent 

$9.6 million for developmental activities, but had never completed the 

mandated planning activities or developed a functioning loan monitoring 

system. 

In 2001, Congress did not appropriate funds for the loan monitoring 

system and instead permitted SBA to use reprogrammed funds, provided 

that SBA notify Congress in advance of SBA’s use of the reprogrammed 

funds.20 Congress also directed SBA to develop a project plan to serve as a

basis for future funding and oversight of the loan monitoring system. As a 

result, SBA suspended the loan monitoring system development effort. Of 

the $32 million appropriated for the loan monitoring system effort, about

$14.7 million remained. In 2002, SBA contracted for assistance to identify

alternatives and provide recommendations for further developing a loan 

monitoring system. This effort led to SBA awarding a contract to Dun and

Bradstreet in April 2003 to obtain loan monitoring services, including loan

and lender monitoring and evaluation; and risk management tools. The 

SBA Has Made 

Advancements in 

Information Technology 

Critical to Business Loans 

 17Pub. L No. 104-208, div. D, title I, § 102,110 Stat. 3009-724, 3009-725, (Sept. 30, 1996) 

(codified at 15 U.S.C. § 633(b)(3). 

18GAO, Small Business Administration: Better Planning and Controls Needed for 

Information Systems, GAO/AIMD-97-94 (Washington, D.C.: June 27, 1997).

19GAO, Small Business Administration: Mandated Planning for Loan Monitoring System 

Is Not Complete, GAO/AIMD-98-214R (Washington, D.C.: June 30,1998); Small Business

Administration: Planning for Loan Monitoring System Has Many Positive Features but 

Still Carries Implementation Challenges, GAO/T-AIMD-98-233 (Washington, D.C.: July 16, 

1998); SBA Loan Monitoring System: Substantial Progress Yet Key Risks and Challenges

Remain, GAO/AIMD-00-124 (Washington, D.C.: Apr. 25, 2000); Loan Monitoring System: 

SBA Needs to Evaluate the Use of Software, GAO-02-188 (Washington, D.C.: Nov. 30, 2001). 

20 See Pub. L. No. 107-77, 115 Stat. 748, 796-799 (Nov. 28, 2001); and H.R. Conf. Rep. No. 107-

278 at 164 (2001). 

Page 9 GAO-06-605T 
contract includes four 1-year options at an average cost of approximately 

$2 million a year. 

In 2001 we reported on SBA’s organizational structure and the challenges 

it presented for SBA to deliver services to small businesses.21 We reviewed 

how well SBA’s organization was aligned to achieve its mission. We found 

a field structure that did not consistently match with SBA’s mission 

requirement. This was caused by past realignment efforts during the mid1990s that changed how SBA performed its functions, but left some 

aspects of the previous structure in place. Among the other weaknesses 

we identified were: 

SBA Has Applied Key 

Practices but Overlooked 

Transparency and 

Communication During Its 

Workforce Transformation 

• ineffective lines of communication; 

• confusion over the mission of district offices; and 

• complicated, overlapping organizational relationships. 

SBA began realigning its organization, operations, and workforce to better

serve its small-business customers in the 1990’s. With less responsibility 

for direct lending and a declining operating budget, SBA streamlined its 

field structure by downsizing its 10 regional offices, moving the workload 

to district or headquarters offices, and eliminating most of the regional

offices’ role as the intermediate management layer between headquarters 

and the field. SBA created the Office of Field Operations, largely to 

represent the field offices in headquarters and to provide guidance and 

oversight to field office management. In 2002, the agency planned to 

approach its 5-year transformation efforts in phases, testing a number of 

initiatives in order to make refinements before implementing the 

initiatives agencywide. These efforts are ongoing. SBA’s current 

transformation objectives are to: 

• streamline ODA by realigning offices, employees, and space to better serve

disaster victims and leverage use of the new disaster loan processing 

system; 

 21GAO, Small Business Administration: Current Structure Presents Challenges for 

Service Delivery, GAO-02-17 (Washington, D.C.: Oct. 26, 2001). 

Page 10 GAO-06-605T 
• centralize all 7(a) loan processing in two centers to standardize 

procedures and reduce the workforce required for this program; 

• centralize all 504 loan liquidations in two centers to standardize 

processing and increase efficiency; 

• centralize disaster loan liquidations in one center to standardize 

processing and increase efficiency; and 

• transform the regional and district offices by standardizing their size and

function. 

In October 2003, when we reported on SBA’s transformation, SBA was 

near completion of the first phase of its transformation process.22 This 

initial phase aimed to 

• transform the role of the district office to focus on outreach to small 

businesses about SBA’s products and services, and link these businesses 

to the appropriate resources, including lenders; and 

• centralize some of its loan functions to improve efficiency and the 

consistency of its loan approval and liquidation processes. 

We found that the agency had applied some key practices important to 

successful organizational change, but had overlooked aspects that 

emphasize transparency and communication. For example, SBA had top 

leadership support and a designated transformation-implementation team, 

but the makeup of the team was not communicated to employees and 

stakeholders, and the team’s leadership was not always consistent. Also, 

SBA had developed a transformation plan that contained goals, anticipated 

results, and an implementation strategy--but the plan was not made public, 

and employees and stakeholders were not apprised of the details of the 

plan. Also, certain aspects of the plan were revised, causing further 

confusion among non-management employees. Further, SBA had 

developed strategic goals to guide its transformation, but these goals were

not linked with measurable performance goals that would demonstrate the 

success of the agency’s plan to expand the focus of the district offices on

marketing and outreach.

 22GAO, Small Business Administration: Progress Made, but Transformation Could

Benefit from Practices Emphasizing Transparency and Communication, GAO-04-76 

(Washington, D.C.: Oct. 31, 2003). 

Page 11 GAO-06-605T 
Based on our findings and the possibility that further progress could be 

impeded by budget and staff realignment challenges, we recommended 

that SBA: 

• ensure that implementation leadership is clearly identified to employees 

and stakeholders; 

• finalize its transformation plan and share it with employees and 

stakeholders; 

• develop performance goals that reflect the strategic goals for 

transformation, and budget requests that clearly link resource needs to 

achieving strategic goals;

• use the new performance management system to define responsibilities; 

• develop a communication strategy that promotes two-way communication; 

and 

• solicit ideas and feedback from employees and the union, and ensure that 

their concerns were considered. 

SBA officials have told us of the Administrator’s increased efforts to 

communicate with staff by holding agencywide meetings with employees, 

for example. In addition, the agency plans to finalize a transformation plan 

and share it with employees in June. These actions could address some of 

the recommendations we made to SBA, but we have not documented or 

evaluated the efforts. 

SBA has made good progress towards addressing financial management 

issues that for several years prevented it from obtaining an unqualified 

audit opinion on its financial statements. We reported on some of these 

issues in our January 2003 report on SBA’s loan sales.23 Specifically, we 

found that SBA lacked reliable data to determine the overall financial

results of its loan sales. Further, because SBA did not analyze the effect of 

loan sales on its remaining portfolio, we reported that its credit program 

SBA Addressed Major 

Financial Management 

Issues, but Additional 

Steps are Necessary to 

Sustain Progress 

 23GAO, Small Business Administration: Accounting Anomalies and Limited Operational

Data Make Results of Loan Sales Uncertain, GAO-03-87 (Washington, D.C.: Jan. 3, 2003). 

Between fiscal years 1999 and 2003, SBA conducted seven loan sales, divesting itself of 

about 166,000 loans with an outstanding balance of about $5.7 billion. Approximately 86 

percent of the amount sold was from disaster assistance loans.

Page 12 GAO-06-605T 
cost estimates for the budget and financial statements may have contained 

significant errors. In addition, SBA could not explain unusual account 

balances related to the disaster loan program, which indicated that the 

subsidized program was expected to generate a profit. These issues raised 

concerns about SBA’s ability to properly account for loan sales and to 

make reasonable estimates of program costs. 

In response to our findings and several recommendations, SBA conducted

an extensive analysis to resolve the issues we identified and implemented 

a number of corrective actions. For example, SBA developed a new cashflow model to estimate the costs of its disaster loan program, and 

implemented standard operating procedures for annually revising the cost

estimates for its credit programs. SBA also revised its approach to 

determine the results of loan sales and found that loans were sold at 

losses, which was contrary to the original determination that the sales 

generated gains. These findings prompted SBA to eventually discontinue 

its loan sales program. We reviewed the improvements made by SBA and 

reported in April 2005 that the loan accounting issues we previously 

identified were resolved, and that the new cash-flow model improved its 

ability to prepare more reliable cost estimates and to determine the results 

of prior loan sales.24 However, we recommended additional steps that 

would improve the long-term reliability of the cost estimates, such as 

routine testing of the model. According to SBA officials, steps have been 

taken to address each of our recommendations, including the development 

of policies and procedures on how to operate and test the model. 

These improvements helped SBA achieve an unqualified audit opinion on 

its fiscal year 2005 financial statements, which represents significant 

progress from prior years. However, for fiscal year 2005 SBA’s auditor 

continued to note weaknesses in SBA’s overall internal controls. The 

auditor noted three areas involving internal controls that are considered to

 24GAO, SBA Disaster Loan Program: Accounting Anomalies Resolved but Additional 

Steps Would Improve Long-Term Reliability of Cost Estimates, GAO-05-409 (Washington,

D.C.: Apr. 14, 2005). 

Page 13 GAO-06-605T 
be weaknesses.25 The first area, which the auditor considered to be a 

significant weakness, related to financial management and reporting 

controls. Specifically, the auditor found that SBA needed to improve its 

funds management (i.e., canceling loan amounts not disbursed and closing 

out grants), its review process for accounting transactions, and its 

financial statement preparation process. The other two less significant 

control weaknesses related to SBA’s ODA administrative expenditure 

controls and agencywide information system controls. While these internal

control weaknesses were not severe enough to impact SBA’s audit opinion

for fiscal year 2005, it is important for SBA to address them to help ensure

that SBA continues to be able to generate reliable financial data. 

Disaster assistance has been part of SBA since its inception, and SBA’s 

physical disaster loan program is the only form of assistance not limited to 

small businesses.26 Through the ODA, SBA provides low-interest, long-term 

loans to individuals and businesses to assist them with disaster recovery.

Unlike the 7(a) program, the disaster loan program provides loans directly

to disaster victims. Businesses can apply for “physical loans” to repair or 

replace business property to pre-disaster conditions, as well as economic 

injury disaster loans (EIDLs) to obtain working capital funds to meet their 

normal operating expenses. The maximum loan amount for both physical 

business loans and EIDLs is $1.5 million, but SBA was given federal 

authority and supplemental appropriations to increase the amount for 9/11 

disaster loans. Homeowners and renters can also apply for loans to cover

their uninsured losses. The maximum amount available for home loans is 

$200,000, and personal property loans to replace items such as 

automobiles, clothing, and furniture are available up to $40,000.27 SBA 

offers terms of up to 30 years for repayment. According to SBA, although 

SBA Provided 

Disaster Loans in 

Response to 

September 11th and 

Now Is Responding to 

the Gulf Coast 

Hurricanes 

 25There are two types of internal control weaknesses. A “reportable condition” is a 

significant deficiency in the design or operation of internal controls that could adversely 

affect the organization’s ability to provide reasonable assurance on the reliability of its 

financial reporting, performance reporting, and compliance with laws and regulations. The

more significant weakness, referred to as a “material internal control weakness,” is a 

reportable condition that does not reduce to a relatively low level the risk that errors, 

fraud, or noncompliance involving significant amounts may occur and may not be detected 

in a timely manner, by employees in the normal course of performing their assigned 

functions. 

26The economic injury disaster loan (EIDL) program under 15 U.S.C. § 636(b)(2) covers

small business concerns and small agricultural cooperatives located in a disaster area. 

2713 C.F.R. § 123.105. 

Page 14 GAO-06-605T 
ODA aims to provide loan funds to disaster victims as quickly as possible, 

its focus is on long-term recovery, and not on emergency relief. 

Since SBA provides low-interest loans, the agency is required to determine 

whether each applicant is able to obtain financial assistance at reasonable 

rates and terms from non-government sources prior to assigning an 

interest rate. A higher rate applies for physical loan applicants if they are 

determined to have other credit available, and economic injury loan 

applicants are ineligible if they have other credit available. Physical 

business loans--where the applicant has credit available from other 

sources--are also subject to a maximum 3-year term for repayment.28 SBA 

also has standard procedures and requirements for disaster loans, 

including verification of losses claimed, verification of repayment ability, 

and collateral to secure loans for economic injury loans over $5,000 or for 

home loans or physical disaster business loans over $10,000.29 SBA verifies 

losses for physical loans and also deducts certain forms of compensation, 

including insurance recoveries, from the eligible loan amount. Federal 

Emergency Management Agency (FEMA) is the coordinating agency for 

presidential disaster declarations, and most disaster victims register with 

FEMA initially before receiving a referral to SBA.30 SBA can review 

FEMA’s information to determine if an applicant has already received

federal assistance or insurance proceeds to avoid duplication of benefits.

31

If insurance reimbursement is undetermined at the time of application, 

SBA can approve a loan for the total replacement cost, but any insurance 

proceeds must be assigned to SBA to reduce the loan balance. In 

considering any loan, SBA must have reasonable assurance that the loan

can be repaid. To make this determination, SBA examines federal tax 

returns and income information and reviews credit reports to verify the 

manner in which an applicant’s obligations, including federal debts, have 

been met. One of the reasons that SBA may decline a loan application is 

 2813 C.F.R. § 123.203(a). 

2913 C.F.R. § 123.11. 

30Non-business disaster victims initially register with the Federal Emergency Management 

Agency (FEMA) and are directed to apply for an SBA disaster assistance loan if they meet 

certain basic criteria. Business owners are also encouraged to register with FEMA. 

Applicants not approved for an SBA loan are referred back to FEMA for possible grant 

assistance. 

31ODA’s new Disaster Credit Management System (DCMS) has a direct link to FEMA’s

database, which allows SBA to conduct the duplication of benefits (DOB) review 

electronically. 

Page 15 GAO-06-605T 
unsatisfactory history on a federal obligation. The law does not require 

collateral for disaster loans, but SBA policy establishes collateral 

requirements in order to balance the agency’s disaster recovery mission 

with its responsibility as a lender of federal tax dollars. For example, for 

physical disaster loans over $10,000, applicants are required to provide 

collateral that will best secure the loan, and multiple loans totaling over 

$10,000 also require collateral to secure each loan. Real estate is the 

preferred form of collateral, but SBA will not automatically decline an 

application if the best available collateral is insufficient in value to secure

the loan. 

Following the terrorist attacks of September 11th, SBA provided 

approximately $1 billion in loans to businesses and individuals in the 

federally declared disaster areas and to businesses nationwide that 

suffered related economic injury.32 Home and business owners in the 

federally declared disaster areas received just under half of the disbursed 

loans; the remainder went to eligible businesses around the country. 

Congress and SBA made several modifications to the programs in 

response to complaints from small businesses. For example, the EIDL 

program was expanded to the entire country and to industries that had not

previously been covered, size standards for some eligible business were 

changed, and loan approval and disbursement were expedited. 33

In 2004, in response to concerns that about half of the loan applications 

submitted by small businesses were declined or withdrawn, we reviewed a 

representative sample of these applications and found that SBA had 

followed the appropriate policies and procedures in making loan 

 32GAO, Small Business Administration: Response to September 11 Victims and

Performance Measures for Disaster Lending, GAO-03-385 (Washington, D.C.: Jan. 29, 

2003). 

33SBA was given supplemental appropriations to make loans after September 11th and the 

2005 Gulf Coast hurricane disasters. 

Page 16 GAO-06-605T 
decisions.34 We compared SBA’s loan requirements to those of selected 

nonprofit agencies in the New York area that provided financial assistance 

to local small businesses following the disaster. Generally, we found that 

SBA had loan requirements that were similar to these nonprofits, but the 

nonprofits’ programs allowed some additional flexibility to address the 

particular needs of their small business constituents. 

We also currently have work under way to identify and assess the factors 

that have affected the SBA’s ability to respond to victims of Hurricane 

Katrina and the other 2005 Gulf Coast hurricanes in a timely manner.35 As 

part of our work, we are evaluating how SBA’s new Disaster Credit 

Management System, which has been in use since January 2005, affected 

SBA’s response. As the primary federal lender to disaster victims, 

including individual homeowners, renters, and businesses, SBA’s ability to 

process and disburse loans in a timely manner is critical to the recovery of

the Gulf Coast region. As of February 25, 2006, SBA faced a backlog of 

about 103,300 applications in loan processing pending a final decision, and 

the average time these applications had been in process was about 94 

days. During the month of March, SBA continued to process applications. 

By March 25, 2006, SBA had mailed out more than 1.6 million loan 

applications, received over 350,000 completed applications, processed 

more than 290,000 applications, and disbursed about $600 million in 

disaster loan funds. Although SBA’s current goal is to process loan 

applications within 7 to 21 days, as of March 25, 2006, SBA faced a backlog 

of about 55,000 applications in loan processing pending a final decision 

and the average age of these loan applications was about 88 days. SBA 

also has more than 43,000 loan applications that have been approved but 

 34GAO, Small Business Administration: SBA Followed Appropriate Policies and

Procedures for September 11 Disaster Loan Applications, GAO-04-885 (Washington, D.C.: 

Aug. 31, 2004). In addition to SBA disaster loans, Congress allowed SBA to collect reduced

annual fees on 7(a) loans made by lenders to small businesses “adversely affected” by the

terrorist attacks and their aftermath (see Pub. L. 107-117, § 203, 115 Stat. 2230, 2297-2298 

(Jan. 10, 2002)). These loans were designated by SBA as “Supplemental Terrorist Activity 

Relief” or STAR, loans. When the STAR program expired on January 10, 2003, 

approximately $3.7 billion in STAR loans had been approved. In a review of the STAR loan 

program, SBA’s Office of Inspector General found that most lender files did not contain

sufficient information to demonstrate that borrowers were adversely affected by the

attacks and their aftermath, and that SBA did not establish specific requirements to review 

or verify lenders’ STAR justifications. See SBA, Office of Inspector General, Audit of SBA’s

Administration of the Supplemental Terrorist Activity Relief (STAR) Loan Program, 

Rept. No. 6-09 (Washington, D.C.: Dec. 23, 2005). We did not review the STAR program. 

35 Hurricane Katrina struck the Gulf Coast on August 29; Hurricanes Rita and Wilma struck 

the U.S. Mainland on September 24 and October 24, respectively. 

Page 17 GAO-06-605T 
have not been closed or fully disbursed. As a result, disaster victims in the 

Gulf Region have not received timely assistance in recovering from this 

disaster and rebuilding their lives. 

Based on our preliminary analysis of SBA’s disaster loan origination 

process, we have identified several factors that have affected SBA’s ability 

to provide a timely response to Gulf Coast disaster victims. First, the 

volume of loan applications SBA mailed out and received has far exceeded

any previous disaster. Compared with the Florida hurricanes of 2004 or 

the 1994 Northridge earthquake, the hurricanes that hit the Gulf Coast in 

2005 resulted in the issuance of roughly two to three times as many loan 

applications. Second, although SBA’s new disaster-loan processing system 

provides opportunities to streamline the loan origination process, initially 

it experienced numerous outages and slow response times in accessing 

information. However, we have not yet determined the duration and 

impact of these outages on processing. SBA officials have attributed many 

of these problems to a combination of hardware-and telecommunicationscapacity limitations as well as the level of service SBA has received from 

its contractors. Third, SBA’s planning efforts to address a disaster of this 

magnitude appear to have been inadequate. Although SBA’s disaster 

planning efforts focused primarily on responding to a disaster the size of

the Northridge earthquake, SBA officials said that it initially lacked the 

critical resources such as office space, staff, phones, computers, and other 

resources to process loans for this disaster. SBA has participated in 

disaster simulations on a limited basis only and it is unclear whether 

previous disaster simulations of category 4 hurricanes hitting the New 

Orleans area were considered. 

We are also assessing other factors that have affected SBA’s ability to 

provide timely loans to disaster victims in the Gulf region including: 

workforce transformation, the exercise of its regulatory authority to 

streamline program requirements and delivery to meet the needs of 

disaster victims, coordination with state and local government agencies, 

SBA’s efforts to publicize the benefits offered by the disaster loan 

program, and the limits that exist on the use of disaster loan funds. 

Mr. Chairman, this concludes my prepared statement. I would be happy to

answer any questions at this time. 

Page 18 GAO-06-605T 
For further information on this testimony, please contact William B. Shear 

at (202) 512-8678. Individuals making key contributions to this testimony 

included Katie Harris, Assistant Director, and Bernice Benta.

Contacts and 

Acknowledgments 

Page 19 GAO-06-605T 
Page 20 GAO-06-605T 

Selected GAO Products 

SBA Disaster Loan Program: Accounting Anomalies Resolved but 

Additional Steps Would Improve Long-Term Reliability of Cost 

Estimates. GAO-05-409. Washington, D.C.: April 14, 2005. 

Small Business Administration: SBA Followed Appropriate Policies and 

Procedures for September 11 Disaster Loan Applications. GAO-04-885. 

Washington, D.C.: August 31, 2004. 

Small Business Administration: New Service for Lender Oversight 

Reflects Some Best Practices, but Strategy for Use Lags Behind. GAO-04-

610. Washington, D.C.: June 8, 2004.

Small Business Administration: Model for 7(a) Program Subsidy Had 

Reasonable Equations, but Inadequate Documentation Hampered 

External Reviews. GAO-04-9. Washington, D.C.: March 31, 2004. 

Small and Disadvantaged Businesses: Most Agency Advocates View

Their Roles Similarly. GAO-04-451. Washington, D.C.: March 22, 2004. 

Small Business Administration: Progress Made, but Transformation 

Could Benefit from Practices Emphasizing Transparency and 

Communication. GAO-04-76. Washington, D.C.: October 31, 2003. 

Small and Disadvantaged Businesses: Some Agencies’ Advocates Do Not 

Report to the Required Management Level. GAO-03-863. Washington, D.C.: 

September 4, 2003. 

Small Business Administration: Observations on the Disaster Loan 

Program. GAO-03-721T. Washington, D.C.: May 1, 2003. 

Small Business Administration: Progress Made but Improvements 

Needed in Lender Oversight. GAO-03-720T. Washington, D.C.: April 30, 

2003. 

Small Business Administration: Response to September 11 Victims and 

Performance Measures for Disaster Lending. GAO-03-385. Washington,

D.C.: January 29, 2003. 

Small Business Administration: Accounting Anomalies and Limited 

Operational Data Make Results of Loan Sales Uncertain. GAO-03-87. 

Washington, D.C.: January 3, 2003. 
Major Management Challenges and Program Risks: Small Business 

Administration. GAO-03-116. Washington, D.C.: January 1, 2003. 

Small Business Administration: Progress Made but Improvements 

Needed in Lender Oversight. GAO-03-90. Washington, D.C.: December 9, 

2002. 

September 11: Small Business Assistance Provided in Lower Manhattan 

in Response to the Terrorist Attacks. GAO-03-88. Washington, D.C.: 

November 1, 2002. 

Small Business Administration: Workforce Transformation Plan Is 

Evolving. GAO-02-931T. Washington, D.C.: July 16, 2002. 

Loan Monitoring System: SBA Needs to Evaluate the Use of Software. 

GAO-02-188. Washington, D.C.: November 30, 2001. 

Small Business Administration: Current Structure Presents Challenges 

for Service Delivery. GAO-02-17. Washington, D.C.: October 26, 2001. 

Small Business Administration: Actions Needed to Strengthen Small 

Business Lending Company Oversight. GAO-01-192. Washington, D.C.: 

November 17, 2000. 

SBA Loan Monitoring System: Substantial Progress Yet Key Risks and 

Challenges Remain. GAO/AIMD-00-124. Washington, D.C.: April 25, 2000.

Small Business Administration: Planning for Loan Monitoring System 

Has Many Positive Features but Still Carries Implementation

Challenges. GAO/T-AIMD-98-233. Washington, D.C.: July 16, 1998. 

Small Business Administration: Mandated Planning for Loan 

Monitoring System Is Not Complete. GAO/AIMD-98-214R. Washington, 

D.C.: June 30, 1998. 

Small Business Administration: Few Reviews of Guaranteed Lenders 

Have Been Conducted. GAO/GGD-98-85. Washington, D.C.: June 11, 1998. 

Page 21 GAO-06-605T (250284) 
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