Page 1 GAO-09-507R SBA’s Economic Stimulus Provisions 

United States Government Accountability Office

Washington, DC 20548 

April 16, 2009 

Congressional Committees 

Subject: Small Business Administration’s Implementation of Administrative 

Provisions in the American Recovery and Reinvestment Act of 2009 

Due to recent turmoil in U.S. credit markets, many lenders have been reluctant to 

offer conventional loans—that is, loans that are not guaranteed by the federal 

government—to small businesses so that they can finance their operations and 

capital needs. While the Small Business Administration’s (SBA) principal loan 

guarantee programs, the 7(a) and 504 programs, are intended to facilitate the capacity 

of small businesses to raise critical financing that they may have difficulty obtaining 

from other sources, the availability of such loans has also declined. Under the 7(a) 

program, SBA generally provides lenders guarantees on up to 85 percent of the value 

of loans to qualifying small businesses in exchange for fees to help offset the costs of 

the program. Under the 504 program, which generally applies to small business real 

estate and other fixed assets, SBA also provides certified development companies 

with a guarantee on up to 40 percent of the financing of the projects’ costs in 

exchange for fees while the small business borrowers and other lenders provide the 

remaining 60 percent of the financing on an unguaranteed basis.1

 Many lenders, such 

as banks, that participate in the 7(a) or 504 programs frequently try to sell qualifying 

small business loans on the secondary markets to raise funds necessary for additional 

lending. 2 Since mid-2008, investors that typically purchase securities collateralized 

by the pools of 7(a) guaranteed small business loans3 and certain 504 loans largely 

have withdrawn from the secondary markets. As a result, many such loans remain on 

the balance sheets of broker-dealers that package the securities or the original 

lenders. According to SBA, lenders’ origination of loans the agency guarantees, 

principally through the 7(a) and 504 programs, are trending below $10 billion during 

2009 after reaching about $20 billion in 2008 due in part to weakness in the secondary 

markets. 

 

1

In the financing of a typical 504 loan project, the small business borrower provides at least 10 percent 

of the funds, a third-party lender originates a mortgage, referred to as a first-lien mortgage to provide 

50 percent of the funds, and a non-profit certified development company provides the remaining 40 

percent of the funding through an SBA-guaranteed debenture. 

2

As described in this report, secondary markets have developed for the guaranteed portions of 7(a) 

loans and the guaranteed and unguaranteed portions of primarily real estate projects (including 

machinery and equipment) financed pursuant to the 504 program. 

3

The guaranteed portions of 7(a) loans may be bundled into guaranteed securities. In this report, we 

refer to these as pools of 7(a) guaranteed loans and 7(a) guaranteed securities. 
Under the American Recovery and Reinvestment Act of 2009 (ARRA),4

 Congress 

required SBA to implement a total of eight administrative provisions to help facilitate 

small business lending and enhance liquidity in the secondary markets. These 

administrative provisions include (1) temporarily requiring SBA to reduce or 

eliminate certain fees on 7(a) and 504 loans; (2) temporarily increasing the maximum 

7(a) guarantee from 85 percent to 90 percent; and (3) implementing provisions 

designed specifically to facilitate secondary markets, such as extending existing 

guarantees in the 504 program and making loans to systemically important brokerdealers that operate in the 7(a) secondary market.5

 Further, ARRA established 

deadlines for SBA to issue regulations that implement certain administrative 

provisions, such as those pertaining to facilitating secondary market activities. 

Specifically, ARRA required SBA to issue regulations extending the guarantee related 

to the 504 program within 15 days after enactment (March 4, 2009) and for making 

loans to systemically important broker-dealers within 30 days after enactment (March 

19, 2009). 

ARRA also mandates that we report within 60 days after the date of enactment, April 

17, 2009, on SBA’s initial efforts to comply with these provisions.6

 In response, this 

report (1) summarizes key activities undertaken by the Administrator of SBA to 

implement the administrative provisions including establishment of project plans 

with timelines for fulfilling responsibilities, and (2) analyze whether the 

Administrator is accomplishing the purpose of increasing liquidity in the secondary 

markets for SBA loans. Because SBA’s efforts are still in their early stages, we agreed 

with the staffs of the House and Senate Committees on Small Business to focus our 

work on four key administrative provisions for the purposes of this report. These 

four provisions are eliminating or reducing fees on 7(a) and 504 loans, extending the 

existing guarantee on 7(a) loans, and taking two specific steps to facilitate activities 

in the secondary markets: extending the guarantee on 504 financing and making loans 

to systemically important broker-dealers. However, consistent with ARRA’s 

requirements, we are also providing information on the status of SBA’s 

implementation of the other four administrative provisions.7

To address these objectives, we obtained and analyzed program regulations, policies, 

procedures, and SBA reports to Congress. We also analyzed available historical 

financial data on the 7(a) and 504 markets, including relevant data on secondary 

market activity. In addition, we interviewed senior SBA officials to obtain 

information on the agency’s efforts to implement ARRA’s administrative provisions, 

 

4

Pub. L. No. 111-5, Division A, Title V, 123 Stat. 115, 151-161 (2009). 

5

ARRA authorizes the SBA Administrator to extend the agency’s guarantee to pools of first-lien 

mortgages that are packaged into securities and sold to third party investors who participate in 

secondary markets for small business loans. The intent of this administrative provision is to help 

facilitate secondary market activity for such securities, which largely collapsed during current turmoil 

in credit markets. 

6

The mandate also directed us to analyze whether the activities are accomplishing the purposes of 

increasing liquidity in the secondary market for SBA loans. 

7

ARRA has four additional SBA provisions including (1) providing guarantees on loans to small 

businesses that have qualifying small business loans and are experiencing immediate financial 

hardship, (2) granting SBA authority to refinance a limited amount of certain existing loans as new 504 

loans, (3) increasing the leverage of Small Business Investment Companies, and (4) increasing the 

maximum amount for contracts that qualify for SBA-guaranteed surety bonds. 

Page 2 GAO-09-507R SBA’s Economic Stimulus Provisions
including efforts to coordinate relevant activities with the Department of Treasury 

and the Federal Reserve. We also contacted the Treasury to discuss its SBA 

coordination efforts. Finally, we interviewed representatives of trade groups that 

represent SBA lenders as well as certain broker-dealers that participate in the 7(a) 

and 504 secondary loan markets to obtain their perspectives. 

We conducted our work from February 2009 through April 2009 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 based 

on our audit objectives. 

Results in Brief 

SBA has implemented two of the four key administrative ARRA provisions as defined 

for purposes of this report, and plans to have the two secondary market provisions 

finalized by June 2009. On March 16, 2009, SBA issued policy notices to eliminate 

certain fees on 7(a) and 504 loans and to extend the maximum guarantee on 7(a) 

loans from 85 percent to 90 percent. According to SBA officials, eliminating fees and 

extending lender protections on certain 7(a) loans should provide incentives for small 

businesses to apply for additional loans and lenders to originate them. However, SBA 

has not met its statutory requirement to issue regulations associated with extending 

existing guarantees on 504 projects (which were due by March 4, 2009) and making 

loans to systemically important broker-dealers that participate in the secondary 

market for 7(a) loans (which were due by March 19, 2009). According to SBA 

officials, issuing the regulations for these ARRA provisions is complicated and time 

consuming because it involves establishing new programs and related infrastructure, 

such as establishing policies and procedures, hiring and training staff, developing 

information systems, and establishing risk mitigation strategies as well as resolving 

critical policy issues. For example, an SBA official said that the agency must 

determine the extent to which broker-dealers and perhaps small business lenders 

would be required to share in the potential losses associated with extending the 

guarantee in the 504 program.8

 While requiring broker-dealers and lenders to share in 

potential losses could help ensure sound loan underwriting and thereby limit SBA’s 

potential exposure, it could also lessen their willingness to participate and thereby 

fail to facilitate secondary market activity as ARRA intended. SBA officials and trade 

groups we contacted also said that ARRA’s array of requirements may also place 

strains on the agency’s staff resources, and our previous work has also concluded 

that limited resources and pending retirements could affect its capacity to implement 

programs such as those specified in ARRA.9

 To address these and other challenges, 

SBA has established an intra-agency process to implement ARRA’s provisions, 

 

8

ARRA requires broker-dealers that participate in the secondary market for 504 first-lien mortgages on 

which SBA guarantees may be extended, to assume at least 5 percent of the potential losses on 

securities established under the provision. SBA, in its discretion, could require broker-dealers to 

assume more of the potential risk. 

9

GAO, Small Business Administration: Opportunities Exist to Build on Leadership’s Efforts to 

Improve Agency Performance and Employee Morale, GAO-08-995 (Washington, D.C.: Sept. 24, 2008). 

Page 3 GAO-09-507R SBA’s Economic Stimulus Provisions
including the appointment of relevant project teams, and indicated it has consulted 

with Treasury and Federal Reserve officials on its responsibilities. According to SBA, 

the draft rules for the secondary market provisions are now undergoing internal SBA 

review, and those rules are expected to be sent to the Office of Management and 

Budget (OMB) for its review and finalized by June 2009. 

Largely because SBA has not yet implemented its key secondary market 

administrative authorities, it is not possible at this time to assess their effect on the 

secondary markets for SBA loans. Such an assessment will only be possible when the 

regulations are issued and fully implemented and market participants have had some 

time to evaluate them and decide whether to participate or not. According to SBA 

officials, the agency is considering a variety of potential performance measures to 

assess ARRA’s administrative provisions once they are implemented. For example, 

an official said that the agency might collect and analyze financial data on 7(a) and 

504 loan originations and related secondary market activity, such as the percentage of 

such loans that are sold in secondary markets over time. However, it may be very 

difficult for SBA to isolate the effects of ARRA’s administrative provisions from other 

federal initiatives that are currently being implemented to support small business 

finance. For example, on March 16, 2009, Treasury announced plans under the 

Troubled Asset Relief Program (TARP) to directly purchase up to $15 billion in SBA 

guaranteed 7(a) and 504 securities to help unclog secondary markets. Because this 

Treasury program, and a related joint Federal Reserve and Treasury program, are 

potentially far larger than SBA’s initiatives under ARRA, it may be very difficult to 

discern the effects of SBA’s various administrative provisions on small business 

finance and secondary markets once they are finalized. Going forward, SBA officials 

said they will continue to coordinate with Treasury and the Federal Reserve as the 

programs to facilitate small business finance are developed. Such coordination is 

important to maximize the potential overall effect of these programs. 

We provided SBA a draft of this report for review and comment. In written 

comments, which are reprinted in enclosure I, the SBA Administrator said that the 

draft report presented a fair and balanced discussion of the agency’s efforts thus far 

in implementing ARRA’s administrative provisions. The Administrator also provided 

additional information to demonstrate SBA’s commitment to implementing the 

administrative provisions, organizational effort to do so, and improvements resulting 

from provisions already implemented. For example, she stated that SBA has kept the 

Congress, other oversight authorities, and the public informed of SBA’s progress as 

well as establishing project and support teams with specific implementation 

responsibilities. In addition, the Administrator stated that the impact of actions taken 

four weeks ago to increase guarantee percentages and lower program fees appears to 

be strong with both the 7(a) and 504 loan programs experiencing some growth in loan 

volume over this period. SBA also provided technical comments, which were 

incorporated as appropriate. 

Background 

Under the 7(a) loan program, SBA guarantees loans made by commercial lenders to 

small businesses for whom credit is not otherwise available on reasonable terms 

from non-federal sources and do not have the personal resources to provide financing 

Page 4 GAO-09-507R SBA’s Economic Stimulus Provisions
themselves.10 The guarantee assures the lender that if a borrower defaults on a loan, 

the lender will receive an agreed-upon portion (generally between 50 percent and 85 

percent) of the outstanding balance. Loan proceeds may be used for working capital 

and other general business purposes. 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. To offset some of the costs of the program, SBA assesses 

lenders two fees on each 7(a) loan, an up-front guarantee fee that may be passed on 

to the borrower and an annual servicing fee. 

The 504 loan program provides long-term, fixed-rate financing to small businesses for 

expansion or modernization, primarily of real estate (including land and new building 

construction, existing building purchases or renovation, and machinery and 

equipment).11 Financing is delivered through certified development companies 

(CDC), private nonprofits established to contribute to the economic development of 

their communities. In a typical 504 loan project, a third-party lender provides 50 

percent or more of the financing pursuant to a first-lien mortgage, a CDC provides up 

to 40 percent of the financing through a debenture that is fully guaranteed by SBA, 

and a borrower contributes at least 10 percent of the financing. The borrower must 

meet eligibility requirements similar to those for 7(a) program borrowers, and a 

project generally must create or retain at least one job for every $50,000 guaranteed 

by SBA. Like the 7(a) program, lenders, small business borrowers, and CDCs in the 

504 program are required to pay various fees to offset the costs of the program. 

Over the years, the development of secondary markets for both 7(a) and 504 loans 

facilitated the capacity of lenders to originate such loans and small businesses to apply for 

them. By selling loans to investors via secondary markets, among other benefits, lenders 

can receive additional funds, or liquidity, to make more loans. In the 7(a) secondary 

market, lenders sell the SBA guaranteed portions of the loans to investors, with the 

participation of broker-dealers and other market participants, and generally retain the nonguaranteed portion in their portfolios. The broker-dealers assemble the guaranteed 

portions of 7(a) loans from lenders into securities and manage the sale of such securities 

to investors. Lenders, broker-dealers, and other secondary market participants make 

profits from the premiums that investors pay for the securities, through various fees, and 

through servicing the loans over time. Due to the structure of 504 loans, there are two 

separate secondary markets. There is a secondary market for the SBA-guaranteed, or 

debenture, portion of 504 loans and another market for the first-lien mortgage portion. 

A significant decline in SBA-guaranteed lending and related secondary markets 

activity has accompanied the deterioration of credit markets and the decline in 

economic activity. As discussed previously, the origination of SBA-guaranteed loans, 

principally 7(a) and 504 loans, is trending below $10 billion during 2009 from about 

$20 billion in 2008, according to the agency. SBA data also indicate that there has 

been a recent and sharp decline in secondary market activity. For example, table 1 

indicates that the guaranteed portion of 7(a) loans sold on the secondary market 

averaged about 45 percent from 2006 through most of 2008, but declined to an 

average of about 23 percent from October through December 2008 before recovering 

 

10Section 7(a) of the Small Business Act, as amended, codified at 15 U.S.C. § 636(a); see also 13 C.F.R. 

Part 120. 

1115 U.S.C. §§ 695 et seq. 

Page 5 GAO-09-507R SBA’s Economic Stimulus Provisions
somewhat in January and February 2009. According to representatives from SBA and 

broker-dealers we contacted, there was a significant decline in secondary market 

activity during the fourth quarter of 2008 for 7(a) loans and securities collateralized 

by first-lien mortgages, which are unguaranteed, that are issued in connection with 

the 504 program. However, some broker-dealer representatives said there had been a 

marginal improvement in secondary market activity in the first quarter of 2009. 

Table 1: Proportion of 7(a) Guaranteed Loans Sold on the Secondary Market 

(Dollars in thousands) 

Time period 

Guaranteed portion of 7(a) 

loans approved 

Guaranteed amount sold 

on secondary market 

Proportion sold on 

secondary market

FY 2006 $10,234,585 $4,531,992 44.3%

FY 2007 10,015,068 4,373,174 43.7%

FY 2008 9,051,727 4,095,595 45.2%

July 2008 879,139 393,997 44.8%

August 2008 592,895 277,546 46.8%

September 2008 764,744 310,038 40.5%

October 2008 485,190 114,133 23.5%

November 2008 409,925 111,025 27.1%

December 2008 510,232 94,656 18.6%

January 2009 348,309 84,513 24.3%

February 2009 382,013 135,259 35.4%

Source: GAO analysis of SBA data. 

Note: Many lenders sell the guaranteed portion of the 7(a) loans in the secondary market. The proportion sold refers to the 

guaranteed portion of loans. 

SBA Has Finalized Some but Not All Key ARRA Provisions to Facilitate Small 

Business Lending 

Tables 2 and 3 show the status of SBA’s efforts to implement ARRA’s eight 

administrative provisions that were generally established to facilitate small business 

lending and related secondary markets. Table 2 indicates that SBA has implemented two 

key provisions (as defined for purposes of this report) but has missed the statutory 

deadlines for issuing regulations in two others pertaining to facilitating secondary 

market activity. On March 16, 2009, SBA issued a policy notice temporarily eliminating 

the up-front guarantee fees for eligible 7(a) loans, as well as the third-party participation 

fees and CDC processing fees for eligible 504 loans. SBA also issued a policy notice 

implementing the temporarily increased guarantee percentage on eligible 7(a) loans from 

85 percent to 90 percent.12 According to SBA officials, lowering the costs associated with 

7(a) and 504 loans and affording additional protections to 7(a) lenders is intended to 

encourage small businesses to apply for such loans and make lenders more willing to 

originate them. However, SBA has not yet implemented other administrative provisions 

considered critical to reviving secondary markets for small business loans that the 

agency guarantees. Specifically, SBA has not implemented the provision to extend the 

guarantee to pools of 504 first-lien mortgages, which serve as the collateral for securities 

 

12Prior to the signing of ARRA, the maximum guaranty percentage for all 7(a) loan programs, ranged 

from 85 percent for loans of $150,000 or less to 75 percent for loans greater than $150,000. 

Page 6 GAO-09-507R SBA’s Economic Stimulus Provisions
that are sold on the secondary market, or established a program to make loans to 

systemically important broker-dealers that operate in the 7(a) secondary market. 

Regarding the four other administrative provisions shown in table 3, SBA has issued an 

information notice increasing the maximum amount for contracts that qualify for SBA 

guaranteed surety bond to $5,000,000, issued a notice to announce the amended job 

creation eligibility requirement for the 504 program, missed a statutory deadline to issue 

regulations for a new program to guarantee loans of $35,000 or less to small business 

concerns suffering immediate financial hardship, and has rulemakings underway to 

develop a program to refinance certain 504 loans and increase the leverage of Small 

Business Investment Companies.13

Table 2: Status of SBA’s Implementation of Key Administrative Provisions 

in ARRA 

Provision number and 

title Primary requirements and sunset provisions

SBA’s actions, as of April 16, 

2009 

501 

Fee Reductions 

Permits temporary reduction or elimination of fees, 

until September 30, 2010, for 7(a) and 504 loans 

until $375 million of appropriated funds are 

expended. 

Operational on March 16, 

2009. 

502 

Economic Stimulus 

Lending Program 

Permits SBA to guarantee up to 90 percent of 

qualifying 7(a) loans made by SBA lenders. 

No loan guarantees under this provision can be 

made 12 months after the date of enactment or 

until appropriated funds are expended. 

Operational on March 16, 

2009. 

503 

Establishment of SBA 

Secondary Market 

Guarantee Authority 

Allows the SBA Administrator to establish a 

secondary market guarantee for pools of first-lien 

504 loans to sell to third-party investors. 

This authority terminates 2 years after enactment. 

Under emergency rulemaking authority, requires 

the Administrator to issue regulations within 15 

days after enactment. 

Missed deadline of March 4, 

2009. 

In process of clearing 

regulations. 

509 

Establishment of SBA 

Secondary Market 

Lending Authority 

Authorizes the SBA Administrator to make loans 

to systemically important broker-dealers that 

operate in the SBA 7(a) secondary market. 

Under emergency rulemaking authority, requires 

the Administrator to issue regulations within 30 

days after enactment. 

This authority terminates 2 years after enactment. 

Missed deadline of March 19, 

2009. 

In process of drafting 

regulations. 

Source: GAO analysis of ARRA administrative provisions and SBA information. 

Note: Defined as key administrative provisions for purposes of this report. 

 

13SBA can guarantee bonds for contracts covering bid, performance, and payment bonds for small and 

emerging contractors who cannot obtain surety bonds through regular commercial channels. Small 

Business Investment Companies, which are licensed by the SBA, are privately owned and managed 

investment funds that use their own capital and funds borrowed at favorable rates through the federal 

government to provide venture capital to small independent businesses. 

Page 7 GAO-09-507R SBA’s Economic Stimulus Provisions
Table 3: Status of SBA’s Implementation of Other Administrative Provisions 

in ARRA 

Provision number 

and title 

Primary requirements and sunset 

provisions SBA’s actions, as of April 16, 2009 

504 

Stimulus for 

Community 

Development Lending 

Authorizes SBA to refinance a limited 

amount of certain existing loans as new 

504 loans. 

Changes an eligibility criterion for 504 

loans from creating one job for every 

$50,000 guaranteed to one job for every 

$65,000 guaranteed. 

The refinancing program and job 

creation goals are permanent changes to 

the 504 loan program. 

Issued notice on April 2, 2009, to 

announce the amended job creation 

eligibility criterion/requirement followed by 

publication in the Federal Register on April 

10, 2009. 

In process of analyzing remaining issues 

and clearing regulations. 

505 

Increasing Small 

Business Investment 

Increases the maximum amount of 

outstanding leverage made available to 

a small business investment company 

(SBIC), to the lesser of 300 percent of 

the SBIC’s private capital or 

$150,000,000. In addition, leverage 

allowed for two or more SBICs operated 

under common control (as determined 

by the Administrator) and that are 

financially sound cannot exceed 

$225,000,000. 

In process of analyzing remaining issues 

and clearing regulations. 

506 

Business Stabilization 

Program 

Creates a new program that allows SBA 

to guarantee loans of $35,000 or less to 

small business concerns that have 

existing qualifying small business loans 

and are suffering immediate financial 

hardship. 

Under emergency rulemaking authority, 

requires the Administrator to issue 

regulations within 15 days after 

enactment. 

The program ends on September 30, 

2010. 

Missed deadline of March 4, 2009. 

In process of clearing regulations. 

508 

Surety Bonds 

Increases maximum contract amount for 

SBA bond guarantee to $5,000,000 and 

up to $10,000,000 if a federal agency 

contracting officer certifies the necessity. 

Establishes conditions of SBA’s liability 

up to $5,000,000 

Requires SBA to study and report on the 

program’s current funding structure. 

Provisions remain in effect until 

September 30, 2010. 

Issued notice on March 27, 2009, to 

increase maximum contract amount for 

SBA bond guarantee to $5,000,000. 

In process of analyzing remaining issues 

and drafting regulations. 

Source: GAO analysis of ARRA administrative provisions and SBA information. 

Implementing ARRA’s Secondary Market Administrative Provisions Involves 

Challenges 

SBA officials cited several factors to explain why the agency had implemented some 

ARRA administrative provisions but had missed statutory deadlines for issuing 

regulations for other provisions. For example, SBA officials said that temporarily 

eliminating or reducing fees for 7(a) and 504 loans and temporarily increasing the 

Page 8 GAO-09-507R SBA’s Economic Stimulus Provisions
Page 9 GAO-09-507R SBA’s Economic Stimulus Provisions

maximum guarantee on 7(a) loans to 90 percent are relatively straightforward 

administrative decisions that pertain to existing agency programs. In contrast, they 

said that other provisions in ARRA require the establishment of new programs, which 

is more complex and must be done on a deliberative and measured basis to help 

ensure that ARRA’s intent is carried out while managing the government’s exposure 

to losses. For example, SBA officials cited the ARRA administrative provisions 

designed to facilitate secondary market activity as such new programs: section 503 

pertaining to extending the guarantee to pools of 504 first-lien mortgages and section 

509 pertaining to loans to systemically important broker-dealers. SBA officials said 

that establishing policies and procedures, hiring and training staff, developing 

information systems and establishing risk mitigation strategies for new programs, 

among other activities, can be complicated and time consuming. 

To illustrate the challenges involved in establishing new programs under ARRA’s 

administrative sections, SBA officials cited section 503’s provisions that extend the 

guarantee to pools of 504 first-lien mortgages, which serve as the collateral for securities 

that are sold on the secondary market. This provision authorizes SBA to guarantee up to 

$3 billion on the first-lien mortgage portion of 504 financing packages. While SBA has 

long guaranteed the debenture portion of such loans and has data on the risks and costs 

associated with doing so, the agency lacks information on the performance of the firstlien portion. Accordingly, SBA has requested data from at least one broker-dealer that 

operates in the secondary market for the 504 first-lien mortgages, to assess the 

performance of such loans over time, including their default rates. It is essential for SBA 

to evaluate the potential risks associated with extending the guarantee to 504 first-lien 

mortgages and determining appropriate fees to offset such risks because ARRA requires 

that the program not result in a net cost to the government under the Federal Credit 

Reform Act of 1990.14 SBA officials also said that the agency has to resolve key policy 

issues associated with extending the guarantee in the 504 program. For example, an 

SBA official said that determining the extent to which broker-dealers and perhaps small 

business lenders share in any losses associated with extending the guarantee on pools of 

first-lien mortgage loans has also been challenging. The official said that risk-sharing 

among SBA loan guarantee program participants is a critical principle and necessary to 

help ensure prudent underwriting. While ARRA mandates that broker-dealers that 

assemble first-lien mortgages under the 504 program into securities retain at least 5 

percent of the potential losses, the SBA official said that it may be appropriate for the 

final rule to require broker-dealers to assume more than 5 percent of the potential losses 

to better ensure sound underwriting. For similar reasons, the SBA official said it may be 

appropriate to require lenders, as is the case in the 7(a) program, to assume 

responsibility for at least some portion of the associated risks on extending the 

guarantee in the 504 program. However, the SBA official also said that requiring brokerdealers and lenders to assume additional risk could limit their participation in the 

program and thereby limit its capacity to generate activity in the secondary market. 

Resource constraints and staff expertise are other challenges that SBA may face in 

finalizing the administrative provisions in ARRA and managing the associated 

programs over time. For example, SBA officials said that the array of requirements 

under ARRA and associated rulemaking deadlines have placed a strain on the 

 

14Federal Credit Reform Act of 1990, as amended, Pub. L. No. 101-508, 104 Stat. 1388-609 (1990), 

codified at 2 U.S.C. §§ 661-661f.
agency’s existing staff and other resources. Similarly, officials from some trade 

groups representing lenders and broker-dealers expressed concerns that SBA lacked 

staffing necessary, particularly in the Office of Capital Access, to carry out ARRA’s 

provisions. We also previously reported on SBA’s reduced staffing levels and the 

impending retirement eligibility of a large portion of its workforce by the end of fiscal 

year 2009.15 In addition, the agency’s Chief Financial Officer (CFO) as well as 

individuals in the CFO’s office that developed estimates used to meet Federal Credit 

Reform Act requirements have recently left the agency. SBA officials said that the 

agency has appointed an acting CFO and they are currently reviewing applications for 

a permanent replacement. In addition, SBA officials said the agency posted a credit 

subsidy specialist job announcement and are currently using contractors to perform 

related work. Generally, the potential loss of expertise through retirements and 

turnover in key positions, coupled with the introduction of new and complex 

programs could challenge the agency’s efforts to achieve the desired purposes. 

SBA Has Various Planning and Coordination Activities Underway and Plans to 

Complete Secondary Market Rulemakings by June 2009 

To help manage the challenges associated with implementing ARRA’s administrative 

provisions, SBA officials said that they have established an intra-agency process that 

is designed to leverage existing resources and expertise and ensure effective 

communication within the agency. Specifically, SBA officials said that they have 

established project teams to address each of the administrative provisions in ARRA 

as well as relevant support teams. The officials told us that each project team is 

responsible for assessing the specific administrative provisions under ARRA, 

including their intended benefits and potential costs, and develop policies, 

procedures, or regulations to implement these provisions. They also told us that the 

support teams perform a variety of activities. For example, the communications 

team works across the agency and with each project team to ensure that information 

about SBA’s implementation of the administrative provisions is clear to key 

constituencies including internal staff and the agency’s resource partners, lenders, 

and trade groups. According to SBA officials, an agency steering committee that 

includes representatives from five key offices--Capital Access, the Chief Information 

Officer, Chief Financial Officer, General Counsel, and Communications--oversees the 

work of the teams and is responsible for the final approval of all decisions that 

pertain to the implementation of ARRA’s administrative provisions. 

SBA officials also said that they are working closely with the Department of the Treasury 

and the Federal Reserve to implement certain of ARRA’s administrative provisions and 

related federal initiatives to facilitate small business lending. For example, SBA officials 

said that they have consulted with Treasury and provided data to the department 

regarding the implementation of Treasury’s planned purchases under the TARP of up to 

$15 billion in SBA-guaranteed securities. Another SBA official said that the agency has 

worked with the Federal Reserve on its efforts to promote small business lending. 

 

15GAO-08-995. 

Page 10 GAO-09-507R SBA’s Economic Stimulus Provisions
According to SBA, the draft rules for the secondary market provisions are currently 

undergoing internal SBA review. SBA officials said that they expect the OMB review 

process to be complete and the rules issued by June 2009. 

SBA Is Considering Various Performance Measures to Evaluate Potential 

Impacts on Secondary Market Liquidity once Authorities Are Fully 

Implemented 

Because SBA has not completed ARRA’s key secondary market provisions, it is not 

possible at this time to assess their impact on the secondary markets for small 

business loans. Such an assessment will only be possible when the regulations are 

issued and market participants have had some time to evaluate and decide whether to 

participate in the program. For example, broker-dealers that participate in the 

secondary market for SBA-guaranteed loans and may be designated by SBA as 

systemically important under ARRA section 509 will have to determine whether the 

terms SBA may establish for such loans, such as the rate offered and profit margin 

earned with selling securities to investors, are attractive. 

According to an SBA official, the agency is considering various performance 

measures that might be used to assess the longer-term impacts of ARRA’s 

administrative provisions on the finance market for SBA 7(a) and 504 first-lien 

mortgage loans, including the relevant secondary markets. For example, an SBA 

official said that the agency may collect relevant secondary market performance data, 

such as the percentage of 7(a) and 504 first-lien mortgage loans that are sold in 

secondary markets and premium and fee information for lenders, broker-dealers, and 

investors. Presumably, if the authorities are successful, then the percentage of 7(a) 

and 504 first-lien mortgage loans sold in the secondary markets will increase as will 

the premiums that investors are willing to pay for SBA-guaranteed securities. The 

SBA official also said that the agency may collect loan performance data over time, 

such as default data on 504 first-lien mortgage loans, to help determine whether the 

programs are being operated at a net zero cost to the government as required. 

However, it may be difficult to isolate the effect of the ARRA provisions from general 

changes in the economy affecting the secondary markets or actions by other federal 

entities. Changes in the market for SBA loans could be affected by other security 

market activity such as competing sales of other asset-backed securities. Both 

Treasury and the Federal Reserve have also announced plans to directly purchase or 

help finance individual investors’ purchase of billions of dollars in SBA-guaranteed 

securities. Specifically, as part of the Consumer and Business Lending Initiative, 

Treasury announced plans on March 16, 2009, to use TARP funds to purchase up to 

$15 billion in securities backed by the guaranteed portions of 7(a) loans, securities 

packaged from 504 first-lien mortgages, and 504 first-lien securities that receive new 

SBA guarantees under ARRA. Also, under this initiative, the Federal Reserve with 

Treasury support plans to lend funds to investors through the Term Asset-Backed 

Securities Loan Facility (TALF) program to finance the purchase of a variety of assetbased securities, including SBA guaranteed securities. Given that the TARP and 

TALF programs are substantially larger than SBA’s provisions under ARRA (e.g., 

Treasury’s TARP program may involve the direct purchase of $15 billion in SBAguaranteed securities, whereas ARRA limits SBA’s amount guaranteed on the firstPage 11 GAO-09-507R SBA’s Economic Stimulus Provisions
lien mortgage portions of 504 financing packages to $3 billion), it may be very 

difficult to determine the extent that any pick up in small business lending activity 

may be attributable solely to the SBA ARRA initiatives. 

Going forward, SBA officials said they will continue to coordinate with Treasury and the 

Federal Reserve as the programs to facilitate small business finance are developed. Such 

coordination is important to maximize the potential overall effect of these programs. 

While the TARP and TALF programs largely focus on the direct purchase of SBAguaranteed securities in the secondary markets or providing incentives for private sector 

investors to do so, SBA under the ARRA provisions is largely focused on facilitating 

lenders’ capacity to originate small business loans and broker-dealers capacity to 

increase their secondary market activities. To the extent that the federal entities 

involved in these initiatives--Treasury, the Federal Reserve, and SBA--experience delays 

in their program implementation efforts, then an opportunity to maximize small business 

financing as part of an integrated approach will be missed.

Agency Comments

We provided SBA a draft of this report for review and comment. In written comments, 

which are reprinted in enclosure I, the SBA Administrator said that the draft report 

presented a fair and balanced discussion of the agency’s efforts thus far in implementing 

ARRA’s administrative provisions. The Administrator also provided additional 

information to demonstrate SBA’s commitment to implementing the administrative 

provisions, organizational effort to do so, and improvements resulting from provisions 

already implemented. For example, she stated that SBA has kept the Congress, other 

oversight authorities, and the public informed of SBA’s progress as well as establishing 

project and support teams with specific implementation responsibilities. In addition, the 

Administrator stated that the impact of actions taken four weeks ago to increase 

guarantee percentages and lower program fees appears to be strong with both the 7(a) 

and 504 loan programs experiencing some growth in loan volume over this period. SBA 

also provided technical comments, which we incorporated as appropriate. 

_________________________________ 

We are sending copies of this report to interested congressional committees and 

other parties. In addition, the report will be available at no charge on GAO’s Web site 

at http://www.gao.gov. 

If you or your staffs 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. Major contributors to this 

report were Wesley Phillips, Paige Smith, Janet Fong, Tomas Garcia, Alexandra MartinArseneau, Ben Bolitzer, Tania Calhoun, Marcia Carlsen, and Barbara Roesmann. 

William B. Shear 

Director, Financial Markets and 

 Community Investment 

Enclosure 

Page 12 GAO-09-507R SBA’s Economic Stimulus Provisions
List of Congressional Committees 

The Honorable Joseph I. Lieberman 

Chairman 

The Honorable Susan M. Collins 

Ranking Member 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Mary L. Landrieu 

Chair 

The Honorable Olympia J. Snowe 

Ranking Member 

Committee on Small Business and Entrepreneurship 

United States Senate 

The Honorable Richard J. Durbin 

Chairman 

The Honorable Sam Brownback 

Ranking Member 

Subcommittee on Financial Services and General Government 

Committee on Appropriations 

United States Senate 

The Honorable Edolphus Towns 

Chairman 

The Honorable Darrell Issa 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

The Honorable Nydia M. Velázquez 

Chairwoman 

The Honorable Sam Graves 

Ranking Member 

Committee on Small Business 

House of Representatives 

The Honorable José E. Serrano 

Chairman 

The Honorable Jo Ann Emerson 

Ranking Member 

Subcommittee on Financial Services and General Government 

Committee on Appropriations 

House of Representatives 

Page 13 GAO-09-507R SBA’s Economic Stimulus Provisions
Enclosure I: Comments from the Small Business Administration 

Page 14 GAO-09-507R SBA’s Economic Stimulus Provisions
(250451) 

Page 15 GAO-09-507R SBA’s Economic Stimulus Provisions
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