Testimony 

Before the Committee on Small Business 

and Entrepreneurship, U.S. Senate 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 9:30 a.m. EDT 

Wednesday, April 30, 2003 SMALL BUSINESS 

ADMINISTRATION 

Progress Made but 

Improvements Needed in 

Lender Oversight 

Statement of Davi M. D'Agostino 

Director, Financial Markets and Community Investments 

GAO-03-720T 
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Page 1 GAO-03-720T 

Madam Chair and Members of the Committee: 

I am pleased to be here today at this roundtable to discuss the results of 

our work on the Small Business Administration’s (SBA) oversight of its 

7(a) loan program lenders, particularly those who participate in the 

Preferred Lenders Program or PLP. SBA delegates full authority to 

preferred lenders to make loans without prior SBA approval. In fiscal year 

2002, preferred lenders approved 55 percent of the dollar value of all 7(a) 

loans—about $7 billion. Small businesses are certainly a vital part of the 

nation’s economy. According to SBA, they generate more than half of the 

nation’s gross domestic product and are the principal source of new jobs 

in the U.S. economy. In turn, SBA’s mission is to maintain and strengthen 

the nation’s economy by aiding, counseling, assisting, and protecting the 

interests of small businesses. Providing small businesses with access to 

credit is a major avenue through which SBA strives to fulfill its mission. 

Strong oversight of lenders by SBA is needed to protect SBA from 

financial risk and to ensure that qualified borrowers get 7(a) loans. SBA 

has a total portfolio of about $46 billion, including $42 billion in direct and 

guaranteed small business loans and other guarantees.1

 Because SBA 

guarantees up to 85 percent of the 7(a) loans made by its lending partners, 

there is risk to SBA if the loans are not repaid. SBA must ensure that 

lenders provide loans to borrowers who are eligible and creditworthy to 

protect the integrity of the 7(a) program. 

Our statement today is based on the report we issued December 9, 2002, 

Small Business Administration: Progress Made but Improvements 

Needed in Lender Oversight (GAO-03-90). The report and our remarks will 

focus on our evaluation of (1) SBA’s 7(a) lender oversight program and (2) 

SBA’s organizational alignment for conducting oversight of preferred 

lenders and Small Business Lending Companies (SBLC).2

 In addition, we 

will comment on SBA’s latest response to our findings and 

recommendations.3

 Our overall objective is to provide the Committee with 

information and perspectives to consider as it moves forward on SBA 

reauthorization. 

 1

As of September 30, 2002. 

2

SBLCs, which make only 7(a) loans, are privately owned and managed, nondepository, 

lending institutions that are licensed and regulated by SBA but not generally regulated or 

examined by financial institution regulators. 

3

Hector Barreto, SBA Administrator, letter to The Honorable Susan Collins, Chair, 

Committee on Government Affairs, U.S. Senate, March 12, 2003. 
Page 2 GAO-03-720T 

In analyzing SBA’s oversight of its preferred lenders, we defined oversight 

to include both SBA’s reviews of preferred lenders for compliance with 

SBA rules and regulations and SBA’s evaluations of lenders to decide their 

initial and continued participation in the PLP. We focused our reviews in 

part to follow up on recommendations made in our June 1998 report, 

where we found that SBA was doing few reviews of its preferred lenders.4

We analyzed a sample of review reports and PLP guidance, and review and 

lending data to the extent that they were available. We also interviewed 

SBA headquarters and regional staff, PLP lenders, and representatives of 

the National Association of Government Guaranteed Lenders. 

SBA has made progress in developing its lender oversight program, but 

there are still areas in need of improvement. While SBA has identified 

appropriate elements for an effective lender oversight program, it has been 

slow to change programs and procedures to fully incorporate all of these 

elements. In addition, financial risk management issues have become more 

critical for SBA, as its current loan programs focus on partnering with 

lenders, primarily banks, that make loans guaranteed up to 85 percent by 

SBA. However, our work showed that 

• SBA had not yet consistently incorporated adequate measures of financial 

risk into the PLP review process or the SBLC examination program. 

• The current PLP review process, which SBA uses to ensure compliance 

with the program mission, rules, and regulations, involves a cursory 

review of documentation maintained in lenders’ loan files rather than a 

qualitative assessment of borrower creditworthiness or eligibility. 

• SBA’s standards for borrower eligibility (the “credit elsewhere” 

requirement) are broad and therefore subject to interpretation. 

• SBA had not developed clear enforcement policies for preferred lenders or 

SBLCs that would specifically describe its response in the event that 

reviews discover noncompliance or safety and soundness problems. 

 4

U.S. General Accounting Office, Small Business Administration: Few Reviews of 

Guaranteed Lenders Have Been Conducted, GAO/GGD-98-85 (Washington, D.C.: June 

1998). 

Summary 
Page 3 GAO-03-720T 

• SBA had been slow to finalize and issue SBLC examination reports.5 In 

addition, SBA had been slow to respond to recommendations for 

improving the SBLC examination program. 

Without continued improvement to better enable SBA to assess the 

financial risk posed by 7(a) loans and to ensure that its lending partners 

are making loans to eligible small businesses, SBA will not have a 

successful lender oversight program. 

Although SBA has listed the oversight of its lending partners as an agency 

priority, the function does not have the necessary organizational 

independence or resources to accomplish its goals. In our past work 

analyzing organizational alignment and workload issues, we have 

described the importance of (1) tying organizational alignment to a clear 

and comprehensive mission statement and strategic plan and (2) providing 

adequate resources to accomplish the mission. However, two different 

offices—Lender Oversight and Financial Assistance, both of which are in 

the Office of Capital Access (OCA)—carry out SBA’s lender oversight 

functions (see fig. 1). OCA also promotes and implements SBA’s lending 

programs. This alignment presents a possible conflict because PLP 

promotion and operations are housed in the same office that assesses 

lender compliance with SBA safety and soundness and mission 

requirements. Additionally, split responsibilities within OCA and limited 

resources have impeded SBA’s ability to complete certain oversight 

responsibilities, which could result in heightened risk to its portfolio or 

lack of comprehensive awareness of portfolio risk. 

Our report made recommendations to improve SBA’s oversight of its 

lenders. Specifically, we recommended that SBA: 

• incorporate strategies into its review process to adequately measure the 

financial risk lenders’ portfolios of guaranteed SBA loans pose to SBA, 

• develop specific criteria to apply to the credit elsewhere standard used to 

determine borrower eligibility, 

 5

Since 1999, SBA has had an agreement with the Farm Credit Administration (FCA) to 

conduct safety and soundness examinations of the SBLCs. FCA is an independent agency 

within the executive branch; it regulates Farm Credit System institutions. FCA also 

contracts with other government agencies to provide examination services. 
Page 4 GAO-03-720T 

• perform qualitative assessments of lenders’ performance and lending 

decisions, 

• clarify its enforcement authority and specify conditions under which it 

would take enforcement action, 

• make the preferred lender program more accessible to large national 

lenders, and 

• better emphasize lender oversight in its organizational alignment to 

provide an oversight office with greater autonomy within SBA to match 

the growing importance of lender oversight. 

SBA essentially disagreed with part or all of our recommendations for 

improving its assessments of lenders, said that it was “working to address” 

issues we raised about enforcement and accessibility of the preferred 

lender program, and disagreed with our recommendation to separate 

lender oversight functions and responsibilities from preferred lender 

program management functions. 
Page 5 GAO-03-720T 

Figure 1: Preferred Lender Oversight Responsibilities within OCA 

The 7(a) loan program, which is authorized by Section 7(a) of the Small 

Business Act, is SBA’s largest business loan program.6

 It is intended to 

serve small business borrowers who otherwise cannot obtain financing 

under reasonable terms and conditions from the private sector. In 

administering the 7(a) program, SBA has evolved from making guaranteed 

loans directly to depending on lending partners, primarily banks.7

 Under 

7(a), SBA provides guarantees of up to 85 percent on loans made by 

participating lenders. 

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

and preferred. SBA evaluates and grants preferred lender status to 7(a) 

 6

15 U.S.C. § 636 (2000). 

7

Other types of financial institutions, such as savings banks, are lending partners. In this 

statement, we refer to all financial institutions that make 7(a) loans as banks. 

Background 
Page 6 GAO-03-720T 

lenders after receiving nominations and reviews from its 70 district offices 

and a regional processing center. Of the three categories, preferred lenders 

have the most autonomy in that they can make loans without prior SBA 

review or approval. Most preferred lenders are banks that have their own 

safety and soundness regulators, such as the Office of the Comptroller of 

the Currency. Those regulators, however, may not focus on the 7(a) loans 

that SBA guarantees when they examine the bank. The other preferred 

lenders, which are SBLCs, have no regulator other than SBA—making SBA 

oversight more critical. As of August 2002, SBA had over 400 preferred 

lenders. To give you an idea of this program’s scope, in fiscal year 2002, 

7(a) loan approvals totaled approximately $12.2 billion, of which preferred 

lenders approved $6.7 billion. However, preferred lending activity is 

concentrated in a few larger institutions. Less than 1 percent of 7(a) 

lenders account for more than 50 percent of 7(a) dollar volume 

outstanding. According to SBA, most of these lenders are preferred 

lenders. 

Two offices within SBA have primary responsibility for 7(a) lender 

oversight—the Office of Lender Oversight (OLO) and the Office of 

Financial Assistance (OFA). OLO is responsible for many oversight 

functions, such as managing all headquarters and field office activities 

regarding lender reviews. However, OFA has retained some oversight 

responsibilities. OFA’s current role in lender oversight is to provide final 

approval of lenders’ PLP status. Lenders are granted PLP status in specific 

SBA districts for a period of 2 years or less. OFA collects information 

about the lender prepared by the Sacramento Processing Center, with 

input from one or more of SBA’s 70 district offices, and decides whether to 

renew a lender’s PLP status or to grant status in an additional district. OFA 

may also discontinue a lender’s PLP status. 

Other lenders participating in the 7(a) program are subject to a different 

oversight regime. Specifically, SBA divides SBLC program functions 

between OLO and OFA. OLO is responsible for SBLC on-site examination, 

and OFA handles day-to-day program management and policymaking. 

Ultimate responsibility for enforcement of corrective actions rests with 

OCA. As participants in the 7(a) program, SBLCs are subject to the same 

review requirements as other 7(a) lenders, and they are also subject to 

safety and soundness oversight by SBA. 
Page 7 GAO-03-720T 

SBA has identified goals for its lender oversight program that are 

consistent with appropriate standards for an oversight program; however, 

SBA had not yet established a program that is likely to achieve them. Since 

our last review, SBA had made progress in developing its lender oversight 

program, but there are still areas in need of improvement if SBA is to 

develop a successful program. SBA has highlighted risk management in its 

strategy to modernize the agency; however, PLP reviews are not designed 

to evaluate financial risk, and the agency has been slow to respond to 

recommendations made for improving its monitoring and management of 

financial risk—posing a potential risk to SBA’s portfolio. PLP reviews are 

designed to determine lender compliance with SBA regulations and 

guidelines, but they do not provide adequate assurance that lenders are 

sufficiently assessing eligibility and creditworthiness of borrowers. 

Although SBA has identified problems with preferred lender and SBLC 

lending practices, it has not developed clear policies that would describe 

enforcement responses to specific conditions. Thus, it is not clear what 

actions SBA would take to ensure that preferred lenders or SBLCs address 

lending program weaknesses. Although the process for certifying lenders 

for PLP status—another means by which SBA oversees lenders—has 

become better defined and more objective, some lenders told us they 

continue to experience confusing and inconsistent procedures during this 

process due to varying recommendations from field offices. 

Since our June 1998 report, SBA has responded to a number of 

recommendations for improving lender oversight by developing guidance, 

establishing OLO, and doing more reviews. SBA developed “Standard 

Operating Procedures” (SOP) for oversight of SBA’s lending partners and 

the “Loan Policy and Program Oversight Guide for Lender Reviews” in 

October 1999. 

SBA established OLO in fiscal year 1999 to coordinate and centralize 

lender review processes for PLP and SBLC oversight. OLO created a 

“Reviewer Guide” for personnel engaged in PLP reviews and does training 

for all SBA staff involved in conducting preferred lender reviews. OLO 

officials said that to effectively oversee and monitor SBA lenders, they also 

evaluate lender-generated risk to the SBA portfolio, work with SBA 

program offices to manage PLP oversight operations, and plan to conduct 

regular and systematic portfolio analysis using a new loan monitoring 

system. Additionally, to minimize the number of visits SBLCs receive 

during a year, OLO combined PLP reviews with SBLC examinations 

performed by FCA. 

Lender Oversight Is 

Not Achieving All of 

Its Goals 

SBA Has Made Progress in 

Developing Its Lender 

Oversight Function 
Page 8 GAO-03-720T 

In another effort to improve the lender review process, SBA developed an 

automated, 105-item checklist that is designed to make its analysis more 

objective. The questionnaire addresses lender organizational structure, 

policies, and controls, but the answers are provided in a “yes-no” format 

and generally refer to the presence or absence of specific documents. SBA 

noted that the format makes assessments of lenders more consistent and 

objective. However, we note that without a more substantive method of 

evaluating lender performance, this approach does not provide a 

meaningful assessment. 

SBA also has increased the number of PLP reviews performed. In June 

1998, we reported that SBA had not reviewed 96 percent of 7(a) lenders, 

including preferred lenders, in the districts we visited. SBA reviewed 385 

reviews of 449 preferred lenders in its 2001-- 2002 review year.8

While elements of SBA’s oversight program touch on the financial risk 

posed by preferred lenders, including SBLCs, weaknesses in the program 

limit SBA’s ability to focus on, and respond to, current and future financial 

risk to their portfolio. Neither the PLP review process nor SBA’s off-site 

monitoring efforts adequately focus on the financial risk posed by 

preferred and other lenders to SBA. SBA oversight of SBLCs is charged 

with monitoring how SBLCs administer their credit programs, identifying 

potential problems, and keeping SBA losses to an acceptable level. 

However, SBA’s progress in reporting examination results in a timely 

manner and implementing other program improvements limits the 

effectiveness of SBA’s SBLC oversight. 

SBA officials stated that PLP reviews are strict compliance reviews that 

are not designed to measure the lenders’ financial risk. Our review and 

that of SBA’s Inspector General (IG) confirmed this. The PLP review 

serves as SBA’s primary internal control mechanism to determine whether 

preferred lenders are processing, servicing, and liquidating loans 

according to SBA standards and whether such lenders should participate 

in the programs. While the review has questions that touch on the financial 

risk of a given loan, review staff are not required to answer them; and SBA 

guidance explicitly states that the answers to the questions are for 

 8

SBA’s review year runs from April 1 to March 31. SBA officials explained that the initial 

date of its contract with the vendor that conducts PLP reviews began on April 1, and they 

have since used this as the beginning of their review year. 

SBA’s Lender Oversight 

Does Not Adequately 

Focus on Financial Risk 
Page 9 GAO-03-720T 

research purposes only and are not to be considered in making any 

determinations about the lender. By not including an assessment of the 

financial risk posed by individual lenders during PLP reviews, SBA is 

missing an opportunity to gather information that could help predict PLP 

lenders’ future performance, thereby better preparing SBA to manage the 

risk to its portfolio. The SBA IG also suggested that financial risk and 

lender-based risk should be considered as part of a comprehensive 

oversight program.9

SBA’s off-site monitoring efforts do not adequately assess the financial risk 

posed by PLP and other lenders. SBA currently uses loan performance 

benchmarking and portfolio analysis to serve as its primary tools for offsite monitoring. While SBA officials stated that loan performance 

benchmarks are based on financial risk and serve as a measure to address 

a lender’s potential risk to the SBA portfolio, we found that the 

benchmarks were not consistently used for this purpose.10 In addition, we 

found that OLO does not perform routine analysis of SBA’s portfolio to 

assess financial risk. At the time of our review, staff produced ad-hoc 

reports to analyze aggregate lending data to look for trends and to try to 

anticipate risk. 

Currently, FCA staff responsible for SBLC safety and soundness 

examinations also perform PLP reviews at SBLCs—these reviews are the 

same ones that SBA contractors perform at preferred lenders and employ 

the same review checklist.11 Upon the completion of its examinations, FCA 

provides a draft report to SBA for comment, incorporates any changes, 

and then provides a final report to SBA, which, in turn, issues a final report 

to the SBLC. 

 9

The SBA Inspector General defines financial risk as the composite risk posed by loans and 

guarantees actually booked to SBA’s portfolio and how they perform over time, and defines 

lender-based risk as the potential financial injury due to the lender’s failure to perform its 

role properly. U.S. Small Business Administration, Office of Inspector General, Audit 

Report PLP Oversight Process, Report Number 1-19, (Washington, D.C.: September 27, 

2001). 

10The five benchmarks are ratios for currency, delinquency, default, liquidation, and loss. 

Each is defined in SBA’s SOP. 

11FCA conducts broad-based examinations and evaluates each SBLC’s capital adequacy, 

asset quality, management, earnings, and liquidity. The examinations are similar to safety 

and soundness examinations performed by bank and government-sponsored enterprise 

regulators. 

SBA Has Not Eliminated 

Weaknesses in SBLC 

Oversight That Pose a 

Threat to the SBA 

Portfolio 
Page 10 GAO-03-720T 

SBA has not eliminated weaknesses in SBLC oversight, which were cited 

by us and the SBA IG. We, and the SBA IG, found that final SBLC 

examination reports were not issued in a timely manner. SBA’s IG 

reported that final reports for fiscal year 2001 SBLC examinations were 

not issued until February 2002, 10 months after OLO received the first 

draft report from FCA.12 Our work confirmed these findings. We found that 

OLO does not maintain standards for the timely issuance of examination 

reports. However, OLO has recently developed draft customer service 

goals calling for SBLC examination reports to be finalized within 90 days 

of receipt of a draft report from FCA. However, as of August 2002, none of 

the examination reports from fiscal year 2002 had been issued. According 

to the IG, because of the delays in finalizing the reports and SBA’s policy 

to delay any necessary enforcement actions until final reports are issued, 

two SBLCs were allowed to continue operating in an unsafe and unsound 

manner, despite early identification of material weaknesses during fiscal 

year 2001 examinations. The effectiveness of any examination program is 

measured, to a large degree, on its ability to identify and promptly remedy 

unsafe and unsound conditions. By delaying reporting and remedial action, 

SBA has significantly limited the effectiveness of its SBLC oversight 

program. 

SBA has been slow to implement recommendations from FCA for 

improving the SBLC examination program. In addition to examining 

SBLCs, FCA was asked by SBA to provide recommendations for changes 

in the SBLC program. Each year FCA provides its views in a 

comprehensive report. FCA’s September 1999 report made 15 

recommendations, 12 of which SBA agreed to implement.13 We reviewed 

the reports for fiscal years 2000 and 2001, in which FCA made additional 

recommendations with which SBA agreed. Yet, the 2001 report still lists 8 

recommendations from the 1999 report and 2 from the 2000 report. SBA 

officials explained that limited resources have contributed to the delay in 

implementation of many of these recommendations. 

 12U.S. Small Business Administration, Office of Inspector General, Improvements Are 

Needed in the Small Business Lending Company Oversight Process, Report No. 2-12 

(Washington, D.C.: March 20, 2002). 

13We listed the 15 recommendations in our November 2000 report. See U.S. General 

Accounting office, Small Business Administration: Actions Needed to Strengthen Small 

Business Lending Company Oversight, GAO-01-192 (Washington, D.C.: November 2000). 
Page 11 GAO-03-720T 

Assessing whether a borrower is eligible for 7(a) assistance is difficult 

because the requirements are broad and variable, making a qualitative 

assessment of a lender’s decision by a trained reviewer all the more 

important. SBA regulations require a lender to attest to the borrower’s 

demonstrated need for credit by determining that the desired credit is 

unavailable to the borrower on reasonable terms and conditions from 

nonfederal sources without SBA assistance.14 These “credit elsewhere” 

provisions are particularly difficult to assess and must be determined prior 

to assessing other credit factors.15 SBA guidance also requires preferred 

lenders to certify that credit is not otherwise available and to retain the 

explanation in the borrower file.16 SBA does provide guidance on factors 

that may contribute to a borrower being unable to receive credit 

elsewhere. Factors that lenders should consider include the following: 

• The business requires a loan with a longer maturity than the lender’s 

policy permits; 

• The requested loan exceeds either the lender’s legal limit or policy limit, 

regarding amounts loaned to one customer; 

• The lender’s liquidity depends upon selling the guaranteed portion of the 

loan on the secondary market; 

• The collateral does not meet the lender’s policy requirements because of 

its uniqueness or low value; 

• The lender’s policy normally does not allow loans to new ventures or 

businesses in the applicant’s industry; and 

• Any other factors relating to the credit that in the lender’s opinion cannot 

be overcome except by receiving a guaranty. 

Based on these criteria, the credit elsewhere test could always be satisfied 

by structuring an SBA guaranteed loan so that its terms and conditions 

differ from those available on the commercial market. As a result, these 

 14The SBA regulations do not further define “reasonable terms and conditions.” See also 13 

C.F.R. Section 120.101. 

15Section 7(a) of the Small Business Act states that “no financial assistance shall be 

extended if the applicant can obtain credit elsewhere.” 15 U.S.C. Section 636(a). 

16SBA SOP 50-10(4)(E). 

PLP Reviews Do Not 

Provide Adequate 

Assurance That Lenders 

Are Sufficiently Assessing 

Eligibility and 

Creditworthiness 
Page 12 GAO-03-720T 

loans could be made available to businesses that could obtain credit 

elsewhere on reasonable market terms and conditions, although not the 

same terms and conditions offered with the SBA guarantee. 

SBA officials stated that the credit elsewhere requirements are designed to 

be broad so as to not limit a lender’s discretion and allow flexibility, 

depending upon geographic region, economic conditions, and type of 

business. For example, SBA officials said that when credit is more readily 

available, businesses that require SBA assistance might be held to a 

different standard, thereby making it more difficult to obtain the SBA 

guarantee than when credit is tighter. Nonetheless, the flexibility that 

lenders have along with the difficulty in assessing lenders’ credit 

elsewhere decisions further support the need for developing specific 

criteria for a credit elsewhere standard. These changes would facilitate a 

more qualitative assessment of eligibility decisions made by preferred 

lenders. 

Moreover, because it is a cursory review of documents in the file, the PLP 

review also does not qualitatively assess a lender’s credit decision. 

Preferred lenders are required to perform a thorough and complete credit 

analysis of the borrower and establish repayment terms on the loan in the 

form of a credit memorandum. SBA guidance requires, at a minimum, 

discussion in the credit memorandum of a borrower’s capitalization or 

proof that the borrower will have adequate capital for operations and 

repayment, as well as capable management ability.17 SBA officials said that 

lender review staff focus on the lender’s process for making credit 

decisions rather than the lender’s decision. SBA officials said that it is 

unlikely that the review would result in a determination that the loan 

should not have been made. An SBA official stated that review staff would 

not perform an in-depth financial analysis to assess the lender’s credit 

decision and that a lender’s process would only be questioned in the case 

of missing documentation. For example, review staff would cite a lender if 

it did not document the borrower’s repayment ability. 

Some lenders we interviewed criticized the lack of technical expertise of 

contract review staff. The lenders stated that review staff was unable to 

provide additional insight into material compliance issues during the 

review because of a lack of technical knowledge of the underwriting 

process and requirements. For example, one lender said he was cited for 

 17SBA SOP 50-10(4). 
Page 13 GAO-03-720T 

not signing a credit elsewhere statement, but the reviewer did not evaluate 

a financial statement in the file substantiating the credit elsewhere 

assessment. 

To improve PLP and SBLC oversight, 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 lender 

performance and lending decisions. SBA stated that it believes the existing 

statutes, regulations, policies, and procedures provide sufficient guidance 

to lenders. These are the same sources we analyzed and found to be broad, 

making a qualitative assessment of a lender’s decisions difficult. SBA has 

responded that it does measure financial risk of SBLCs through the safety 

and soundness examinations conducted by FCA and that the PLP lender 

reviews do estimate some degree of financial risk. We had noted both of 

these measures in our December 9, 2002 report. We also noted that SBA 

had not acted on suggestions that FCA had made to enhance SBA’s 

oversight of SBLCs. Only 3 of 15 preferred lender review reports that we 

reviewed provided any evidence of such an assessment. And, we note, 

SBA’s review guidance does not require such a review. Thus, our 

recommendations remain open. 

SBA has authority to suspend or revoke a lender’s PLP status for reasons 

that include unacceptable loan performance; failure to make enough loans 

under SBA’s expedited procedures; and violations of statutes, regulations, 

or SBA policies.18 However, SBA has not developed policies and 

procedures that describe circumstances under which it will suspend or 

revoke PLP authority or how it will do so. SBA guidance does not include 

specific follow-up procedures for PLP lenders that receive poor review 

ratings, but it does discuss recommended patterns of follow-up. SBA 

officials said that, in practice, they request action plans to address 

deficiencies for any ratings of “minimally in compliance” and “not in 

compliance.” In addition, lenders with ratings of not in compliance are to 

receive follow-up reviews. SBA officials explained that because they want 

to encourage lenders to participate in PLP, they prefer to work out 

problems with lenders, and therefore rarely terminate PLP status. And, 

where a lender persists in noncompliance, SBA will generally allow the 

status to expire, rather than terminating it. However, without clear 

 1813 C.F.R. § 120.455 (2002). 

SBA Has Not Developed 

Clear Enforcement 

Policies for Preferred 

Lenders and SBLCs 
Page 14 GAO-03-720T 

enforcement policies, PLP lenders cannot be certain of the consequences 

of certain ratings and they may not take the oversight program seriously. 

In November 2000, we recommended that the SBLC examination program 

could be strengthened by clarifying SBA’s regulatory and enforcement 

authority regarding SBLCs. Although it has the authority to do so, SBA has 

yet to develop, through regulation, clear policies and procedures for taking 

supervisory actions. By not expanding the range of its enforcement 

actions—which it can do by promulgating regulations—SBA is limited in 

the actions it can take to remedy unsafe and unsound conditions in SBLCs. 

SBA regulations only provide for revocation or suspension of an SBLC 

license for a violation of law, regulation, or any agreement with SBA. 

Without less drastic measures, SBA has a limited capability to respond to 

unsatisfactory conditions in an SBLC. Unlike SBA, federal bank and thrift 

regulators use an array of statutorily defined supervisory actions, short of 

suspension or revocation of a financial institution’s charter or federal 

deposit insurance, if an institution fails to comply with regulations or is 

unsafe or unsound. 

We recommended that SBA provide, through regulation, clear policies and 

procedures for taking enforcement actions against preferred lenders and 

SBLCs in the event of continued noncompliance with SBA’s regulations. 

Most recently, SBA has responded that it does have clear policies and 

procedures; however, the agency intends to expand upon them. We will 

continue to followup and monitor SBA’s response to this recommendation. 

SBA’s preferred lender certification process begins when a district office 

serving the area in which a lender’s office is located nominates the lender 

for preferred status or when a lender requests a field office to consider it 

for PLP status. The district will then request performance data regarding 

the lender from SBA’s Sacramento Processing Center. The processing 

center then provides the district office with data required to fill in part of a 

worksheet developed for the nomination process. The district office sends 

the completed worksheet, along with other required information, back to 

the processing center. The processing center analyzes the nomination and 

sends it with a recommendation to OFA for final decision. 

According to SBA’s SOP, in making its decision, OFA considers whether 

the lender (1) has the required ability to process, close, service, and 

liquidate loans; (2) has the ability to develop and analyze complete loan 

packages; and (3) has a satisfactory performance history with SBA. OFA 

also considers whether the lender shows a substantial commitment to 

SBA’s Process for 

Administering PLP Status 

Presents Lenders with 

Challenges 
Page 15 GAO-03-720T 

SBA’s “quality lending goals,” has the ability to meet the goals, and 

demonstrates a “spirit of cooperation” with SBA. 

OFA and district office staff said that although district offices do not 

provide final approval of PLP status for lenders in their districts, they 

generally play an important role and district input is given significant 

weight. Most of the district office staff we interviewed believed that they 

had considerable influence on OFA’s decision regarding a lender’s PLP 

status. 

A PLP lender may request an expansion of the territory in which it can 

process PLP loans by submitting a request to the Sacramento Processing 

Center. The processing center will obtain the recommendation of each 

district office in the area into which the PLP lender would like to expand 

its PLP operations. The processing center will forward the district 

recommendations to OFA for a final decision. 

Lenders we interviewed had varying experiences in gaining and 

maintaining their PLP status. While some lenders expressed general 

satisfaction with the process and their understanding of it, others cited 

problems. For example, several PLP lenders we interviewed said that they 

had their PLP status declined in a specific district, although they had 

already achieved PLP status in other districts. In some instances, lenders 

said that they did not understand why they had been turned down, in light 

of their proven performance. These lenders commented that some district 

offices were not open to working with lenders from outside their districts 

while others were. In our interviews with district offices, we sometimes 

heard differing descriptions from district office officials on the level of 

commitment required of a lender who wished to gain PLP status in their 

district. Some district officials said that a lender had to maintain a physical 

presence in the district, while others disagreed. However, all district office 

officials expressed the need for some regular discussion with a lender to 

understand the lender’s commitment to the district. 

Larger lenders, as well as the National Association of Government 

Guaranteed Lenders (NAGGL), noted the administrative burden of 

maintaining relationships with many of the 70 district offices to maintain 

PLP status. The lenders noted that to receive and maintain PLP status in a 

given district, it is generally necessary to meet at least annually with 

district office staff to discuss status and plans for future lending. For some 

large national lenders, this can amount to 40 or more visits per year. In 

response to this concern, NAGGL has recommended a national PLP status 

based on a uniform national standard to ease the administrative burdens 
Page 16 GAO-03-720T 

on large national lenders that account for the largest volume of PLP 

lending. 

District office officials that we interviewed generally acknowledged that 

they want to understand a lender’s plans for their district before agreeing 

to endorse a lender that wishes to gain PLP status in their district. District 

officials explained that PLP status is an important marketing tool for 

lenders. As advocates for the credit needs of small businesses in their 

districts, the district office officials see PLP status as a “carrot” to 

encourage lenders to make a sufficient volume of loans to their district. 

They suggest that a “national” PLP lender might make a large volume of 

PLP loans nationwide, but none in their district. The officials reason that 

without a district-by-district PLP status, district offices would lose an 

important tool for encouraging lenders to respond to credit needs in their 

districts. 

To hold lenders to a uniform national standard while maintaining 

individual district office’s preferences and reinforcing their relationships 

with PLP lenders, SBA developed a formula-driven lender evaluation 

worksheet to facilitate the nomination, expansion, and renewal processes. 

The worksheet replaces the former procedure that involved written 

recommendations from district officials; however, it continues to award 

points based on sometimes subjective criteria, such as the district office’s 

assessment of the lender’s SBA marketing and outreach efforts, rather 

than the formulas in the spreadsheet. Where this is the case, district office 

staff are required to provide written justification for the points awarded. 

SBA has a Lender Liaison program, managed by its Office of Field 

Operations (OFO), to assist large national lenders in managing 

relationships with SBA. The program involves the assignment of a single 

SBA official, generally a district director, to act as a liaison to a large 

national lender. In the event that a large lender should experience 

difficulty in managing its PLP status, it would have a single SBA official to 

call to assist in resolving any problems. OFO staff said that feedback they 

have received from lenders indicated that they like the program, finding it 

useful for resolving difficulties. Two of the lenders we interviewed 

participated in the program, and both expressed satisfaction with it. SBA 

has designated lender liaisons for 20 PLP lenders and, at the time of our 

review, intended to expand the program to 50 additional lenders. OLO 

identified 70 lenders who have PLP status in 6 or more districts and could 

benefit from the program. 
Page 17 GAO-03-720T 

We recommended that SBA continue to explore ways to assist large 

national lenders to participate in the PLP. SBA has indicated that they are 

reviewing the issues we identified with regard to large national lenders 

and considering the best approach to address the issues. We will continue 

to followup with SBA and monitor its response on this matter. 

In our past work analyzing organizational alignment and workload issues 

at SBA and other agencies’ efforts to improve management and 

performance, we have described the importance of tying organizational 

alignment to a clear and comprehensive mission statement and strategic 

plan. By organizational alignment, we mean the integration of 

organizational components, activities, core processes, and resources to 

support efficient and effective achievement of outcomes. For example, we 

noted how agency operations can be hampered by unclear linkage 

between an agency’s mission and structure, but greatly enhanced when 

they are tied together.19 We have identified human capital management 

challenges in key areas, which include undertaking strategic human 

capital planning and developing staffs whose size, skills, and deployment 

meet agency needs.20 We have also noted the importance of separating 

safety and soundness regulation and mission evaluation from the function 

of mission promotion. While SBA’s role regarding PLP lenders is slightly 

different from that of a safety and soundness regulator, two principles still 

apply to SBA. First, oversight and program evaluation functions should be 

organizationally separate and maintain an arm’s-length relationship from 

program promotion. And second, in evaluating program compliance, SBA 

needs to weigh the financial risks to the federal government along with the 

7(a) program’s mission to provide credit to those who cannot get it 

elsewhere. 

SBA officials have said and written that lender oversight is becoming an 

increasing priority for SBA; however, the function is not housed in an 

independent office with the exclusive role of providing lender oversight. 

OLO was created within OCA in fiscal year 1999 to ensure consistent and 

 19U.S. General Accounting Office, Small Business Administration: Current Structure 

Presents Challenges for Service Delivery, GAO-02-17 (Washington, D.C.: October 2001). 

20Also included are leadership continuity and succession planning, and creating resultsoriented organizational cultures. U.S. General Accounting Office, Managing For Results: 

Next Steps to Improve the Federal Government’s Management and Performance, 

GAO-02-439T (Washington, D.C.: February 15, 2002). 

SBA’s Organizational 

Alignment Does Not 

Adequately Support 

SBA’s Lender 

Oversight Functions 
Page 18 GAO-03-720T 

appropriate supervision of SBA’s lending partners; however, OCA has 

other objectives, including the promotion of PLP to appropriate lenders. 

OFA, also part of OCA, is responsible for providing overall direction for 

the administration of SBA’s lending programs, including working with 

lenders to deliver lending programs, including 7(a), and developing loan 

policies and standard operating procedures. 

OFA’s lender oversight role is to provide final approval of lenders’ PLP 

status and to take necessary enforcement actions against SBLCs. Yet, in its 

promotion role, OFA works with lenders to deliver lending programs. Thus 

the only explicit enforcement authority—the authority to revoke PLP 

status—resides with OFA rather than OLO. The presence of both OFA and 

OLO within OCA does not afford the oversight function an arm’s-length 

position from the promotion function. The organizational arrangement 

presents a potential conflict, or at least the appearance of a conflict, 

between the desire to encourage lender participation in PLP and the need 

to evaluate lender performance (with the potential for discontinuing 

lenders’ participation in PLP). 

Evidence of overlapping responsibilities and poorly aligned resources also 

can be seen in delays SBA has experienced in completing certain tasks 

associated with lender oversight. As noted previously, these delays could 

hamper effective PLP and SBLC oversight by delaying corrective action 

that might arise from review findings. Since some, but not all, 

responsibility for the lender oversight function migrated from OFA to 

OLO, both offices continue to mingle responsibilities for certain functions. 

The division of responsibility between OFA and OLO has created the need 

for more interoffice coordination to complete certain tasks. For example, 

we found substantial delays in finalizing PLP review reports and, as noted 

earlier, in SBLC examination reports. 

SBA’s IG concluded that the delays in completing SBLC reports were at 

least partially due to poor coordination between OLO and OFA, both of 

which were involved in reviewing the reports. OLO and OFA, respectively, 

are responsible for oversight and management of the SBLC program. OLO 

is responsible for SBLC on-site examination and off-site monitoring, while 

OFA handles day-to-day program management, policymaking, and 

enforcement of corrective actions. Coordination between the two offices, 

however, was not formally established and simply evolved over time. The 

IG said that this informal structure contributed, in part, to the delays in 

issuing the fiscal year 2001 examination reports. OLO staff said that 

limited staffing also contributed to delays. For example, OLO began 
Page 19 GAO-03-720T 

operations with 3 headquarters staff in fiscal year 2000, a number that 

increased to 12 by December 2002. 

We recommended that SBA separate lender oversight functions and 

responsibilities from OCA, including those currently done by OFA. This 

would provide an oversight office with greater autonomy within SBA to 

match the growing importance of lender oversight in achieving SBA’s goal 

of ensuring that PLP lenders make loans to eligible borrowers while 

properly managing the financial risk to SBA. While SBA did not respond 

directly to this recommendation prior to the December 2002 publication of 

our report, it recently stated in a response to congressional committees 

that it believes OLO has adequate independence. In addition, SBA 

maintains there is an advantage to having both OLO and OFA within the 

same office and working in concert. SBA did state, in March 2003, that it 

was in the process of drafting policies and procedures governing OLO 

program responsibilities. We plan to follow-up with SBA on its response to 

this recommendation. 

Madam Chair, Members of the Committee, this concludes my prepared 

statement. I would be happy to answer any questions at this time. 

For information on this statement, please contact Davi D’Agostino, 

Director, Financial Markets and Community Investment, at (202) 512-8678 

or Katie Harris, Assistant Director, at (202) 512-8415. You may also reach 

them by E-mail at dagostinod@gao.gov or harrism@gao.gov. Other 

individuals who made key contributions to this testimony include Toayoa 

Aldridge, Tom Conahan, and Barbara Roesmann. 

Contacts and 

Acknowledgments 

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