Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury's Programs
Published: 2012-12-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Small Business Jobs Act of 2010 aimed to stimulate job growth by, among other things, establishing the SBLF and SSBCI programs within Treasury. SBLF uses capital investments to encourage community banks with assets of less than $10 billion to increase their small business lending. SSBCI provides funding to strengthen state and municipal programs that support lending to small businesses. Under the act, GAO is required to conduct an audit of both programs annually. GAO's first reports were on the programs' implementation and made recommendations. This second report examines (1) the status of Treasury's efforts to monitor participants' compliance with program requirements under SBLF and SSBCI, (2) the status of SBLF's and SSBCI's small business lending, and (3) Treasury's evaluation of SBLF and SSBCI and communication of outcomes to Congress and interested parties. GAO reviewed Treasury documents on SBLF and SSBCI procedures; analyzed the most recent available performance information for both programs and data on financial institutions; and interviewed officials from Treasury and nine states participating in SSBCI.
section_title: What GAO Found
paragraphs: The U.S. Department of the Treasury (Treasury) has made progress in developing guidance and procedures to monitor participants' compliance with requirements for the Small Business Lending Fund (SBLF) and the State Small Business Credit Initiative (SSBCI) programs. In response to GAO's previous recommendation on SBLF monitoring, Treasury has developed procedures for monitoring SBLF participant compliance with legal and reporting requirements. Treasury also issued standards to provide states with best practices for reviewing participants' compliance with SSBCI's legal and policy requirements and developed procedures for sampling transaction-level data to evaluate the accuracy of the states' SSBCI annual reports.
As of June 30, 2012, SBLF participants had increased their business lending over the 2010 baseline. The median SBLF participant had a 31 percent increase in total business lending and a 14 percent increase for small business loans under $1 million, according to GAO's analysis. For SSBCI, states had used about 10 percent of the funds as of June 30, 2012. The act provides Treasury with authority to terminate funds that have not been allocated to states within 2 years of Treasury's approval of the state's participation in SSBCI. However, Treasury has not yet developed a formal written policy explaining what actions it will take if SSBCI participants have not met the requirements to receive their full allocation of funds within the 2-year time frame. Treasury officials said that they currently have no plans to use this authority but retain the ability to do so in the future. Nevertheless, formal guidelines on how Treasury will use this authority could help ensure consistent use of the authority if used in the future and provide clarity to states about the consequences of not using the funds in a timely manner.
Treasury has taken steps to evaluate SBLF's and SSBCI's performance but could enhance public reporting of program outcome information. In a quarterly report to Congress, Treasury compares business lending in SBLF participants to a large comparison group that it adjusted for certain aspects of bank size and geography. GAO's analysis using a peer group that was adjusted for financial health as well geography and size showed that in nearly every case, the difference in total business lending growth was somewhat smaller than in Treasury's analysis. Treasury considered using a more refined peer group that adjusted for these factors but judged that the differences were not significant. However, Treasury did not disclose these options in the report or explain why the larger comparison group was chosen, which compromised the transparency of Treasury's methodology. Furthermore, Treasury's approach did not isolate the impact of SBLF from other factors that could affect lending, as GAO recommended in its first SBLF report. Treasury officials said they are continuing to explore evaluation approaches, including collecting additional data from a survey of SBLF institutions. In response to GAO's 2011 recommendation on SSBCI performance measures, Treasury has designed performance measures, such as the amount of private leverage states have achieved with SSBCI funds. However, Treasury has not yet developed a way to make this performance information public. Treasury shares information with the states through conferences and technical assistance, but performance information could help Congress and the states to better understand the effectiveness of SSBCI's various programs.
section_title: What GAO Recommends
paragraphs: Treasury should develop a policy on how it will use its authority to terminate SSBCI funds. Treasury should also expand its methodology discussion in SBLF reports and make the results of SSBCI performance measures public.

section_title: Letter
paragraphs: Small businesses play a vital role in the U.S. economy, accounting for  about half of private-sector output and employing more than half of  private-sector workers. Congressional interest in assisting small  businesses has increased in recent years, primarily because of continued  concerns about unemployment and the sustainability of the current  economic recovery. In 2008 and early 2009, major disruptions of business  credit markets made accessing credit difficult for small businesses.  Currently, there is still concern that small businesses might not be able to  access enough capital to create jobs. Recent data show that net  employment growth at small businesses is not increasing at the same  rate as in previous economic recoveries.
To address these concerns, Congress passed the Small Business Jobs  Act of 2010, which was signed by the President on September 27, 2010.  Among other things, this legislation aims to stimulate job growth by  establishing the Small Business Lending Fund (SBLF) and the State  Small Business Credit Initiative (SSBCI). The SBLF program is designed  to encourage banks and community development loan funds (CDLF) with  assets of less than $10 billion to increase their lending to small   The act authorized  businesses with up to $50 million in annual revenues.the Secretary of the Treasury to make up to $30 billion of capital available  and offered incentives to increase small business lending. However,  interest in SBLF was lower than anticipated, with 935 financial institutions  applying to the program for a combined funding request of $11.7 billion.  By September 2011, the Department of the Treasury (Treasury) had  ultimately approved $4.0 billion for 332 institutions through Treasury  purchases of preferred stock or debt instruments—$3.9 billion to 281  banks and $104 million to 51 CDLFs. No additional SBLF funds will be  awarded to banks or CDLFs.
Funded with $1.5 billion, SSBCI is designed to strengthen state programs  that support private financing to small businesses and small  manufacturers that, according to Treasury, are not obtaining the loans or  investments they need to expand and to create jobs. States are expected  to use their SSBCI funds to leverage private financing and investment  that is at least ten times the amount of their SSBCI funds (a leverage ratio  of 10:1) by December 31, 2016. Forty-seven states, American Samoa;  the District of Columbia; Guam; the Northern Mariana Islands; Puerto  Rico; the U.S. Virgin Islands; Carrington, North Dakota; Mandan, North  Dakota; and Anchorage, Alaska currently participate in the program.
The 2010 Small Business Jobs Act requires us to conduct an annual audit  of the SBLF and SSBCI programs. implementation of SBLF and SSBCI and made recommendations to  improve the management oversight of the programs. This second report  examines (1) the status of Treasury’s efforts to monitor participants’  compliance with program requirements under SBLF and SSBCI; (2) the  status of SBLF and SSBCI participants’ small business lending; and (3)  the extent to which Treasury evaluates the SBLF and SSBCI programs  and communicates their outcomes, such as an increase in small business  lending, to Congress and interested parties.
12 U.S.C. § 4107(c) and 12 U.S.C. § 5710 (b).
SSBCI compliance procedures and officials from the states of Colorado,  Florida, Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon,  and Texas. Factors we used for selecting these states included the  amount of funding provided by Treasury, geographic diversity, number  and types of small business programs, and status of use of funds. Our  selection process is more fully described in appendix I. We reviewed the  Allocation Agreements between Treasury and each of the nine  participating states that we interviewed to analyze the conditions and the  requirements placed on the states.
To determine the status of SBLF participants’ small business lending, we  reviewed Treasury’s Use of Funds Reports to determine the most current  level of qualified small business lending and the distribution of dividend or  interest rates paid by program participants. Because Treasury requires  only SBLF participants to submit data on qualified small business  lending—generally, lending below $10 million—we also analyzed total  business lending as well as small business lending under $1 million,  which is available through the Call Reports. We accessed Call Report  data using SNL Financial—a private financial database that contains  publicly filed regulatory and financial reports—and analyzed lending by  SBLF participants for the quarter ending June 30, 2012. For the SSBCI  program, we collected and reviewed data from the quarterly reports as of  June 30, 2012, of all SSBCI participants. These data were the most  recent available for our analysis. We determined that the data collected  by Treasury on SBLF and SSBCI were sufficiently reliable for our  purposes.
To examine the extent to which Treasury evaluates and communicates  SBLF and SSBCI program outcomes, we reviewed Treasury  documentation for both programs. To determine the extent to which  Treasury evaluates the performance of SBLF, we reviewed Treasury’s  Use of Funds Report to identify how Treasury analyzed the performance  of SBLF. We assessed the methodology and the comparison group  Treasury used in evaluating the performance of SBLF participants as well  as institutions that did not participate in SBLF. We interviewed Treasury  officials on their comparison group analysis to understand the process by  which the analysis was developed. To help understand the usefulness of  the comparison group, we chose a peer group of non-SBLF institutions  that we adjusted for geographical and size distribution as well as financial  health. By analyzing a peer group, we could account for differences  between SBLF participants and other financial institutions. For  determining the extent to which Treasury evaluates SSBCI performance  outcomes, we collected and reviewed the performance measures that  Treasury developed for evaluating SSBCI. In addition, we interviewed  officials from the nine selected states to collect information on their  evaluation relating to their state’s SSBCI performance and identify what  type of performance information they think would be helpful in  administering their state small business programs.
We conducted this performance audit from March 2012 to December  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Small Business Lending Fund
paragraphs: For the purpose of the SBLF program, the Small Business Jobs Act of  2010 defines qualified small business lending—as defined in an  institution’s quarterly regulatory filings (Call Reports)—as one of the  following: owner-occupied nonfarm, nonresidential real -estate loans; commercial and industrial loans;  loans to finance agricultural production and other loans to farmers;  and  loans secured by farmland.
In addition, qualifying small business loans cannot be for more than $10  million, and the business may not have more than $50 million in revenue.  The act specifically prohibits Treasury from accepting applications from  institutions that are on the Federal Deposit Insurance Corporation’s  (FDIC) problem bank list or have been removed from that list during the  previous 90 days. The initial baseline small business lending amount for  the SBLF program was the average amount of qualified small business  lending that was outstanding for the four full quarters ending on June 30,  2010, and the dividend or interest rates paid by an institution are adjusted  by comparing future lending against this baseline. Also, the institution is  required to list any loans resulting from mergers and acquisitions so that  its qualified small business lending baseline is adjusted accordingly.
Fewer institutions applied to SBLF than initially anticipated, in part  because many banks did not anticipate that demand for small business  loans would increase.  The institutions that applied to and were funded by  SBLF were primarily institutions with total assets of less than $500 million.   In addition, in our 2011 report, we reported that the lack of clarity by  Treasury in explaining the program’s requirements created confusion  among applications and Treasury faced multiple delays in implementing  the SBLF program and disbursing SBLF funds by the statutory deadline  of September 27, 2011.
The amount of funding a bank received under the SBLF program  depended on its asset size as of the end of the fourth quarter of calendar  year 2009. Specifically, if the qualifying bank had total assets of $1 billion  or less, it was eligible for SBLF funding that equaled up to 5 percent of its   If the qualifying bank had assets of more than $1  risk-weighted assets.billion but less than $10 billion, it was eligible for funding that equaled up  to 3 percent of its risk-weighted assets. The SBLF program provided an  option for eligible institutions to refinance preferred stock or subordinated  debt issued to the Treasury through the Troubled Asset Relief Program’s  (TARP) Capital Purchase Program (CPP). Participating SBLF banks  must pay dividends or interest of 5 percent per year initially to Treasury,  with reduced rates available if they increase their small business lending.  Specifically, the dividend rate payable will decrease as banks increase  small business lending over their baselines. While the dividend rate will  be no more than 5 percent for the first 2 years, a bank can reduce the  rate to 1 percent by generating a 10 percent increase in its lending to  small businesses compared with its baseline. After 2 years, the dividend  rate on the capital will increase to 7 percent if participating banks have  not increased their small business lending. After 4.5 years, the dividend  rate on the capital will increase to 9 percent for all banks regardless of a  bank’s small business lending. For S-corporations and mutual institutions,  the initial interest rate was at most 7.7 percent. The rate would fall as low  as 1.5 percent if these institutions increase their small business lending   For CDLFs, the initial  by 10 percent or more from the previous quarter.dividend rate will be 2 percent for the first 8 years. After 8 years, the rate  will increase to 9 percent if the CDLF has not repaid the SBLF funding.  This structure is designed to encourage CDLFs to repay the capital  investment by the end of the 8-year period. Treasury will allow an SBLF  participant to exit the program at any time, with the approval of its  regulator, by repaying the funding provided along with dividends owed for  that period.
Under the act, Treasury has a number of reporting requirements to  Congress related to SBLF: (1) monthly reports describing all of the  transactions made under the program during the reporting period; (2) a  semiannual report (for the periods ending each March and September)  providing all projected costs and liabilities and all operating expenses;  and (3) a quarterly report known as the Use of Funds Report.
section_title: State Small Business Credit Initiative
paragraphs: SSBCI was established to support existing and new state programs that  support private financing to small businesses and small manufacturers  that, according to Treasury, are not obtaining the loans or investments  they need to expand and to create jobs. The act allowed Treasury to  provide SSBCI funding for two state program categories: capital access  programs (CAP) and other credit support programs (OCSP). For both  CAP and OCSPs, lenders are required to have at least 20 percent of their  own capital at risk in each loan. Also, origination and annual utilization  fees are determined by each state to defray the program’s cost. Loan  terms, such as interest and collateral, are typically negotiated between  the lender and the borrower, although in some cases loan terms are  subject to state approval and, in many cases, the state and lender will  discuss and negotiate loan terms and guarantee options prior to reaching  agreement to approve the loan and issue a guarantee.  A CAP is a loan  portfolio insurance program wherein the borrower and lender, such as a  small business owner and a bank, contribute to a reserve fund held by the  lender. Under a CAP, when a participating lender originates a loan, the  lender and borrower combine to contribute an amount equal to a  percentage of the loan to a loan reserve fund, which is held by the lender.  Under SSBCI, the contribution must be from 2 percent to 7 percent of the  amount borrowed. Typically, the contribution ranges from 3 percent to 4  percent. The state then matches the combined contribution and sends  that amount to the lender, which deposits the funds into the lender-held  reserve fund. Under SSBCI, approved CAPs are eligible to receive  federal contributions to the reserve funds held by each participating  financial institution in an amount equal to the total amount of the  contributions paid by the borrower and the lender on a loan-by-loan basis.
In addition, the following OCSPs are examples of programs eligible to  receive funding under the act:
Collateral support programs: A Collateral Support Program is  designed to enable financing that might otherwise be unavailable due  to a collateral shortfall. It provides pledged cash collateral to lenders  to enhance the collateral coverage of individual loans. The state and  lender negotiate the amount of cash collateral to be pledged by the  state.
Loan participation programs: States may structure a loan participation  program in two ways: (1) through purchase transactions, also known  as purchase participation, in which the state purchases a portion of a  loan originated by a lender, or (2) by participating in a loan as a co- lender, where a lender originates a senior loan and the state  originates a second loan to the same borrower that is usually  subordinate to the lender’s senior loan should a default occur. State  loan participation programs encourage lending to small businesses  because the lender is able to reduce its potential loss by sharing its  exposure to loan losses with the state.
Loan guarantee programs: These programs enable small businesses  to obtain a term loan or line of credit by providing the lender with the  necessary security in the form of a partial guarantee. In most cases, a  state sets aside funds in a dedicated reserve or account to  collateralize the guarantee of a specified percentage of each  approved loan. The guarantee percentage is determined by the states  and lenders but, under SSBCI, may not exceed 80 percent of loan  losses.
Venture capital programs: These programs provide investment capital  to create and grow start-ups and early-stage businesses, often in one  of two forms: (1) a state-run venture capital fund (which may include  other private investors) that invests directly in businesses, or (2) a  fund of funds, which is a fund that invests in other venture capital  funds that in turn invest in individual businesses.
Direct loan programs: Although Treasury does not consider these  programs to be a separate SSBCI program type, it acknowledges that  some states may identify programs that they plan to support with  SSBCI funds as direct loan programs. The programs that some states  label as direct loan programs are viewed by Treasury as co-lending  programs categorized as loan participation programs, which have  lending structures that are allowable under the statute.
OCSPs approved to receive SSBCI funds are required to target small  businesses with an average size of 500 or fewer employees and to target  support towards loans with an average principal amount of $5 million or  less. In addition, these programs cannot lend to borrowers with more than  750 employees or make any loans in excess of $20 million.
After their applications were approved, the states entered into Allocation  Agreements with Treasury before they received their funds. SSBCI  Allocation Agreements are the primary tool signed by Treasury and each  participating state and outline how recipients are to comply with program  requirements. The act requires that each state receive its SSBCI funds in  three disbursements or tranches of approximately one-third of its  approved allocation. Prior to receipt of the second and third  disbursements, a state must certify that it has expended, transferred, or  obligated 80 percent or more of the previous disbursement. Treasury may  terminate any portion of a state’s allocation that Treasury has not yet  transferred to the state within 2 years of the date on which its SSBCI  Allocation Agreement was signed. Treasury may also reduce, suspend or  terminate a state’s allocation at any time during the term of the Allocation  Agreement upon an event of default under the agreement. Under the act,  states are required to submit quarterly and annual reports on their use of  SSBCI funds. All SSBCI Allocation Agreements will expire on March 31,  2017.
section_title: Treasury Has Made Progress in Developing Compliance Guidance and Processes for SBLF and SSBCI
paragraphs: In response to our previous recommendation on SBLF compliance  procedures, Treasury has developed procedures for monitoring SBLF  participant compliance with legal and reporting requirements. Treasury  has also issued compliance standards for SSBCI and procedures to  review states’ annual reports. The standards provide the participating  states with best practices for reviewing borrower and lender compliance  with SSBCI’s legal and policy requirements.
subsections: section_title: Treasury Has Developed Procedures to Monitor SBLF Participant Compliance and Report of Lending Data
paragraphs: We recommended in December 2011 that Treasury should finalize  procedures for monitoring SBLF participants, including procedures to  better ensure that Treasury is receiving accurate information on  participants’ small business lending. In response to the  recommendation, Treasury officials told us they had written compliance  procedures in March 2012 and finalized compliance procedures on  September 28, 2012, for monitoring participant conformance with  program terms, including documentation requirements, certification  requirements, and other requirements under the Securities Purchase  Agreement. compliance procedures include a review of the Quarterly Supplemental   In addition, according to Treasury officials, SBLF  Reports (quarterly reports) for accuracy to monitor that the dividend or  interest rates paid by the institutions are correct.
As mandated by the act, Treasury requires each SBLF participant to  submit two annual certifications:  (1) Any businesses receiving a loan from an SBLF participant  using SBLF funds must certify to the institution that the principals  of the business have not been convicted of a sex offense against  a minor. Under the Securities Purchase Agreement, annually until  redemption, the SBLF participant is required to provide the  certifications to Treasury that businesses receiving loans from the  bank have certified that their principals have not been convicted of  a sex offense against a minor.  (2) Each SBLF participant must certify that it is in compliance with  the requirements of the Customer Identification Program, which is  intended to enable the bank to form a reasonable belief that it  knows the true identity of each customer.
In addition to these certifications, Treasury requires, through the  Securities Purchase Agreement, that SBLF participants meet certain  additional conditions and certifications, such as the bank’s Chief  Executive Officer and Chief Financial Officer attesting to the accuracy of  the bank’s Call Report and certifying to Treasury that information provided  on each supplemental quarterly report, is complete and accurate.  Treasury developed a compliance monitoring tool for verifying the proper  certification submission by SBLF participants. The tool is a set of  spreadsheets Treasury uses to track the receipt of documents from SBLF  participants, as required by the Securities Purchase Agreement, including  annual financial statements, independent auditor certifications, and  executive officer certifications.
An important SBLF compliance focus is the review and monitoring of the  quarterly reports. Each SBLF participant is required to correctly calculate  its quarter-end adjusted small business lending baseline and the qualified  small business lending for that quarter.primary source on which Treasury bases its Use of Funds Report of  qualified small business lending and the dividend or interest rate paid by  the SBLF participants. The quarterly reports are forms in which the SBLF  participants calculate their qualified small business lending for the quarter  and the resulting dividend or interest rate. The dividend or interest  payment depends on the growth or the decline of qualified small business  lending. Thus, if the baseline or the qualified small business lending is  incorrectly calculated, Treasury will not receive an accurate dividend or  interest payment amounts.
The quarterly reports are the  According to Treasury documentation, Treasury will review the following  elements in the quarterly reports: analysis of the quarterly reports; and explanation letters and auditor attestations if the quarterly report is a  certification of accuracy by the institution’s executives (including Chief  Executive Officer, Chief Financial Officer, and all directors or trustees  who attested to the Call Report);  independent auditor certification;  real-time validation of the calculations for the quarterly reports;  resubmission.
According to Treasury officials, the review performed by SBLF  compliance staff is primarily to identify discrepancies between data on the  quarterly reports and the Call Reports. According to Treasury staff, they  use a system that allows staff to monitor discrepancies or errors and  follow up with participants. Treasury staff review participants’ quarterly  reports to identify any potential errors or missing information. Staff  compare the quarterly report submissions to the Call Reports to check for  discrepancies for the same period. According to Treasury officials, staff  also compare quarterly reports to prior Call Reports to check for errors in  reported changes in loan balances and net charge-offs and apply  statistical tests, such as a comparison of government guaranteed lending  amounts in the quarterly reports, to lending figures publicly reported by  the Small Business Administration.verification check for arithmetic errors for calculating the adjusted  baseline exclusions and qualified small business lending. Treasury  follows up with institutions to address identified issues and errors and  requests resubmission of corrected quarterly reports, as appropriate.
Treasury staff said they use a  Treasury has also responded to the findings and recommendations of the  Treasury’s Office of Inspector General (OIG). In August 2012, Treasury’s  OIG reported on a small judgmental sample of 10 initial supplemental   To establish initial dividend reports submitted by SBLF participants. rates, SBLF participants completed the initial supplemental reports using  small business lending data from their quarterly Call Reports and loans  records and submitted them to Treasury. The OIG reviewed the  calculations for the small business lending baseline and the initial  dividend rate payment and found errors in 8 of the 10 reviewed reports.  OIG’s recommendations included the following:  follow up with the 8 banks where errors were identified and determine  whether corrected initial supplemental reports and quarterly reports  should be submitted and make the necessary adjustments to dividend  rates for the banks, as appropriate; notify all SBLF participants about the types of errors identified by this  audit to help prevent similar errors from occurring in the future; and ensure that the October 2012 Use of Funds Report contains  corrections for errors identified by this audit.
Treasury agreed with the OIG’s recommendations and commented that it  would review the identified errors with each institution and direct these  institutions to resolve any errors in the third quarter of 2012, including  resubmitting corrected initial and quarterly supplemental reports, as  appropriate. Further, Treasury conducted training webinars in July and  August 2012 to address common errors identified in their reviews of  quarterly report submissions. According to Treasury officials, they  completed the review of the eight banks where quarterly report errors  were identified and banks resubmitted quarterly reports as appropriate.  Two banks submitted revised reports identifying a combined total of  $258.00 in overpayments to Treasury.
section_title: Treasury Has Developed Guidance to Assist SSBCI- Participating States in Their Oversight of Lenders and Borrowers
paragraphs: Treasury has developed SSBCI Policy Guidelines and compliance  standards for participating states to follow in implementing their state  small business programs using SSBCI funds. According to Treasury  officials, primary oversight of the use of SSBCI funds is the responsibility  of each participating state. The participating states we interviewed viewed  their responsibility as monitoring SSBCI lender and borrower compliance  with program requirements. Under the act, specific lender and borrower  assurances and certifications must be delivered before a transaction is  enrolled in the participating state’s approved program. For example,  borrowers must provide assurance that proceeds will be used for an  eligible business purpose and that the borrower is not an executive  officer, director, or principal shareholder (or a member or the immediate  family or a related interest of such individual) of the lender. Similarly,  lenders must submit certifications to the participating state providing  assurance that, for example, the loan is not a refinancing of a loan  previously made to that borrower by the lender or an affiliate of the  lender. In addition to these certifications, the act requires that borrowers  and the lenders certify that their principals have not been convicted of a  sex offense against a minor as such terms are defined in section 111 of  the Sex Offender Registration and Notification Act.  Eight states we  interviewed told us that they reviewed borrower and lender certifications  for meeting the legal requirements and assurances before enrolling the  loans.
In May 2012 Treasury issued the SSBCI National Standards for  Compliance and Oversight, which was intended to provide the states with  guidance for reviewing, monitoring, and managing compliance.considers the standards as best practices that the states should adopt or  incorporate, as appropriate, into existing procedures. For example,  according to the standards, if a participating state delegates to an  administrative entity the responsibility to obtain the certifications to   Treasury  individual lenders, the participating state must exercise oversight to  ensure compliance. One means of ensuring oversight would be for the  participating state to conduct an annual audit of each lender’s transaction  files to verify that the use of proceeds certifications are on file and signed  by an authorized representative of the lender.  As another example of a  best practice, the standards recommend that, when overseeing entities  that administer the state small business programs, states should perform  site visits, require periodic status update reports, or conduct regular  conference calls with the administering entity.
The participating states we interviewed found the SSBCI National  Standards for Compliance and Oversight to be helpful as they were  developing their compliance procedures. Three of the nine states already  had similar compliance procedures in place for their small business  lending and amended their procedures to include SSBCI compliance  standards. Six states told us that they established or are establishing  compliance standards using the SSBCI National Standards for  Compliance and Oversight as guidance. According to state officials of the  nine states we interviewed, as part of their procedures, staff reviewed the  borrower and lender documentation for compliance.
Under the act, SSBCI participants are subject to two reporting  requirements: annual reports and quarterly reports. As part of its  responsibilities for overseeing the use of SSBCI funds, Treasury is  planning to conduct a review of the Annual Report data submitted to them  by the states. Under the act, SSBCI participants are to submit to Treasury  an Annual Report no later than March 31 of each year. The data included breakdowns by industry type, loan size, annual sales, and number of  transaction-level data for each loan or investment made using SSBCI  funds for that year;  the number of borrowers that received new loans originated under the  approved state program;  the total amount of such new loans; other data that the Secretary may require to carry out the purposes of  employees of the borrowers that received such new loans;  the zip code of each borrower that received such a new loan; and  the program.
As part of its review of the 2012 Annual Report data, Treasury plans to  review a sample of loans and investments for the appropriate  documentation of borrower and lender assurances and certifications for  data accuracy. To conduct this review, SSBCI staff designed an  evaluation form to review the certifications and the Annual Report data.  SSBCI participants are required to submit their 2012 annual data to  Treasury by March 31, 2013.  The loans or investment will be reviewed  for the following assurances and certifications:
Each lender or investor that has received credit support for a  particular transaction has at least 20 percent of their own capital at  risk unless Treasury has waived this requirement.
Signed borrower and lender use-of-proceeds certifications have been  provided, and the borrower/lender signature block matches the  borrower on the loan documents.
Signed borrower and lender sex offender certifications have been  provided.
In the data accuracy review, Treasury plans to verify a sample of SSBCI  Annual Report data submitted by the states with the actual loan or  investment documentation. The types of data that Treasury intends to  verify include the following: date of disbursement for the loan or investment; borrower’s annual revenue and the year of business incorporation; enrolled loan amount and any public subsidy associated with the  enrolled loan or venture capital investment;
SSBCI federal contribution to CAP loan; and amount the state had contributed to a loan participation, loan  guarantee, or loan collateral program.
Treasury also intends to verify that the amount of subsequent private  financing matches the documentation provided and that the  documentation supports the relationship between the SSBCI loan  program and the private financing.
The states are required to submit to Treasury a quarterly report on the  use of SSBCI funds during the previous quarter. Under the act, states are  required to report the total amount of federal funding used and to certify  that the information provided is accurate and that the state is  implementing its approved programs in accordance with the act and the  regulations or other guidance issued by Treasury. As part of the  Allocation Agreements, Treasury also requires states to submit reports on  the total amount of allocated funds used for administrative costs, the  amount of program income generated, and the amount of charge-offs  against the federal contributions to the reserve funds. Treasury conducts  a more limited review of the SSBCI quarterly reports compared to the  Annual Report. Specifically, Treasury staff conduct checks on the  administrative costs to ensure that the costs do not exceed the statutory  caps. In addition, staff verify that the amount of funds used does not  exceed the amount allocated to the state and that the state official signing  the SSBCI quarterly reports is authorized to do so.
According to Treasury officials, they would not approve a new  disbursement of funds if they had substantial evidence that a state’s  compliance with SSBCI program requirements was inadequate. When a  participating state requests a disbursement of funds, according to  Treasury staff, they will conduct a pre-disbursement review. In addition to  confirming that the participating state has expended, obligated, or  transferred 80 percent of its previous disbursement, Treasury staff review  the results of Treasury’s SSBCI compliance monitoring. According to  Treasury documentation, this review will include a review of a sample of  transactions in which SSBCI funds were used; a review of financial  audits, if submitted; the review of the quarterly reports and if available, the  annual reports for accuracy and completeness; and the review of any of  the states’ compliance activities or records that would indicate whether a  participating state had failed to comply with any program requirements.
section_title: SBLF-Funded Institutions and SSBCI-Funded States Have Begun to Support Small Business Lending, but Treasury’s Policy for Timely Use of SSBCI Funds Is Unclear
paragraphs: As of June 30, 2012, SBLF participants had increased their business  lending over the baseline from 2010. For SSBCI, Treasury had  transferred to the states nearly one-third of the program’s $1.5 billion in  total funding as of June 30, 2012. States had used about $154 million  (about 10 percent) of these funds through a variety of programs. States  had received and used funds at differing levels, but some states were  concerned that Treasury may take actions to suspend disbursements  after participants have been in the program for more than 2 years.  Treasury has the authority to terminate disbursements to SSBCI  participants who have not met the requirements to receive their full  allocation within 2 years of having been accepted into the program.   Treasury has not yet developed a policy that reflects how it will use this  authority even though this 2-year period will end for most states sometime  in 2013. Treasury officials stated that they do not plan to use this authority  at this time and that Treasury will provide all participants with sufficient  lead time so that they can modify or adjust their programs, as necessary.
subsections: section_title: SBLF Participants Have Generally Increased Their Levels of Both Small Business and Total Business Lending
paragraphs: According to Treasury, SBLF participants have increased their qualified  small business lending by $6.7 billion over their $36.0 billion baseline, as  of June 30, 2012. This number includes a $1.5 billion increase over the  prior quarter. Further, Treasury reported that 89 percent of participants  had increased their qualified small business lending over baseline levels  and about 76 percent of participants had increased their qualified small  business lending by 10 percent or more. As previously discussed, SBLF  uses a dividend or interest rate incentive structure to encourage  participating institutions to increase qualified small business lending.  SBLF participants paid an average dividend or interest rate of 2.1 percent  on their SBLF funds as of June 30, 2012. Over half of SBLF participants  paid a dividend or interest rate of 1 percent on their SBLF funds— because their qualified small business lending growth was 10 percent or  higher—and 15 percent of institutions paid 5 percent or more (see  fig. 1).
SBLF participants also showed increases in small business loans under  $1 million, as well as total business lending. While the Small Business  Jobs Act set the threshold for qualified small business lending at $10  million, depository institutions are required to submit Call Reports with  detailed financial information including small business lending, which the  reports define as loans under $1 million. Such data are useful for  comparing certain small business lending of SBLF participants with that of  institutions that did not participate in SBLF.which includes all business loans, including loans over $10 million and   Total business lending— those to businesses with over $50 million in revenue—can also help  illustrate differences in lending activity between these two groups.
Treasury uses total business lending in its reporting to compare SBLF  participants to non-SBLF institutions and noted that qualified small  business lending makes up a large part of total business lending for SBLF  participants. For example, qualified small business lending totaled 95  percent of total business lending for the median SBLF participant as of  December 31, 2011.
SBLF participants increased both small business loans under $1 million  as well as total business lending. In particular, the median SBLF  participant had a 31 percent increase in total business lending for the  quarter ending June 30, 2012, over the baseline level. The median  SBLF participant had a 14 percent increase for small business loans  under $1 million over the same period. When categorizing SBLF  participants by the changes in their lending, the SBLF participants fell into  the higher growth categories for total business lending, but were more  evenly distributed for small business loans under $1 million except for  participants whose lending increased over 40 percent (see fig. 2).
About half of SBLF participants used their program funds to repay and  exit TARP’s CPP. These CPP refinance participants had noticeably lower  lending growth than SBLF participants that did not participate in CPP (see  fig. 3). In particular, CPP refinance participants increased small business  loans under $1 million by 5 percent compared with 33 percent for non- CPP participants. For total business lending, CPP refinance participants  saw increases of 17 percent compared with 45 percent for non-CPP  participants. Treasury officials said that one possible reason for this  difference is that CPP refinance participants were only eligible for a  limited amount of incremental SBLF funds, beyond the amount of CPP  funds refinanced. As a result, unlike other SBLF participants, these  institutions did not receive as much “new” capital to increase small  business lending. Nevertheless, all SBLF participants are subject to the  same incentive structure based on the dividend or interest rate.  Furthermore, Treasury officials also noted that in many instances the  CPP refinance participants may have already experienced an increase in  lending from the CPP capital they originally received.
As of June 30, 2012, Treasury had transferred $468 million in SSBCI  funding to the states, representing about one-third of the $1.5 billion that  was set aside for the program. States had used $150 million of these  funds—about 10 percent of the program total—disbursing them to lending  institutions through a variety of programs. Loan participation programs  accounted for 47 percent of the funds used, as of June 30, 2012, followed  by venture capital programs (28 percent), collateral support programs (17  percent), and loan guarantee programs (6 percent), as shown in figure 4.  The remaining program categories—capital access programs, direct  lending, and other—combined for the remaining 2 percent of funds used.
Participating states have received and used SSBCI funds at differing  levels, partially because of when applications were approved and funds  were allocated (see fig. 5). Of the 53 states, territories, or municipalities  that received SSBCI funding, 47 had used a proportion of their funds as  of June 30, 2012. Montana had the highest proportion used of the amount  that Treasury had allocated, as of June 30, 2012. States we interviewed  said that disbursing funds was much faster for state programs that were  in existence before SSBCI because the infrastructure was already in  place and lenders were already familiar with the programs. Moreover,  some states implementing new programs told us that it could take time to  use the funds because they had to conduct extensive outreach to lenders  to make them aware of the programs and encourage them to commit to  small business lending.
Under the act, the Secretary may revoke any portion of a participating  state’s allocated amount that has not been transferred to the state by the  end of the 2-year period beginning on the date the state received  approval, but Treasury has not developed a written policy on how it will  use this authority. For most of the participating states, this 2-year period  will end sometime during 2013, but it is still unknown if they all will be able  to use their funds in time to obtain the third and final disbursement within  this time frame. This time frame is quickly approaching for five states  (California, Hawaii, Missouri, North Carolina, and Vermont) that signed  their Allocation Agreements with Treasury before May 2011. For 39 states  the 2-year time frame will end by September 30, 2013, in terms of their  allocation agreement. As of November 16, 2012, according to Treasury,  ten states (Idaho, Indiana, Kansas, Michigan, Missouri, Montana, North  Carolina, South Carolina, South Dakota, and Washington) had requested  and received their second disbursement; eight states (Arkansas,  Delaware, Florida, Louisiana, Massachusetts, New Hampshire, New  Jersey, and West Virginia) had requested their second disbursement but  had not yet received it; and one state, Montana, had requested and  received a partial third disbursement. The remaining 38 SSBCI  participants were still working to use their first disbursement, as of  November 16, 2012.
Some states told us that the 2-year time frame is short for disbursing  SSBCI funds especially for states with new state small business  programs.  One state official told us that because their programs are  relatively new and lending institutions are unfamiliar with them, the 2-year  time frame is too tight for lenders to make informed decisions about  participating in the program. Similarly, officials from two states told us that  the 2-year time frame for disbursing the SSBCI funds is short because  their state small business programs were newly created.
According to Treasury officials, Treasury is aware of the 2-year time  frame and the potential concerns of the states. After reviewing the law,  Treasury officials told us that the Secretary has discretion on whether or  not to revoke the undisbursed allocation if it has not been transferred to a  participating state as of the 2-year anniversary. According to Treasury  officials, they have not drafted a policy or procedures on what actions  they may implement if the states miss the 2-year time frame for their final  disbursement of funds. However, they told us that the states were  encouraged to describe in their applications how they would disburse the  funds within the 2-year time frame and that they advised the states of the  importance of meeting the 2-year time frame. Moreover, they said that  they do not consider the 2-year time frame to be a requirement that funds  not yet transferred must be deemed unavailable at that time. At an  October 2012 conference attended by many SSBCI participants,  according to Treasury staff, the Deputy Assistant Secretary for Small  Business, Community Development, and Affordable Housing Policy told  the participants that Treasury did not currently plan to exercise this  authority in the near future. However, these statements are not currently  documented in a written or formal policy statement explaining its position.  Treasury staff told us when Treasury develops a policy on its  discretionary authority, it will provide all participants with sufficient lead  time so that they can modify or adjust their programs, as necessary.  Treasury officials told us that the purpose of the Deputy Assistant  Secretary’s conference announcement was to address the concern and  clarify that Treasury would not be taking action at this time if an SSBCI  participant had not met the 2-year requirement and to affirm that Treasury  retains its discretionary authority going forward.
In prior work, we have recommended that when states are required to  spend federal funds to meet a statutory deadline or specific program  requirements, agencies should provide guidance to the states on what  they should expect if they are unable to meet the deadline. The act  provides Treasury’s discretionary authority to encourage the states to use  the funds in a timely manner, but without a formal written policy, how  Treasury would use this authority in a consistent manner is unclear.  Having clear guidelines on how Treasury plans to use its discretionary  authority to terminate funds could help ensure consistent application of  the authority. In addition, such guidelines could help states understand  the need to use the funds in a timely manner while meeting program  requirements and could provide clarity to states about the associated  consequences of not meeting the 2-year time frame.
section_title: Treasury Could Enhance Its Reporting of Program Performance Information
paragraphs: Treasury has established performance measures to manage its programs  but could enhance its public reporting of program performance  information. In its Use of Funds Report, Treasury compared business  lending by SBLF participants to that of non-SBLF institutions, but the  report does not disclose Treasury’s rationale for choosing its comparison  group over other possibly more representative alternatives. Treasury  officials told us that they are continuing to consider different approaches  for evaluating SBLF. In addition, Treasury has designed SSBCI timeliness  and outcome performance measures but has not made this information  publicly available. Treasury officials are considering different options for  presenting this information and said they plan to eventually to make some  of it public. However, Treasury has not made any decisions on the  specific SSBCI performance information that it might publicly release.  Treasury has also taken actions to enhance its communications with  SBLF and SSBCI program participants, such as dedicating staff to assist  with participants’ inquiries.
subsections: section_title: Additional Information on Treasury’s Methods for Analyzing SBLF Outcomes Would Enhance Transparency
paragraphs: Our review found that SBLF participants had noticeably higher changes in  lending rates when compared to similar non-SBLF institutions, but that  Treasury’s methods for analyzing SBLF participants’ lending may  somewhat overstate differences between SBLF participants’ lending and  that of other eligible banks. In our December 2011 report on SBLF, we  recommended that Treasury finalize plans for assessing the performance  of the SBLF program, including measures that can isolate the impact of  SBLF from other factors that affect small business lending. Treasury  officials explained to us that they explored different comparison methods  that more closely mirror SBLF participants, but this information is not  disclosed in its Use of Funds Report to Congress.
In its Use of Funds Report, Treasury compared total business lending by  SBLF participants to that of a comparison group of non-SBLF institutions  and found that SBLF participants had noticeably higher increases in total  business lending. In its analysis, Treasury adjusted the comparison group  for a number of factors, including an institution’s asset size and  geography, thereby excluding institutions that fell outside the asset size  range of SBLF participants and that were headquartered in states that did  not have an institution participating in SBLF.helpful step in understanding the possible effects of SBLF funding.  However, Treasury did not adjust its comparison group to better ensure  that its distribution among various asset sizes and states mirrored that of  SBLF participants. Moreover, Treasury did not adjust its comparison  group to account for differences in financial health despite requiring SBLF  applicants to demonstrate a certain degree of financial health before  approving them for funding. For example, the act specifically restricted  Treasury from accepting applications from institutions that were on or  recently removed from the FDIC problem bank list. Because the  comparison group did not exclude such institutions that were unable to  qualify for SBLF funding, these institutions may have downwardly skewed  the group’s small business lending growth rate, thus causing Treasury’s  results to overstate the implied effect of the program. As a result,  Treasury’s analysis seemingly links SBLF funding to the increase in small  business lending when that increase, to some extent, may have been  associated with the factors mentioned above or other factors such as  improved local economic growth.
We used the Texas Ratio as a proxy for financial health. It is defined as nonperforming  assets plus loans 90 or more days past due divided by tangible equity and reserves. The  Texas Ratio helps determine a bank’s likelihood of failure by comparing its troubled loans  to its capital. Because SBLF funding increases the equity portion of the ratio, we used  Texas Ratios as of March 31, 2011, which was the last quarter preceding the initial  disbursements of SBLF funding. growth. That is, growth rates of SBLF participants remained noticeably  higher than those of our peer group. This growth could indicate a  beneficial effect of SBLF funding on lending, or it could be due to other  factors, including differences between SBLF participants and our peer  group for which we were not able to adjust. When categorizing institutions  by the level of change in their business lending, SBLF participants were  more heavily concentrated in the higher growth categories compared with   Moreover, the median  the peer and comparison groups (see fig. 6).SBLF participant had a 31 percent increase in total business lending,  compared with a 2 percent increase for the comparison group and a 6  percent increase for the peer group.
Further, SBLF participants had a higher median growth rate of total  business lending than both our peer group and Treasury’s comparison  group in all six geographical regions (see fig. 7). Moreover, the peer  group had higher rates of growth than the comparison group in five of the  six regions.
SBLF participants also had a higher median growth rate of total business  lending across all five asset size categories (see fig. 8). Again, the peer  group’s growth rate was slightly closer to that of SBLF participants than  the comparison group was for all five asset groups, yet it remained well  below it. Moreover, SBLF participants in the larger asset categories had  lower growth rates in total business lending. However, the peer and  comparison groups had no noticeable trend across different asset size  groups. In addition, the peer and comparison groups were closest to  SBLF participants among institutions with assets over $1 billion.
Treasury officials said that in determining the comparison group to use in  their analysis, they analyzed distributional differences in asset size and  geography between the groups, as well as some indicators of financial  health. They judged that the differences in the variables they analyzed  were modest and believed that adjusting for these differences—that is,  making the comparison group more representative of SBLF participants— would only provide a limited benefit while making the analysis less  transparent and more difficult for others to replicate. They were also  concerned that using what they considered to be a more judgmental  approach, such as selecting a peer group, would require certain arbitrary  decisions which might raise concerns about the validity of their selection  criteria. As a result, Treasury determined that the differences found in  their analyses did not warrant an approach that would adjust for these  factors.
In addition, although Treasury officials told us they considered but  decided against using a comparison group that would have been adjusted  to more closely mirror SBLF participants; they did not explain this  decision in the methodology section of the Use of Funds Report. In prior  work on another Treasury program, we said that Treasury should  enhance its communications relating to financial assistance so that they  are transparent to the Congress and the public. Without disclosing its  rationale for choosing its comparison group over other possibly more  representative alternatives, Treasury may not be providing policymakers  with a full understanding of its approach and may not be transparent  regarding the potential for its analysis to overstate the effects of SBLF.
Treasury’s comparison group analysis in its Use of Funds Report also  does not isolate the impact of SBLF relative to other factors affecting  small business lending to the extent that other approaches would. While a  comparison group is an important step and provides useful context, a  more rigorous analysis of peer banks to help assess what might have  happened without SBLF, as our 2011 report on SBLF recommends, may  help Treasury better understand the effects of the program. Our prior  work on program evaluation suggests that a carefully constructed control  group should be as similar to program participants as possible to help  identify the impact of a program, and a number of statistical methods can  help account for differences. making arbitrary judgments in the selection of peers could be addressed  by conducting a sensitivity analysis—a best practice also identified by the  Office of Management and Budget—which involves varying assumptions  to determine how sensitive results are to changes in those assumptions.
See GAO, Program Evaluation: A Variety of Rigorous Methods Can Help Identify  Effective Interventions, GAO-10-30 (Washington, D.C.: Nov. 23, 2009) and Designing  Evaluations: 2012 Revision, GAO-12-208G (Washington, D.C.: Jan. 2012). approving applications for small business loans or credit lines; the  demand for small business loans; the participant’s practices regarding  approvals of loans and lines of credit for small business; use of SBLF  funding or the type of actions the institution has taken because of SBLF  funding; and outreach activities to minority, women, and veteran  communities. Treasury also leveraged the Federal Reserve’s Senior Loan  Officer Opinion Survey on Bank Lending Practices as it developed  questions for the survey and is exploring how it may analyze results from  both surveys to assess SBLF. Responses were due from the SBLF  participants by October 4, 2012. Treasury plans to issue the results in a  report at a later date.
section_title: Treasury Has Developed Performance Indicators for SSBCI
paragraphs: In our December 2011 SSBCI report, we recommended that Treasury  develop and finalize SSBCI-specific performance measures for evaluating  the effectiveness of the program and when developing these measures  consider key attributes of successful performance measures. In  response to the recommendation, Treasury developed measures for both  the timeliness of program administration and program performance. In  establishing measures on timeliness, Treasury considered its own role in  administering the program, which includes evaluating the eligibility of the  participating states and approving state programs; overseeing compliance  with the provisions of the act, the SSBCI policy guidelines, and the terms  and conditions of the Allocation Agreement; and providing ongoing  technical assistance for each state’s and municipality’s program  implementation. According to Treasury, the timeliness measures will  assess the quality of the direction provided by Treasury to the states,  including the efficiency of Treasury’s administration of program resources  and program oversight. These goals for these measures are
90 percent of requests for modifications to Allocation Agreements are  approved or rejected within 90 days of receiving a final submission,
90 percent of requests for subsequent disbursements under existing  Allocation Agreements are approved or rejected within 90 days of  receipt of a formal submission, and
90 percent of quarterly reports received within 5 days of the deadline.
According to Treasury staff, for the first two goals, the measurement  period starts once Treasury has received all documentation required by  the established procedures for each underlying activity from the state  requesting a modification or disbursement. Treasury staff advised us that  these measures are tracked continuously and that Treasury reports the  12-month data to the Office of Management and Budget annually as part  of SSBCI’s annual budget submission, which should be publicly available.
In addition, Treasury has developed measures for evaluating  performance for SSBCI: amount of SSBCI funds used over time, as reported on SSBCI  quarterly reports;  volume and dollar amount of loans or investments supported by  SSBCI funds, as reported on SSBCI annual report; amount, in dollars, of private-sector leverage in SSBCI annual reports; estimated number of jobs created or retained in SSBCI annual  reports.
Although Treasury has established measures for SSBCI performance,  Treasury is considering how it will use these program performance  indicators for evaluating the overall progress of SSBCI. Treasury staff  recognized that performance indicators can help policymakers  understand the results of the policy, but they emphasized that they do not  have a full year of SSBCI data to use in evaluating the program. Many  states did not receive their first SSBCI allocation until late 2011 and thus,  Treasury had limited data to evaluate SSBCI. For example, Treasury told  us that only 23 states reported using SSBCI funds to support small  business loans or investments as of December 31, 2011. Treasury  officials told us that after they have received the 2012 annual report data  in early 2013, which would constitute a full year of SSBCI funds for almost  all participants, they will be able to decide how they will review and  analyze the performance measures going forward.
In addition, Treasury explained that SSBCI’s performance cannot be  evaluated using a single number or performance indicator because  SSBCI consists of 140 different programs, and most states have multiple  small business programs. For instance, Treasury has not created a  specific number of estimated jobs as a target because so many factors  can determine the use of funds—for example, the degree of interest by  financial institutions and private investors, the performance of the state  agency and any contractors that operate the approved program, and the  effectiveness of the program features designed by the state. How this  program activity affects the level of employment in a state introduces  many variables that can be difficult to predict. According to Treasury  officials, specific numeric indicators, such as the number of loans  resulting from state business programs, may or may not be indicative of  the performance of SSBCI. In analyzing performance outcomes for  SSBCI, Treasury staff advised us that outcomes are highly dependent on  factors outside of the program’s control, such as the demand for credit in  a given locality and the quality of the small business borrowers’ requests  for such funds. Also, the states have different economies that may affect  the results of the SSBCI funds. For example, Michigan’s SSBCI funds are  more concentrated in manufacturing, while other states may be more  focused on providing assistance to small technological firms.
section_title: Information on SSBCI Performance Measures May Be Useful for Stakeholders
paragraphs: In contrast to SBLF, the act does not require Treasury or the states and  municipalities to report to Congress or the public on the status of SSBCI.  Rather, the act requires that SSBCI participants include certain data, such  as the number and the dollar amounts of the loans resulting from SSBCI  funds, in annual reports to Treasury. Treasury’s performance measures  will rely on the data from these annual reports. Treasury officials told us  that they are considering making public some of the SSBCI performance  data, but have not decided what specific SSBCI information will be  released publicly or how it will be presented because they want to make  sure the information reflects the outcomes in an appropriate context. As  noted earlier, SSBCI covers a large number of programs across the  country and other factors, such as local demand for credit, could lead to  different performance outcomes across the participating states. Officials  told us they plan to decide after they receive and review the 2012 annual  reports. The GPRA Modernization Act (GPRAMA) requires agency  performance information to be publicly available. In reporting on the  governmentwide implementation of GPRAMA in 2011, we noted that  agencies need to consider the differing needs of various stakeholders,  including Congress, to ensure that performance information will be both  useful and used.
We reported that federal officials must understand how  the performance information they gather can be used to provide insight  into the factors that impede or contribute to program successes; to  assess the effect of the program; or to help explain the relationships  between program inputs, activities, outputs, and outcomes.
Information on SSBCI’s performance measures regarding the amount of  small business loans or investments and the amount of private leveraging  resulting from SSBCI funds would provide Congress and SSBCI  participants with useful information on the progress of SSBCI and its  effectiveness in increasing small business lending. For example, two  states told us that they would like more information on the performance  measures of the other states’ programs in order to better implement their  own programs. Making the 2012 performance outcome data publicly  available may assist the participating states in identifying successful small  business state programs and the level of private leveraging that the states  have achieved at this point in the SSBCI program. SSBCI applications  were required to demonstrate a reasonable expectation that the programs  would achieve a 10:1 ratio of new small business lending to SSBCI funds  within specified timeframes. Information on the progress of SSBCI  programs may help participating states to make necessary adjustments to  their programs to more efficiently and effectively use their entire allocation  of SSBCI funds.
section_title: Treasury Has Taken Actions to Enhance Communications with SBLF and SSBCI Program Participants
paragraphs: Treasury has taken steps to address our December 2011  recommendation that it apply lessons learned from the SBLF application  review process in order to improve how it communicates with program  participants and other stakeholders, such as the bank regulators and  Congress. In response to the recommendation, Treasury officials told us  that they have enhanced their communication strategy with SBLF  participants and stakeholders and that they are better positioned to  respond to questions about SBLF. Shortly after the application review and  approval period ended, Treasury assigned points of contact for each of  the SBLF participants. Each point of contact was responsible for  responding to inquiries from a designated group of participants and  generally helping to ensure that the participants understood the  compliance and reporting requirements. As the volume of inquiries has  declined, Treasury shifted to a more centralized approach for handling  inquiries. For example, all inquiries from SBLF participants are submitted  to a centralized e-mail system, and they are then assigned to the staff  responsible for (1) compliance, (2) investment management, and (3)  operations. Compliance staff address questions about the Securities  Purchase Agreements and the quarterly reports, and the reporting of  qualified small business lending and the investment rates paid by SBLF  participants. Investment management responds to inquiries relating to  acquisitions and mergers and operations handle questions about  redemption of SBLF shares and dividend payments. In addition, Treasury  has assigned a staff member to handle external communications with  Congress, the media, and the general public, including the reporting of  qualified small business and the investment rates paid by SBLF  participants. According to Treasury officials, they also communicate with  industry and trade associations. Other communication methods  established by Treasury included a webinar for instructing SBLF  participants on completing the quarterly reports. Treasury staff told us that  the purpose of the webinars was to reduce the number of errors in the  quarterly reports.
In addition, on September 28, 2012, Treasury finalized written procedures  to provide guidelines for answering inquiries to provide for consistency,  continuity, and validity in communications with SBLF participants and  their representatives. The guidelines describe the process by which a  contact manager or staff member will communicate with SBLF  participants. The process steps include the tracking and handling of  incoming inquiries, outgoing mass communications, periodic reviews by  business lines for potential Frequently Asked Questions, and the control  manager’s reviews of control effectiveness. The procedures outline the  communication roles and responsibilities of SBLF employees, the contact  manager, and management.
SSBCI has also developed communication mechanisms to assist states  in developing and implementing their state small business programs.  Treasury has assigned three relationship managers whose role is to work  with an assigned group of states in successfully allocating the funds to  lenders and subsequently to borrowers. Moreover, Treasury has assigned  a consultant for three states that requested additional technical expertise  in implementing their small business programs. Additionally, according to  Treasury officials, Treasury has engaged a consultant to assist in  educating lenders nationwide about the approved state programs and two  consultants to assist with expertise in state-run venture capital to support  SSBCI staff in providing technical assistance to state program managers  In addition to the relationship managers and consultants, Treasury has  held two conferences for communicating with SSBCI participants. Under  the act, Treasury is generally required to disseminate best practices to  the states, and Treasury staff view the conferences as one method of  doing so. The SSBCI National Standards for Compliance and Oversight  are another example of disseminating best practices. According to  Treasury staff, conferences provide state officials with the opportunity to  discuss their programs with peers that are running similar programs and  can potentially make modifications to their applications. During the March  2012 conference, states received information on the different types of  small business programs, lenders, and Treasury assistance. The  conference agenda showed that several panels were held. Generally, the  panels consisted of state officials, who discussed their small business  programs, such as the Loan Participation Program and the Venture  Capital Program. In addition, four banks participated in the panels.  Training sessions were held during the conference on the National  Compliance Standards, on requests for modifications to the Allocation  Agreements, and on subsequent disbursement requests of SSBCI funds.  Officials from two states we interviewed told us that they found the March  2012 conference helpful. For example, one official stated that she found  the conference assisted her in answering questions on compliance and  on SSBCI small business programs. Treasury held a similar conference in  early October 2012.
section_title: Conclusions
paragraphs: SBLF and SSBCI officials have made progress in developing procedures  to monitor participants’ compliance. In response to our previous  recommendation on SBLF monitoring, Treasury has developed  procedures for monitoring SBLF participant compliance with legal and  reporting requirements. Treasury also issued the standards for  compliance to provide states with best practices for reviewing  participants’ compliance with SSBCI’s legal and policy requirements and  developed procedures for sampling transaction-level data to evaluate the  accuracy of the states’ annual reports.
Most SSBCI participants have only received the first of three  disbursements of their full allocation approved by Treasury, and some  participants were concerned that they may have difficulty using the funds  in time to meet the requirements to get their third and final allocation  within 2 years. SSBCI participants lack a clear understanding of what  actions Treasury plans to take if they do not meet the 2-year time frame.  Although a Treasury official has publicly indicated that Treasury does not  currently plan to exercise the authority to terminate funds that have not  been allocated within 2 years from the states’ approval date, it retains the  authority to do so in the future. Treasury has yet to develop a formal  written policy or guidance explaining its position. Clear and specific  guidelines on how Treasury plans to use this authority to terminate funds  will help ensure Treasury is consistent in how it applies this authority and  may further encourage participants to develop programs and approaches  to use the funds in a timely manner. Moreover, such a policy could also  facilitate the ongoing communication between Treasury and the  participants on how best to allocate and use the funds.
Treasury has taken some steps to evaluate the performance of SBLF and  the extent to which SBLF participants are increasing their small business  lending, but further refinements could provide a better assessment of the  effectiveness of SBLF. As we found in our December 2011 SBLF report,  Treasury has yet to finalize plans for assessing the performance of the  program, including measures that can isolate the impact of SBLF from  other factors that affect small business lending. As we found in Treasury’s  analysis as well as our own, SBLF participants appear to be increasing  their small business lending since entering the program. However, as we  recommended in our 2011 report, many factors can contribute to such  increases, and Treasury should assess these trends taking other factors  into account. While Treasury compared SBLF participants to non-SBLF  institutions and reported this analysis in its Use of Funds Report, it did not  provide important information on why it selected the comparison group  that it used rather than using a peer group more closely matched to the  SBLF participants. Our own analysis using a peer group showed that  SBLF participants had increased their lending compared to peers, but  also showed that the difference in small business lending growth was  somewhat smaller than what Treasury’s analysis suggests. The lack of  explanation for Treasury’s approach in the Use of Funds Report could  create confusion about the rigorousness of the comparison. Furthermore,  a more transparent description of the methodological decisions would  help to enhance the transparency of the information reported. In addition,  as we recommended in the 2011 report, Treasury should include in its  plans for assessing the program a more robust evaluation that controls for  factors that affect small business lending, such as improved local  economic growth. Without such an evaluation, policymakers, including  Congress, may not have the information they need to assess whether the  SBLF approach of using capital injections is a desirable policy option for  increasing small business lending. Furthermore, a more transparent  description of the methodological decisions would help to enhance the  transparency of the information reported.
In addition, as we recommended last year, Treasury has created  performance indicators to help monitor and measure the effectiveness of  SSBCI. However, Treasury has not yet determined how and when it will  make this information public. Treasury officials acknowledged the  importance of this information for policymakers and have said they hope  to develop a method for sharing this information publicly after they have  had time to review the second annual reports that will be completed by  the states next year. While we recognize that it is still early in the program  and results vary greatly across the program participants for a variety of  reasons, performance information is an important tool for policymakers,  particularly as Congress reviews and considers programs to assist small  businesses going forward. In addition, making this information public in a  timely manner may help program participants, who could observe how  their peers are performing and use this information to help them improve  their own programs.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the Treasury take the following  three actions:
To help ensure that Treasury is transparent and accountable in its  decision making, Treasury should develop a written policy explaining  how it will use the Secretary’s discretionary authority to terminate the  availability of allocated funds to SSBCI participating states if funds  have not been transferred to the participant by the end of the 2-year  period beginning on the date that the Secretary approved the state for  participation.
To enhance the transparency of its reporting on SBLF, Treasury  should expand its methodology discussion in its Use of Funds Report  to include the rationale for its methodology and alternative  methodologies it considered.
To provide Congress and the participating states with information on  the progress of SSBCI, Treasury should make information publicly  available on its performance indicators measuring SSBCI’s  performance.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for review and comment.   The Deputy Assistant Secretary for Small Business, Community  Development, and Affordable Housing Policy provided written comments,  which are reprinted in appendix II. Treasury also provided technical  comments on the draft report, which we incorporated as appropriate. In  the written comments, Treasury agreed with the three recommendations  and stated that it has begun to take steps to implement each of them.   Specifically, Treasury said it has begun to develop a written policy for  exercising its discretion to terminate any portion of a state’s allocation not  yet transferred to the state after two years. Treasury said it also will  include the rationale for Treasury’s methodology along with alternative  methodologies that were considered in the methodology section of the  next Use of Funds Report and that work is underway on publishing  performance indicators that measure SSBCI outcomes. Treasury noted  that the report reflected the progress SBLF and SSBCI had made in  setting up compliance procedures and taking steps to improve  communication with program participants. Treasury also stated that both  programs are working as intended and that it expects both programs to  continue to promote lending to small businesses.
We are sending copies of this report to the appropriate congressional  committees and Treasury. The report also is available at no charge on the  GAO website at http://www.gao.gov. If you or your staff members have  any questions about this report, please contact Daniel Garcia-Diaz at  (202) 512-8678 or garciadiazd@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine: (1) the status of the U.S. Department of  the Treasury’s (Treasury) efforts to monitor participants’ compliance with  program requirements under the Small Business Lending Fund (SBLF)  and the State Small Business Credit Initiative (SSBCI); (2) the status of  SBLF and SSBCI participants’ small business lending; and (3) the extent  to which Treasury evaluates and communicates SBLF and SSBCI  program outcomes.
To examine the status of Treasury’s efforts to monitor participants’  compliance with program requirements under SBLF and SSBCI, we  analyzed Treasury’s documentation. For SBLF, we reviewed and  analyzed SBLF’s Participant Compliance Monitoring Procedures, which  were issued on September 28, 2012. We interviewed Treasury officials on  their compliance program and the process by which staff review the  Quarterly Supplemental Reports for their accuracy.
For SSBCI, we reviewed SSBCI National Standards for Compliance and  Oversight and SSBCI Policy Guidelines. We reviewed the Allocation  Agreements between Treasury and nine participating states that we  interviewed to analyze the conditions and the requirements placed on the  states. We interviewed Treasury officials on implementing the SSBCI  compliance standards and officials from the states of Colorado, Florida,  Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, and  Texas. We judgmentally selected these nine states based on the  following criteria: (1) the top 25 states awarded the most SSBCI funds; (2)  geographical diversity; (3) states with at least two small business  programs; (4) states that began using funds as of March 31, 2012, and  states that had not yet used funds for any loans or investments as of  March 31, 2012; and (5) avoiding states which have been reviewed  previously by GAO or the Treasury’s Office of the Inspector General.  Because a large number of states had not spent their first allocation as of  December 31, 2011, we used both the 2011 Annual Report and the  Quarterly Report for March 31, 2012, to identify states’ progress in  allocating their funds. In terms of geographical diversity, we selected at  least two states from each of four regions: Midwest, Northeast, South,  and West.
To determine the status of SBLF, we reviewed the SBLF Use of Funds  Reports to determine the most current level of qualified small business  lending and the distribution of dividend or interest rates paid by program  participants. Because Treasury requires only SBLF participants to submit  data on qualified small business lending—generally, lending below $10  million— we also analyzed total business lending as well as small  business loans under $1 million, which is available through the Call  Reports.private financial database that contains publicly filed regulatory and  financial reports—and analyzed lending by SBLF participants for the  quarter ending June 30, 2012. The Small Business Jobs Act of 2010 (the  act) establishes the baseline for measuring the change in small business  lending as the average of the amounts that were reported for each of the  four calendar quarters ended June 30, 2010. Call Reports did not begin  requiring quarterly reporting of small business loans under $1 million until  the second quarter of this four quarter baseline period. Accordingly, we  calculated the baseline for small business loans under $1 million using  the average of each of the three calendar quarters ended June 30, 2010.  The act also defines one of the categories of qualified small business  lending as owner-occupied nonfarm, nonresidential real estate loans. For  quarterly reports of small business lending, Call Reports use a broader  category of all nonfarm, nonresidential real estate without a distinction for  owner occupancy. As a result, the small business loans under $1 million  include the broader category. The total business lending numbers use the  full baseline and the narrower categorization of owner-occupied nonfarm,  nonresidential real estate and should therefore not be compared to the   We accessed the Call Report data using SNL Financial—a  numbers for small business loans under $1 million. We assessed the  reliability of these data, for example, by analyzing missing data and  performing various logic tests and determined that the data were  sufficiently reliable for the purpose of reporting on SBLF lending.
To review SSBCI participants’ small business lending, we collected and  reviewed data from the Quarterly Report as of June 30, 2012—the most  recent quarter available. We conducted data reliability checks on the  SSBCI quarterly data for the dollar amounts transferred to the states and  the dollar amounts used by each participating state to identify any  potential discrepancies in the data. We interviewed Treasury officials on  how they assessed these data. In addition, we verified with three states  the data that they had sent to Treasury on the SSBCI Quarterly Report as  of June 30, 2012. We also interviewed state and Treasury officials about  the status of the use of SSBCI funds and Treasury’s authority to suspend  disbursements to SSBCI participants. Based on these steps, we  determined that the data collected by Treasury for SSBCI were  sufficiently reliable for the purpose of reporting total amounts of funds  allocated and used by the states.
To examine the extent to which Treasury evaluates and communicates  SBLF and SSBCI program outcomes, we reviewed Treasury  documentation for both programs. For determining the extent to which  Treasury evaluates the performance of SBLF, we reviewed the Use of  Funds Report to evaluate the methodology Treasury used to assess the  performance of SBLF participants against a comparison group of  institutions that did not participate in SBLF. We interviewed Treasury  officials to understand the process for developing the comparison group  as well as the alternatives they considered. We used the methodology in  the report to replicate Treasury’s group for our analysis. To help  understand the usefulness of the comparison group, we also chose a  peer group of non-SBLF institutions that we adjusted for geographical and  size distribution as well as financial health, using the Texas Ratio as a  proxy.Treasury’s comparison group of 6,175 institutions and categorized them   To select the peer group, we started with our replication of  into six asset-size groups. We then sorted the institutions by state, asset  group, and Texas Ratio and generally assigned two peer institutions to  each SBLF participant with the closest Texas Ratios, within the same  state and asset group. In some cases, we had to make judgments in  choosing the peers—for example, when two SBLF participants were  similar to one another and when too few potential peers existed. We  determined that any potential judgment factors were mitigated by the fact  that the peer group mirrored the SBLF more closely than the comparison  group across geographical and size distribution as well as financial health  (see table 1). Consistent with the Use of Funds Report, we analyzed the  growth in total business lending because qualified small business lending  data were not available for non-SBLF institutions and because qualified  small business lending totaled 95 percent of total business lending for the  median SBLF participant as of December 31, 2011. Here we calculated  the baseline using the average of the four quarters ending June 30, 2010.  The data limitation mentioned earlier that required us to use only three  quarters in the calculation of the baseline only applied to the availability of  small business lending data, and the three-quarter baseline was used  only in those earlier sections. We compared our peer group with  Treasury’s comparison group and compared both to SBLF participants.  We also compared Treasury’s analysis against our previous work on  program evaluation as well as best practices identified by the Office of  Management and Budget. In assessing the SBLF communication  process, we reviewed and analyzed SBLF’s Contact Management  Procedures and interviewed Treasury officials on how they communicated  with SBLF participants.
For determining the extent to which Treasury evaluates SSBCI  performance outcomes, we collected and reviewed the performance  measures that Treasury developed for evaluating SSBCI. We interviewed  Treasury officials on how they were planning to use the performance  outcome measures in evaluating SSBCI. We also interviewed officials  from the same nine states we described earlier—Colorado, Florida,  Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, and  Texas—to collect information on their evaluation and the performance  information they reviewed relating to SSBCI.  To analyze the  communication of SSBCI performance outcomes, we reviewed the  relevant provisions of the Small Business Jobs Act of 2010 and  Treasury’s outreach information that they had drafted for the states, such  as conference materials.
We conducted this performance audit from March 2012 to December  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of the Treasury
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Kay Kuhlman (Assistant  Director), Pamela Davidson, Nancy Eibeck, Chris Forys, Michael  Hoffman, Jonathan Kucskar, Marc Molino, Jennifer Schwartz, and Jena  Sinkfield made key contributions to this report.