SBA was established in 1953, but its basic mission dates to the 1930s and 1940s when a number of predecessor agencies assisted small businesses affected by the Great Depression and, later, by wartime competition. The first of these, the Reconstruction Finance Corporation, was abolished in the early 1950s; SBA was established by the Small Business Act of 1953, to continue the functions of the previous agencies. By 1954, SBA was making business loans directly to small businesses and guaranteeing loans banks made, making loans directly to victims of disasters, and providing a wide range of technical assistance to small businesses. Today, SBA’s stated purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. SBA also serves as a small business advocate, working with other federal agencies to, among other things, reduce regulatory burdens on small businesses. Most SBA financial assistance is now provided in the form of guarantees for loans made by private and other institutions, but the agency’s disaster program remains a direct loan program and is available to homeowners and renters that are affected by disasters of any kind; and to all businesses, regardless of their size, to cover physical damages. At the end of fiscal year 2005, SBA had authority for over 4,000 full-time employees and budgetary resources of approximately 1.1 billion. Providing small businesses with access to credit is a major avenue through which SBA strives to fulfill its mission. The 7(a) loan program, which is SBA’s largest business loan program, is intended to serve small business borrowers who cannot obtain credit elsewhere. Because SBA guarantees up to 85 percent of each 7(a) loan made by its lending partners, there is risk to SBA if the loans are not repaid. SBA is to ensure that lenders provide loans to borrowers who are eligible and creditworthy. Therefore, strong oversight of lenders by SBA is needed to ensure that qualified borrowers get 7(a) loans and to protect SBA from financial risk. As of September 30, 2005, SBA’s portfolio of 7(a) loans totaled $43 billion. In administering the 7(a) program, SBA has evolved from making loans directly to depending on lending partners, primarily banks that make SBA guaranteed loans. SBA’s other lending partners are Small Business Lending Companies (SBLC)—privately owned and managed, non-depository lending institutions that are licensed and regulated by SBA and make only 7(a) loans. Unlike SBA’s bank lending partners, SBLCs are not generally regulated by financial institution regulators. Since the mid-1990s, when SBA had virtually no oversight program for its 7(a) guaranteed loan program, the agency has established a program and developed some enhanced monitoring tools. We have conducted four studies of SBA’s oversight efforts since 1998 and made numerous recommendations related to establishing a lender oversight function and improving it. Although we sometimes repeated recommendations in more than one report because SBA had not acted to address them, SBA has now addressed many of the outstanding recommendations and is in the process of addressing others. Prior to December 1997, SBA’s procedures required annual on-site reviews of lenders with more than three outstanding guaranteed loans. But in a June 1998 study, we could not determine from the district offices’ files which lenders met this criterion and should have been reviewed. In the five SBA district offices we visited, we found that about 96 percent of the lenders had not been reviewed in the past 5 years and that some lenders participating in the program for more than 25 years had never been reviewed. When we did our study, SBA was implementing a central review program for its “preferred” lenders (those SBA certifies to make loans without preapproval). The Small Business Programs Improvement Act of 1996 required SBA to review preferred lenders either annually or more frequently. In our 1998 report, we recommended that SBA establish a lender review process for all of its 7(a) lenders, including the SBLCs. In 1999, SBA established OLO and charged it with, among other duties, managing lender reviews, including safety and soundness examinations of SBLCs. In the same year, SBA contracted with the Farm Credit Administration—the safety and soundness regulator of the Farm Credit System—to perform examinations of SBLCs. Numerous deficiencies were identified in those first examinations, but the SBLCs and SBA responded positively to address the recommendations. SBA continues its contracting arrangement with FCA. It was during our 2000 study on oversight of SBLCs that we first recommended that SBA clarify its authority to take enforcement actions, if necessary, against SBLCs, and to seek any statutory authority it might need to do so. We made this recommendation again in 2002 and in 2004 and included a call to clarify procedures for taking actions against preferred lenders as well. We recommended that SBA provide, through regulation, clear policies and procedures for taking enforcement actions against preferred lenders or SBLCs in the event of continued noncompliance with its regulations. During this time, SBA sought appropriate authority from Congress to take enforcement actions against SBLCs similar to those of other regulators of financial institutions, such as cease-and-desist and civil money penalty powers. Congress provided SBA enforcement authority over non-bank lenders in late 2004, and SBA announced related delegations of authority in the Federal Register in April 2005 to clarify responsibilities within the agency. SBA officials have told us that they will issue related regulations in 2006. Our 2002 study focused more broadly on the relatively new OLO and found that the agency had made more progress in developing its lender oversight program. OLO had developed guidance, centralized the lender review processes, and was performing more reviews of its lenders. We did, however, find some shortcomings in the program and made recommendations for improving it. For example: While elements of the oversight program touched on the financial risk posed by preferred lenders, weaknesses limited SBA’s ability to focus on, and respond to, current and future financial risk to its portfolio. Neither the lender review process nor SBA’s off-site monitoring adequately focused on the financial risk lenders posed. The reviews used an automated checklist to focus on lenders’ compliance with SBA’s 7(a) processing, servicing, and liquidation standards. The reviews did not provide adequate assurance that lenders were sufficiently assessing borrowers’ eligibility and creditworthiness. We recommended that SBA incorporate strategies into its review process to adequately measure the financial risk lenders pose to SBA, develop specific criteria to apply to the “credit elsewhere” standard, and perform qualitative assessments of lenders’ performance and lending decisions. By 2004, as I will discuss in a moment, we found that SBA had made progress in its ability to monitor and measure the financial risk lenders pose but had not developed criteria for its credit elsewhere standard. Although SBA had taken a number of steps to develop its lender oversight function, the placement of its OLO within the Office of Capital Access (OCA) did not give OLO the necessary organizational independence it needed to accomplish its goals. OCA has other objectives, including promoting the lending program to appropriate lenders. We recommended that SBA make lender oversight a separate function and establish clear authority and guidance for OLO. SBA has taken several steps to address this recommendation but has not made OLO an independent office. In the 2005 delegations of authority published in the Federal Register, SBA specified that a Lender Oversight Committee (comprised of a majority of senior SBA officials outside of OCA) would have responsibilities for reviewing reports on lender-oversight activities; OLO recommendations for enforcement action; and OLO’s budget, staffing, and operating plans. SBA officials believe that these and other measures will ensure sufficient autonomy and authority for OLO to independently perform its duties. These measures appear to provide the opportunity for more independence for OLO, but we have not evaluated how the measures are actually working. Our most recent review of SBA’s oversight efforts, completed in June 2004, focused on the agency’s risk management needs and its acquisition and use of a new loan monitoring service. Using an assessment of best practices, we determined that SBA would need to base its capabilities for monitoring its loan portfolio and lender partners on a credit risk management program. Largely because SBA relies on lenders to make its guaranteed loans, it needs a loan and lender monitoring capability that will enable it to efficiently and effectively analyze various aspects of its overall portfolio of loans, its individual lenders, and their portfolios. While SBA must determine the level of credit risk it will tolerate, it must do so within the context of its mission and its programs’ structures. Since SBA is a public agency, its mission obligations will drive its credit risk management policies. For example, different loan products in the 7(a) program have different levels of guarantees. These and other differences influence the mix of loans in SBA’s portfolio and, consequently, would impact how SBA manages its credit risk. Such a credit risk management program would likely include a comprehensive infrastructure—including, skilled personnel, strong management information systems, and functioning internal controls related to data quality—along with appropriate methodologies and policies that would ensure compliance with SBA criteria. In 2003, SBA contracted with Dun and Bradstreet for loan monitoring services. These services could enable the agency to conduct the type of monitoring and analyses typical of “best practices” among major lenders, and are recommended by financial institution regulators. The services SBA obtained reflect many best practices, particularly those related to infrastructure and methodology, and can facilitate a new level of sophistication in SBA’s oversight efforts. The services also give SBA a way to measure the financial risk posed by its lending partners, and analyze loan and lending patterns efficiently and effectively.