As authorized by Congress, SBA established the 504 loan program to foster economic development; create or preserve job opportunities; and stimulate the growth, expansion, and modernization of small businesses. The 504 loan program provides long-term, fixed-rate financing to new or growing small businesses for fixed assets such as owner-occupied real estate or long-term equipment and machinery. Small businesses may apply for 504 financing through a CDC serving the area where the 504 project is located. CDCs are generally nonprofit corporations that provide funding to small businesses in order to contribute to economic development within their communities. There are about 270 existing CDCs located throughout the United States and Puerto Rico. A CDC must obtain certification from SBA to operate in a designated state; however, a few CDCs offer 504 funding in contiguous states contingent upon approval from SBA. The 504 loan program is intended to serve small businesses that might otherwise not have access to privately financed credit. Similar to other SBA loan guarantee programs, the 504 program has a “credit elsewhere” requirement, which means that small business applicants must be unable to obtain credit on reasonable terms from a nonfederal source. In 1994, Congress authorized SBA to implement two programs to provide qualified CDCs with delegated authority to carry out certain functions associated with 504 loans that had previously been reserved for SBA. These two programs are the Accredited Lenders Program (ALP) and the Premier Certified Lenders Program. The two programs allow participating CDCs, in some cases, to unilaterally make decisions related to various loan activities. As discussed previously, the scope of this review does not include issues related to the Premier Certified Lenders Program. SBA may designate a CDC as having ALP authority if the CDC meets certain statutory and regulatory requirements. The ALP designation is for 2 years and can be renewed. CDCs with ALP authority assume responsibility for thorough borrower credit and loan eligibility analysis on initial 504 loan applications, which we discuss in more detail later in this report. For a typical 504 loan project, the financing is provided by three parties: a third-party lender, a CDC, and a small business borrower. A third-party lender, typically a commercial bank, provides financing totaling at least as much as the 504 loan, generally 50 percent or more of the total 504 project financing. A CDC provides up to 40 percent of the financing through a loan (the “504 loan”) that is backed by a debenture that is fully guaranteed by SBA. The maximum amount a CDC can loan a small business borrower is $5,000,000 or $5,500,000, depending on the circumstances. Finally, the small business borrower must contribute at least 10 percent of the project financing. Exposure to default risk is tiered in the 504 loan program. The third-party lender’s loan is collateralized by a first lien on the project property. The CDC’s 504 loan is subordinate to the bank’s first position on the debt. A 504 loan is approved but not funded by the sale of the debenture until project-related construction is completed. Prior to the sale of the debenture and funding of the 504 loan, the borrower may obtain interim financing from a third-party lender, usually the same lender that provided the loan covering 50 percent of the total 504 project financing. After project-related construction is completed, the 504 loan is closed, and the debenture is sold by SBA’s central servicing agent. The central servicing agent distributes the appropriate funds to the small business borrower on behalf of SBA and the CDC. SBA’s Office of Capital Access (OCA) is responsible for overseeing the 504 loan program and CDCs. The Office of Financial Assistance (OFA) is an office within OCA that is responsible for the implementation of the 504 loan program. OFA’s primary responsibilities include structuring the 504 loan application process and making necessary adjustments to application criteria based on feedback from program participants and data analysis. OFA also monitors and oversees the requirements and program protocols that determine SBA’s ability to extend capital to small businesses. The Office of Performance and Systems Management, also within OCA, analyzes relevant data to inform final 504 policy decisions and provides system oversight for the central servicing agent, among other responsibilities. The Office of Credit Risk Management (OCRM), another office within OCA, is responsible for managing all activities regarding lender and CDC oversight. Its duties include assigning risk ratings to CDCs, conducting reviews, and preparing written reports addressing CDC oversight. Finally, OCA’s Office of Financial Program Operations is responsible for the execution of the 504 program through loan processing and servicing and through liquidation of 504 loans and management of the loan portfolio. SBA also has district offices and processing and servicing centers that have a role in the 504 program. Staff in SBA’s 68 district offices provide local assistance to participating CDCs and occasionally offer 504 program training courses to lenders and CDCs. They also conduct annual reviews of CDCs’ annual reports. In addition, district office counsel review 504 loan closing documentation, among other things. The Sacramento Loan Processing Center (SLPC) evaluates and issues loan guarantee commitments to eligible and creditworthy 504 loan applicants. In addition, there are two servicing centers, located in Little Rock, Arkansas, and Fresno, California, that serve CDCs based on the CDC’s location. These two servicing centers collectively handle the entirety of SBA’s commercial loan servicing activities, including the liquidation of 504 loans. The Office of Financial Program Operations is responsible for managing SLPC and the two servicing centers. We analyzed 504 loan program data for fiscal years 2003 through 2013 (as of Mar. 31, 2013) to identify loans approved and disbursed. Based on our analysis of this subset of loans, SBA approved loans totaling the largest amounts in fiscal years 2006 and 2007 (see fig. 1). In fiscal years 2008 and 2009, the total number of 504 loans approved and disbursed declined slightly. Section 504 of the American Recovery and Reinvestment Act of 2009 and Section 1122 of the Small Business Jobs Act of 2010 (Jobs Act) expanded the 504 program to allow debt refinancing under certain circumstances, which could account for some of the increase after 2009. The temporary debt refinancing program authorized by the Jobs Act expired at the end of fiscal year 2012. Based on our analysis, the top four types of small businesses funded by 504 loans were hotels, restaurants, doctors’ offices, and dentists’ offices. Respectively, these business types made up 12 percent, 5 percent, 4 percent, and 3 percent of all approved 504 loan dollars from fiscal year 2003 through 2012. Also, 85 percent of approved loans and dollars went to existing small businesses, and 15 percent went to new small businesses. SBA has established lending standards and guidance that address program requirements and protect against default risk. However, the agency has not provided CDCs with specific guidance on compiling and supporting data on jobs created or retained as a result of 504 loans, which is a key economic development goal of the 504 loan program. SBA also has established performance indicators for the 504 program and analyzed 504 program data to measure loan performance. SBA has established lending standards and guidance for CDCs that address 504 program requirements and protect against default risk. Table 1 contains some of the key requirements of the 504 program. SBA has issued regulations implementing the program as well as SOPs that address program requirements and provide additional guidance to CDCs on how to implement the program. SOP 50 10 Subpart C addresses the 504 loan program. In addition to the noneconomic development-related requirements listed in table 1, SBA officials said that credit underwriting standards and reviews of borrowers’ character and credit history, required by regulation and discussed in the SOP, are important requirements that protect against default risk. The SOP lays out the credit underwriting standards that CDCs must comply with as part of the 504 loan approval process. It specifies that CDCs must analyze each loan application in a manner consistent with prudent lending standards and that the cash flow of the small business is the primary source of repayment. In addition, the SOP discusses the types of financial analyses CDCs must perform as part of determining the viability of the project. SBA officials added that the third-party lender also performs its own credit underwriting of the 504 project, which provides additional review of the project and also helps protect against default risk. The majority of CDCs (7 of 10) we spoke with thought SBA 504 lending standards were sufficient in addressing default risk. Three of the 10 CDCs noted that it is the CDC’s responsibility to make sure it is underwriting good loans. SBA also requires reviews of borrowers’ character and credit history. Specifically, SBA requires that any person with 20 percent or more ownership interest in the small business applying for the loan be of good character. SBA officials said that they consider the 504 financing structure to be another protection against default risk. As previously discussed, 504 loan applications are initially approved but are not funded until after project- related construction has been completed (see fig. 2). A third-party lender—typically, the bank that provides 50 percent of the 504 project cost—provides interim financing to cover the 504 loan portion of the project (typically 40 percent) prior to construction being completed. As no SBA-guaranteed funds are disbursed until key aspects of the project have been completed, this mitigates the risk of default due to problems with construction or other issues that may arise prior to project completion. SBA officials told us that the time between approval and closing varies depending on the extent of construction. The debenture must be sold to fund the 504 loan within at least 4 years of the initial approval of the 504 loan.