December 2, 2016
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Small Business Administration's implementation of administrative provisions in the American Recovery and Reinvestment Act

United States Government Accountability Office: 
Washington, DC 20548: 

April 16, 2009: 

Congressional Committees: 

Subject: Small Business Administration's Implementation of 
Administrative Provisions in the American Recovery and Reinvestment Act 
of 2009: 

Due to recent turmoil in U.S. credit markets, many lenders have been 
reluctant to offer conventional loans--that is, loans that are not 
guaranteed by the federal government--to small businesses so that they 
can finance their operations and capital needs. While the Small 
Business Administration's (SBA) principal loan guarantee programs, the 
7(a) and 504 programs, are intended to facilitate the capacity of small 
businesses to raise critical financing that they may have difficulty 
obtaining from other sources, the availability of such loans has also 
declined. Under the 7(a) program, SBA generally provides lenders 
guarantees on up to 85 percent of the value of loans to qualifying 
small businesses in exchange for fees to help offset the costs of the 
program. Under the 504 program, which generally applies to small 
business real estate and other fixed assets, SBA also provides 
certified development companies with a guarantee on up to 40 percent of 
the financing of the projects' costs in exchange for fees while the 
small business borrowers and other lenders provide the remaining 60 
percent of the financing on an unguaranteed basis.[Footnote 1] Many 
lenders, such as banks, that participate in the 7(a) or 504 programs 
frequently try to sell qualifying small business loans on the secondary 
markets to raise funds necessary for additional lending.[Footnote 2] 
Since mid-2008, investors that typically purchase securities 
collateralized by the pools of 7(a) guaranteed small business 
loans[Footnote 3] and certain 504 loans largely have withdrawn from the 
secondary markets. As a result, many such loans remain on the balance 
sheets of broker-dealers that package the securities or the original 
lenders. According to SBA, lenders' origination of loans the agency 
guarantees, principally through the 7(a) and 504 programs, are trending 
below $10 billion during 2009 after reaching about $20 billion in 2008 
due in part to weakness in the secondary markets. 

Under the American Recovery and Reinvestment Act of 2009 (ARRA), 
[Footnote 4] Congress required SBA to implement a total of eight 
administrative provisions to help facilitate small business lending and 
enhance liquidity in the secondary markets. These administrative 
provisions include (1) temporarily requiring SBA to reduce or eliminate 
certain fees on 7(a) and 504 loans; (2) temporarily increasing the 
maximum 7(a) guarantee from 85 percent to 90 percent; and (3) 
implementing provisions designed specifically to facilitate secondary 
markets, such as extending existing guarantees in the 504 program and 
making loans to systemically important broker-dealers that operate in 
the 7(a) secondary market.[Footnote 5] Further, ARRA established 
deadlines for SBA to issue regulations that implement certain 
administrative provisions, such as those pertaining to facilitating 
secondary market activities. Specifically, ARRA required SBA to issue 
regulations extending the guarantee related to the 504 program within 
15 days after enactment (March 4, 2009) and for making loans to 
systemically important broker-dealers within 30 days after enactment 
(March 19, 2009). 

ARRA also mandates that we report within 60 days after the date of 
enactment, April 17, 2009, on SBA's initial efforts to comply with 
these provisions.[Footnote 6] In response, this report (1) summarizes 
key activities undertaken by the Administrator of SBA to implement the 
administrative provisions including establishment of project plans with 
timelines for fulfilling responsibilities, and (2) analyze whether the 
Administrator is accomplishing the purpose of increasing liquidity in 
the secondary markets for SBA loans. Because SBA's efforts are still in 
their early stages, we agreed with the staffs of the House and Senate 
Committees on Small Business to focus our work on four key 
administrative provisions for the purposes of this report. These four 
provisions are eliminating or reducing fees on 7(a) and 504 loans, 
extending the existing guarantee on 7(a) loans, and taking two specific 
steps to facilitate activities in the secondary markets: extending the 
guarantee on 504 financing and making loans to systemically important 
broker-dealers. However, consistent with ARRA's requirements, we are 
also providing information on the status of SBA's implementation of the 
other four administrative provisions.[Footnote 7] 

To address these objectives, we obtained and analyzed program 
regulations, policies, procedures, and SBA reports to Congress. We also 
analyzed available historical financial data on the 7(a) and 504 
markets, including relevant data on secondary market activity. In 
addition, we interviewed senior SBA officials to obtain information on 
the agency's efforts to implement ARRA's administrative provisions, 
including efforts to coordinate relevant activities with the Department 
of Treasury and the Federal Reserve. We also contacted the Treasury to 
discuss its SBA coordination efforts. Finally, we interviewed 
representatives of trade groups that represent SBA lenders as well as 
certain broker-dealers that participate in the 7(a) and 504 secondary 
loan markets to obtain their perspectives. 

We conducted our work from February 2009 through April 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings 
based on our audit objectives. 

Results in Brief: 

SBA has implemented two of the four key administrative ARRA provisions 
as defined for purposes of this report, and plans to have the two 
secondary market provisions finalized by June 2009. On March 16, 2009, 
SBA issued policy notices to eliminate certain fees on 7(a) and 504 
loans and to extend the maximum guarantee on 7(a) loans from 85 percent 
to 90 percent. According to SBA officials, eliminating fees and 
extending lender protections on certain 7(a) loans should provide 
incentives for small businesses to apply for additional loans and 
lenders to originate them. However, SBA has not met its statutory 
requirement to issue regulations associated with extending existing 
guarantees on 504 projects (which were due by March 4, 2009) and making 
loans to systemically important broker-dealers that participate in the 
secondary market for 7(a) loans (which were due by March 19, 2009). 
According to SBA officials, issuing the regulations for these ARRA 
provisions is complicated and time consuming because it involves 
establishing new programs and related infrastructure, such as 
establishing policies and procedures, hiring and training staff, 
developing information systems, and establishing risk mitigation 
strategies as well as resolving critical policy issues. For example, an 
SBA official said that the agency must determine the extent to which 
broker-dealers and perhaps small business lenders would be required to 
share in the potential losses associated with extending the guarantee 
in the 504 program.[Footnote 8] While requiring broker-dealers and 
lenders to share in potential losses could help ensure sound loan 
underwriting and thereby limit SBA's potential exposure, it could also 
lessen their willingness to participate and thereby fail to facilitate 
secondary market activity as ARRA intended. SBA officials and trade 
groups we contacted also said that ARRA's array of requirements may 
also place strains on the agency's staff resources, and our previous 
work has also concluded that limited resources and pending retirements 
could affect its capacity to implement programs such as those specified 
in ARRA.[Footnote 9] To address these and other challenges, SBA has 
established an intra-agency process to implement ARRA's provisions, 
including the appointment of relevant project teams, and indicated it 
has consulted with Treasury and Federal Reserve officials on its 
responsibilities. According to SBA, the draft rules for the secondary 
market provisions are now undergoing internal SBA review, and those 
rules are expected to be sent to the Office of Management and Budget 
(OMB) for its review and finalized by June 2009. 

Largely because SBA has not yet implemented its key secondary market 
administrative authorities, it is not possible at this time to assess 
their effect on the secondary markets for SBA loans. Such an assessment 
will only be possible when the regulations are issued and fully 
implemented and market participants have had some time to evaluate them 
and decide whether to participate or not. According to SBA officials, 
the agency is considering a variety of potential performance measures 
to assess ARRA's administrative provisions once they are implemented. 
For example, an official said that the agency might collect and analyze 
financial data on 7(a) and 504 loan originations and related secondary 
market activity, such as the percentage of such loans that are sold in 
secondary markets over time. However, it may be very difficult for SBA 
to isolate the effects of ARRA's administrative provisions from other 
federal initiatives that are currently being implemented to support 
small business finance. For example, on March 16, 2009, Treasury 
announced plans under the Troubled Asset Relief Program (TARP) to 
directly purchase up to $15 billion in SBA guaranteed 7(a) and 504 
securities to help unclog secondary markets. Because this Treasury 
program, and a related joint Federal Reserve and Treasury program, are 
potentially far larger than SBA's initiatives under ARRA, it may be 
very difficult to discern the effects of SBA's various administrative 
provisions on small business finance and secondary markets once they 
are finalized. Going forward, SBA officials said they will continue to 
coordinate with Treasury and the Federal Reserve as the programs to 
facilitate small business finance are developed. Such coordination is 
important to maximize the potential overall effect of these programs. 

We provided SBA a draft of this report for review and comment. In 
written comments, which are reprinted in enclosure I, the SBA 
Administrator said that the draft report presented a fair and balanced 
discussion of the agency's efforts thus far in implementing ARRA's 
administrative provisions. The Administrator also provided additional 
information to demonstrate SBA's commitment to implementing the 
administrative provisions, organizational effort to do so, and 
improvements resulting from provisions already implemented. For 
example, she stated that SBA has kept the Congress, other oversight 
authorities, and the public informed of SBA's progress as well as 
establishing project and support teams with specific implementation 
responsibilities. In addition, the Administrator stated that the impact 
of actions taken four weeks ago to increase guarantee percentages and 
lower program fees appears to be strong with both the 7(a) and 504 loan 
programs experiencing some growth in loan volume over this period. SBA 
also provided technical comments, which were incorporated as 
appropriate. 

Background: 

Under the 7(a) loan program, SBA guarantees loans made by commercial 
lenders to small businesses for whom credit is not otherwise available 
on reasonable terms from non-federal sources and do not have the 
personal resources to provide financing themselves.[Footnote 10] The 
guarantee assures the lender that if a borrower defaults on a loan, the 
lender will receive an agreed-upon portion (generally between 50 
percent and 85 percent) of the outstanding balance. Loan proceeds may 
be used for working capital and other general business purposes. To be 
eligible for the 7(a) program, a business must be an operating for- 
profit small firm (according to SBA's size standards) located in the 
United States. To offset some of the costs of the program, SBA assesses 
lenders two fees on each 7(a) loan, an up-front guarantee fee that may 
be passed on to the borrower and an annual servicing fee. 

The 504 loan program provides long-term, fixed-rate financing to small 
businesses for expansion or modernization, primarily of real estate 
(including land and new building construction, existing building 
purchases or renovation, and machinery and equipment).[Footnote 11] 
Financing is delivered through certified development companies (CDC), 
private nonprofits established to contribute to the economic 
development of their communities. In a typical 504 loan project, a 
third-party lender provides 50 percent or more of the financing 
pursuant to a first-lien mortgage, a CDC provides up to 40 percent of 
the financing through a debenture that is fully guaranteed by SBA, and 
a borrower contributes at least 10 percent of the financing. The 
borrower must meet eligibility requirements similar to those for 7(a) 
program borrowers, and a project generally must create or retain at 
least one job for every $50,000 guaranteed by SBA. Like the 7(a) 
program, lenders, small business borrowers, and CDCs in the 504 program 
are required to pay various fees to offset the costs of the program. 

Over the years, the development of secondary markets for both 7(a) and 
504 loans facilitated the capacity of lenders to originate such loans 
and small businesses to apply for them. By selling loans to investors 
via secondary markets, among other benefits, lenders can receive 
additional funds, or liquidity, to make more loans. In the 7(a) 
secondary market, lenders sell the SBA guaranteed portions of the loans 
to investors, with the participation of broker-dealers and other market 
participants, and generally retain the non-guaranteed portion in their 
portfolios. The broker-dealers assemble the guaranteed portions of 7(a) 
loans from lenders into securities and manage the sale of such 
securities to investors. Lenders, broker-dealers, and other secondary 
market participants make profits from the premiums that investors pay 
for the securities, through various fees, and through servicing the 
loans over time. Due to the structure of 504 loans, there are two 
separate secondary markets. There is a secondary market for the SBA- 
guaranteed, or debenture, portion of 504 loans and another market for 
the first-lien mortgage portion. 

A significant decline in SBA-guaranteed lending and related secondary 
markets activity has accompanied the deterioration of credit markets 
and the decline in economic activity. As discussed previously, the 
origination of SBA-guaranteed loans, principally 7(a) and 504 loans, is 
trending below $10 billion during 2009 from about $20 billion in 2008, 
according to the agency. SBA data also indicate that there has been a 
recent and sharp decline in secondary market activity. For example, 
table 1 indicates that the guaranteed portion of 7(a) loans sold on the 
secondary market averaged about 45 percent from 2006 through most of 
2008, but declined to an average of about 23 percent from October 
through December 2008 before recovering somewhat in January and 
February 2009. According to representatives from SBA and broker-dealers 
we contacted, there was a significant decline in secondary market 
activity during the fourth quarter of 2008 for 7(a) loans and 
securities collateralized by first-lien mortgages, which are 
unguaranteed, that are issued in connection with the 504 program. 
However, some broker-dealer representatives said there had been a 
marginal improvement in secondary market activity in the first quarter 
of 2009. 

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

Time period: FY 2006; 
Guaranteed portion of 7(a) loans approved: $10,234,585; 
Guaranteed amount sold on secondary market: $4,531,992; 
Proportion sold on secondary market: 44.3%. 

Time period: FY 2007; 
Guaranteed portion of 7(a) loans approved: $10,015,068; 
Guaranteed amount sold on secondary market: $4,373,174; 
Proportion sold on secondary market: 43.7%. 

Time period: FY 2008; 
Guaranteed portion of 7(a) loans approved: $9,051,727; 
Guaranteed amount sold on secondary market: $4,095,595; 
Proportion sold on secondary market: 45.2%. 

Time period: July 2008; 
Guaranteed portion of 7(a) loans approved: $879,139; 
Guaranteed amount sold on secondary market: $393,997; 
Proportion sold on secondary market: 44.8%. 

Time period: August 2008; 
Guaranteed portion of 7(a) loans approved: $592,895; 
Guaranteed amount sold on secondary market: $277,546; 
Proportion sold on secondary market: 46.8%. 

Time period: September 2008; 
Guaranteed portion of 7(a) loans approved: $764,744; 
Guaranteed amount sold on secondary market: $310,038; 
Proportion sold on secondary market: 40.5%. 

Time period: October 2008; 
Guaranteed portion of 7(a) loans approved: $485,190; 
Guaranteed amount sold on secondary market: $114,133; 
Proportion sold on secondary market: 23.5%. 

Time period: November 2008; 
Guaranteed portion of 7(a) loans approved: $409,925; 
Guaranteed amount sold on secondary market: $111,025; 
Proportion sold on secondary market: 27.1%. 

Time period: December 2008; 
Guaranteed portion of 7(a) loans approved: $510,232; 
Guaranteed amount sold on secondary market: $94,656; 
Proportion sold on secondary market: 18.6%. 

Time period: January 2009; 
Guaranteed portion of 7(a) loans approved: $348,309; 
Guaranteed amount sold on secondary market: $84,513; 
Proportion sold on secondary market: 24.3%. 

Time period: February 2009; 
Guaranteed portion of 7(a) loans approved: $382,013; 
Guaranteed amount sold on secondary market: $135,259; 
Proportion sold on secondary market: 35.4%. 

Source: GAO analysis of SBA data. 

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

[End of table] 

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

Tables 2 and 3 show the status of SBA's efforts to implement ARRA's 
eight administrative provisions that were generally established to 
facilitate small business lending and related secondary markets. Table 
2 indicates that SBA has implemented two key provisions (as defined for 
purposes of this report) but has missed the statutory deadlines for 
issuing regulations in two others pertaining to facilitating secondary 
market activity. On March 16, 2009, SBA issued a policy notice 
temporarily eliminating the up-front guarantee fees for eligible 7(a) 
loans, as well as the third-party participation fees and CDC processing 
fees for eligible 504 loans. SBA also issued a policy notice 
implementing the temporarily increased guarantee percentage on eligible 
7(a) loans from 85 percent to 90 percent.[Footnote 12] According to SBA 
officials, lowering the costs associated with 7(a) and 504 loans and 
affording additional protections to 7(a) lenders is intended to 
encourage small businesses to apply for such loans and make lenders 
more willing to originate them. However, SBA has not yet implemented 
other administrative provisions considered critical to reviving 
secondary markets for small business loans that the agency guarantees. 
Specifically, SBA has not implemented the provision to extend the 
guarantee to pools of 504 first-lien mortgages, which serve as the 
collateral for securities that are sold on the secondary market, or 
established a program to make loans to systemically important broker- 
dealers that operate in the 7(a) secondary market. Regarding the four 
other administrative provisions shown in table 3, SBA has issued an 
information notice increasing the maximum amount for contracts that 
qualify for SBA guaranteed surety bond to $5,000,000, issued a notice 
to announce the amended job creation eligibility requirement for the 
504 program, missed a statutory deadline to issue regulations for a new 
program to guarantee loans of $35,000 or less to small business 
concerns suffering immediate financial hardship, and has rulemakings 
underway to develop a program to refinance certain 504 loans and 
increase the leverage of Small Business Investment Companies.[Footnote 
13] 

Table 2: Status of SBA's Implementation of Key Administrative 
Provisions in ARRA: 

Provision number and title: 501; Fee Reductions; 
Primary requirements and sunset provisions: Permits temporary reduction 
or elimination of fees, until September 30, 2010, for 7(a) and 504 
loans until $375 million of appropriated funds are expended; 
SBA's actions, as of April 16, 2009: Operational on March 16, 2009. 

Provision number and title: 502; Economic Stimulus Lending Program; 
Primary requirements and sunset provisions: Permits SBA to guarantee up 
to 90 percent of qualifying 7(a) loans made by SBA lenders; No loan 
guarantees under this provision can be made 12 months after the date of 
enactment or until appropriated funds are expended; 
SBA's actions, as of April 16, 2009: Operational on March 16, 2009. 

Provision number and title: 503; Establishment of SBA Secondary Market 
Guarantee Authority; 
Primary requirements and sunset provisions: Allows the SBA 
Administrator to establish a secondary market guarantee for pools of 
first-lien 504 loans to sell to third-party investors; This authority 
terminates 2 years after enactment; Under emergency rulemaking 
authority, requires the Administrator to issue regulations within 15 
days after enactment; 
SBA's actions, as of April 16, 2009: Missed deadline of March 4, 2009; 
In process of clearing regulations. 

Provision number and title: 509; Establishment of SBA Secondary Market 
Lending Authority; 
Primary requirements and sunset provisions: Authorizes the SBA 
Administrator to make loans to systemically important broker-dealers 
that operate in the SBA 7(a) secondary market; Under emergency 
rulemaking authority, requires the Administrator to issue regulations 
within 30 days after enactment; This authority terminates 2 years after 
enactment; 
SBA's actions, as of April 16, 2009: Missed deadline of March 19, 2009; 
In process of drafting regulations. 

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

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

[End of table] 

Table 3: Status of SBA's Implementation of Other Administrative 
Provisions in ARRA: 

Provision number and title: 504; Stimulus for Community Development 
Lending; 
Primary requirements and sunset provisions: Authorizes SBA to refinance 
a limited amount of certain existing loans as new 504 loans; Changes an 
eligibility criterion for 504 loans from creating one job for every 
$50,000 guaranteed to one job for every $65,000 guaranteed; The 
refinancing program and job creation goals are permanent changes to the 
504 loan program; 
SBA's actions, as of April 16, 2009: Issued notice on April 2, 2009, to 
announce the amended job creation eligibility criterion/requirement 
followed by publication in the Federal Register on April 10, 2009; In 
process of analyzing remaining issues and clearing regulations. 

Provision number and title: 505; Increasing Small Business Investment; 
Primary requirements and sunset provisions: Increases the maximum 
amount of outstanding leverage made available to a small business 
investment company (SBIC), to the lesser of 300 percent of the SBIC's 
private capital or $150,000,000. In addition, leverage allowed for two 
or more SBICs operated under common control (as determined by the 
Administrator) and that are financially sound cannot exceed 
$225,000,000; 
SBA's actions, as of April 16, 2009: In process of analyzing remaining 
issues and clearing regulations. 

Provision number and title: 506; Business Stabilization Program; 
Primary requirements and sunset provisions: Creates a new program that 
allows SBA to guarantee loans of $35,000 or less to small business 
concerns that have existing qualifying small business loans and are 
suffering immediate financial hardship; Under emergency rulemaking 
authority, requires the Administrator to issue regulations within 15 
days after enactment; The program ends on September 30, 2010; 
SBA's actions, as of April 16, 2009: Missed deadline of March 4, 2009; 
In process of clearing regulations. 

Provision number and title: 508; Surety Bonds; 
Primary requirements and sunset provisions: Increases maximum contract 
amount for SBA bond guarantee to $5,000,000 and up to $10,000,000 if a 
federal agency contracting officer certifies the necessity; Establishes 
conditions of SBA's liability up to $5,000,000; Requires SBA to study 
and report on the program's current funding structure; Provisions 
remain in effect until September 30, 2010; 
SBA's actions, as of April 16, 2009: Issued notice on March 27, 2009, 
to increase maximum contract amount for SBA bond guarantee to 
$5,000,000; In process of analyzing remaining issues and drafting 
regulations. 

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

[End of table] 

Implementing ARRA's Secondary Market Administrative Provisions Involves 
Challenges: 

SBA officials cited several factors to explain why the agency had 
implemented some ARRA administrative provisions but had missed 
statutory deadlines for issuing regulations for other provisions. For 
example, SBA officials said that temporarily eliminating or reducing 
fees for 7(a) and 504 loans and temporarily increasing the maximum 
guarantee on 7(a) loans to 90 percent are relatively straightforward 
administrative decisions that pertain to existing agency programs. In 
contrast, they said that other provisions in ARRA require the 
establishment of new programs, which is more complex and must be done 
on a deliberative and measured basis to help ensure that ARRA's intent 
is carried out while managing the government's exposure to losses. For 
example, SBA officials cited the ARRA administrative provisions 
designed to facilitate secondary market activity as such new programs: 
section 503 pertaining to extending the guarantee to pools of 504 first-
lien mortgages and section 509 pertaining to loans to systemically 
important broker-dealers. SBA officials said that establishing policies 
and procedures, hiring and training staff, developing information 
systems and establishing risk mitigation strategies for new programs, 
among other activities, can be complicated and time consuming. 

To illustrate the challenges involved in establishing new programs 
under ARRA's administrative sections, SBA officials cited section 503's 
provisions that extend the guarantee to pools of 504 first-lien 
mortgages, which serve as the collateral for securities that are sold 
on the secondary market. This provision authorizes SBA to guarantee up 
to $3 billion on the first-lien mortgage portion of 504 financing 
packages. While SBA has long guaranteed the debenture portion of such 
loans and has data on the risks and costs associated with doing so, the 
agency lacks information on the performance of the first-lien portion. 
Accordingly, SBA has requested data from at least one broker-dealer 
that operates in the secondary market for the 504 first-lien mortgages, 
to assess the performance of such loans over time, including their 
default rates. It is essential for SBA to evaluate the potential risks 
associated with extending the guarantee to 504 first-lien mortgages and 
determining appropriate fees to offset such risks because ARRA requires 
that the program not result in a net cost to the government under the 
Federal Credit Reform Act of 1990.[Footnote 14] SBA officials also said 
that the agency has to resolve key policy issues associated with 
extending the guarantee in the 504 program. For example, an SBA 
official said that determining the extent to which broker-dealers and 
perhaps small business lenders share in any losses associated with 
extending the guarantee on pools of first-lien mortgage loans has also 
been challenging. The official said that risk-sharing among SBA loan 
guarantee program participants is a critical principle and necessary to 
help ensure prudent underwriting. While ARRA mandates that broker- 
dealers that assemble first-lien mortgages under the 504 program into 
securities retain at least 5 percent of the potential losses, the SBA 
official said that it may be appropriate for the final rule to require 
broker-dealers to assume more than 5 percent of the potential losses to 
better ensure sound underwriting. For similar reasons, the SBA official 
said it may be appropriate to require lenders, as is the case in the 
7(a) program, to assume responsibility for at least some portion of the 
associated risks on extending the guarantee in the 504 program. 
However, the SBA official also said that requiring broker-dealers and 
lenders to assume additional risk could limit their participation in 
the program and thereby limit its capacity to generate activity in the 
secondary market. 

Resource constraints and staff expertise are other challenges that SBA 
may face in finalizing the administrative provisions in ARRA and 
managing the associated programs over time. For example, SBA officials 
said that the array of requirements under ARRA and associated 
rulemaking deadlines have placed a strain on the agency's existing 
staff and other resources. Similarly, officials from some trade groups 
representing lenders and broker-dealers expressed concerns that SBA 
lacked staffing necessary, particularly in the Office of Capital 
Access, to carry out ARRA's provisions. We also previously reported on 
SBA's reduced staffing levels and the impending retirement eligibility 
of a large portion of its workforce by the end of fiscal year 2009. 
[Footnote 15] In addition, the agency's Chief Financial Officer (CFO) 
as well as individuals in the CFO's office that developed estimates 
used to meet Federal Credit Reform Act requirements have recently left 
the agency. SBA officials said that the agency has appointed an acting 
CFO and they are currently reviewing applications for a permanent 
replacement. In addition, SBA officials said the agency posted a credit 
subsidy specialist job announcement and are currently using contractors 
to perform related work. Generally, the potential loss of expertise 
through retirements and turnover in key positions, coupled with the 
introduction of new and complex programs could challenge the agency's 
efforts to achieve the desired purposes. 

SBA Has Various Planning and Coordination Activities Underway and Plans 
to Complete Secondary Market Rulemakings by June 2009: 

To help manage the challenges associated with implementing ARRA's 
administrative provisions, SBA officials said that they have 
established an intra-agency process that is designed to leverage 
existing resources and expertise and ensure effective communication 
within the agency. Specifically, SBA officials said that they have 
established project teams to address each of the administrative 
provisions in ARRA as well as relevant support teams. The officials 
told us that each project team is responsible for assessing the 
specific administrative provisions under ARRA, including their intended 
benefits and potential costs, and develop policies, procedures, or 
regulations to implement these provisions. They also told us that the 
support teams perform a variety of activities. For example, the 
communications team works across the agency and with each project team 
to ensure that information about SBA's implementation of the 
administrative provisions is clear to key constituencies including 
internal staff and the agency's resource partners, lenders, and trade 
groups. According to SBA officials, an agency steering committee that 
includes representatives from five key offices--Capital Access, the 
Chief Information Officer, Chief Financial Officer, General Counsel, 
and Communications--oversees the work of the teams and is responsible 
for the final approval of all decisions that pertain to the 
implementation of ARRA's administrative provisions. 

SBA officials also said that they are working closely with the 
Department of the Treasury and the Federal Reserve to implement certain 
of ARRA's administrative provisions and related federal initiatives to 
facilitate small business lending. For example, SBA officials said that 
they have consulted with Treasury and provided data to the department 
regarding the implementation of Treasury's planned purchases under the 
TARP of up to $15 billion in SBA-guaranteed securities. Another SBA 
official said that the agency has worked with the Federal Reserve on 
its efforts to promote small business lending. 

According to SBA, the draft rules for the secondary market provisions 
are currently undergoing internal SBA review. SBA officials said that 
they expect the OMB review process to be complete and the rules issued 
by June 2009. 

SBA Is Considering Various Performance Measures to Evaluate Potential 
Impacts on Secondary Market Liquidity once Authorities Are Fully 
Implemented: 

Because SBA has not completed ARRA's key secondary market provisions, 
it is not possible at this time to assess their impact on the secondary 
markets for small business loans. Such an assessment will only be 
possible when the regulations are issued and market participants have 
had some time to evaluate and decide whether to participate in the 
program. For example, broker-dealers that participate in the secondary 
market for SBA-guaranteed loans and may be designated by SBA as 
systemically important under ARRA section 509 will have to determine 
whether the terms SBA may establish for such loans, such as the rate 
offered and profit margin earned with selling securities to investors, 
are attractive. 

According to an SBA official, the agency is considering various 
performance measures that might be used to assess the longer-term 
impacts of ARRA's administrative provisions on the finance market for 
SBA 7(a) and 504 first-lien mortgage loans, including the relevant 
secondary markets. For example, an SBA official said that the agency 
may collect relevant secondary market performance data, such as the 
percentage of 7(a) and 504 first-lien mortgage loans that are sold in 
secondary markets and premium and fee information for lenders, broker- 
dealers, and investors. Presumably, if the authorities are successful, 
then the percentage of 7(a) and 504 first-lien mortgage loans sold in 
the secondary markets will increase as will the premiums that investors 
are willing to pay for SBA-guaranteed securities. The SBA official also 
said that the agency may collect loan performance data over time, such 
as default data on 504 first-lien mortgage loans, to help determine 
whether the programs are being operated at a net zero cost to the 
government as required. 

However, it may be difficult to isolate the effect of the ARRA 
provisions from general changes in the economy affecting the secondary 
markets or actions by other federal entities. Changes in the market for 
SBA loans could be affected by other security market activity such as 
competing sales of other asset-backed securities. Both Treasury and the 
Federal Reserve have also announced plans to directly purchase or help 
finance individual investors' purchase of billions of dollars in SBA- 
guaranteed securities. Specifically, as part of the Consumer and 
Business Lending Initiative, Treasury announced plans on March 16, 
2009, to use TARP funds to purchase up to $15 billion in securities 
backed by the guaranteed portions of 7(a) loans, securities packaged 
from 504 first-lien mortgages, and 504 first-lien securities that 
receive new SBA guarantees under ARRA. Also, under this initiative, the 
Federal Reserve with Treasury support plans to lend funds to investors 
through the Term Asset-Backed Securities Loan Facility (TALF) program 
to finance the purchase of a variety of asset-based securities, 
including SBA guaranteed securities. Given that the TARP and TALF 
programs are substantially larger than SBA's provisions under ARRA 
(e.g., Treasury's TARP program may involve the direct purchase of $15 
billion in SBA-guaranteed securities, whereas ARRA limits SBA's amount 
guaranteed on the first-lien mortgage portions of 504 financing 
packages to $3 billion), it may be very difficult to determine the 
extent that any pick up in small business lending activity may be 
attributable solely to the SBA ARRA initiatives. 

Going forward, SBA officials said they will continue to coordinate with 
Treasury and the Federal Reserve as the programs to facilitate small 
business finance are developed. Such coordination is important to 
maximize the potential overall effect of these programs. While the TARP 
and TALF programs largely focus on the direct purchase of SBA- 
guaranteed securities in the secondary markets or providing incentives 
for private sector investors to do so, SBA under the ARRA provisions is 
largely focused on facilitating lenders' capacity to originate small 
business loans and broker-dealers capacity to increase their secondary 
market activities. To the extent that the federal entities involved in 
these initiatives--Treasury, the Federal Reserve, and SBA--experience 
delays in their program implementation efforts, then an opportunity to 
maximize small business financing as part of an integrated approach 
will be missed. 

Agency Comments: 

We provided SBA a draft of this report for review and comment. In 
written comments, which are reprinted in enclosure I, the SBA 
Administrator said that the draft report presented a fair and balanced 
discussion of the agency's efforts thus far in implementing ARRA's 
administrative provisions. The Administrator also provided additional 
information to demonstrate SBA's commitment to implementing the 
administrative provisions, organizational effort to do so, and 
improvements resulting from provisions already implemented. For 
example, she stated that SBA has kept the Congress, other oversight 
authorities, and the public informed of SBA's progress as well as 
establishing project and support teams with specific implementation 
responsibilities. In addition, the Administrator stated that the impact 
of actions taken four weeks ago to increase guarantee percentages and 
lower program fees appears to be strong with both the 7(a) and 504 loan 
programs experiencing some growth in loan volume over this period. SBA 
also provided technical comments, which we incorporated as appropriate. 

We are sending copies of this report to interested congressional 
committees and other parties. In addition, the report will be available 
at no charge on GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Major contributors to this report were 
Wesley Phillips, Paige Smith, Janet Fong, Tomas Garcia, Alexandra 
Martin-Arseneau, Ben Bolitzer, Tania Calhoun, Marcia Carlsen, and 
Barbara Roesmann. 

Signed by: 

William B. Shear:
Director, Financial Markets and Community Investment: 

Enclosure: 

List of Congressional Committees: 

The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate: 

The Honorable Mary L. Landrieu:
Chair:
The Honorable Olympia J. Snowe:
Ranking Member:
Committee on Small Business and Entrepreneurship:
United States Senate: 

The Honorable Richard J. Durbin:
Chairman:
The Honorable Sam Brownback:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
United States Senate: 

The Honorable Edolphus Towns:
Chairman:
The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives: 

The Honorable Nydia M. Velázquez:
Chairwoman:
The Honorable Sam Graves:
Ranking Member:
Committee on Small Business:
House of Representatives: 

The Honorable José E. Serrano:
Chairman:
The Honorable Jo Ann Emerson:
Ranking Member:
Subcommittee on Financial Services and General Government:
Committee on Appropriations:
House of Representatives: 

[End of section] 

Enclosure I: Comments from the Small Business Administration: 

U.S. Small Business Administration: 
Office Of The Administrator: 
Washington, D.C. 20416: 

April 15, 2009: 

Mr. William Shear: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Re: Small Business Administration's Implementation of Administrative 
Provisions in the American Recovery and Reinvestment Act of 2009" 

Dear Mr. Shear: 

As you know, the U.S. Small Business Administration (SBA) is committed 
to driving economic recovery by helping small businesses - the engine 
of job creation and economic growth - to succeed in the current 
economic environment. The Recovery Act programs will act as a catalyst 
to accomplish this goal. 

Already, we are beginning to see the results of our efforts. Two of the 
programs highlighted in your Report on SBA's implementation of certain 
Recovery Act programs - the fee reduction and the 90% guarantee 
programs - have been available for four weeks, and already more than 
$1.3 billion in new SBA loans have been approved. The impact of these 
programs appears to be strong, with loan volume increasing on average 
more than 20% for both 7(a) and 504 loans since the President's March 
16 announcement that the programs were up and running. 

Because all of these Recovery Act programs are critical, SBA 
appreciates the time and effort you and your team have devoted to the 
audit and Report, which we are pleased to note, contains no 
recommendations or suggestions concerning the Agency's implementation 
efforts. Your Report presents a fair and balanced discussion of our 
progress thus far, to which we would like to add some clarifying 
background and context so that the Agency's accomplishments in this 
unprecedented effort can be fully understood and appreciated. 

I have been impressed by the intensity and level of commitment on the 
part of Agency staff to this important project. Senior managers across 
the Agency have been actively engaged in leading SBA's Recovery Act 
implementation with both urgency and appropriate care. The need to act 
with speed is being balanced with the need to assure that significant 
risks to the Agency that might arise through Recovery Act projects are 
systematically and effectively identified, evaluated, and addressed 
where appropriate. In doing so, we believe we are fulfilling our 
responsibility to small businesses, to our lending partners, and to the 
taxpayers. 

SBA continues to work diligently and expeditiously to implement all of 
SBA's Recovery Act provisions. As the Report suggests, a number of 
these programs require sophisticated financial modeling and/or legal 
documentation, and present challenging policy or structural issues, and 
therefore require additional time to implement. Throughout this 
process, SBA has kept its various oversight authorities informed of its 
progress and projected timeframes. This includes regular communication 
with multiple Congressional oversight committees, SBA's Office of 
Inspector General, and the Government Accountability Office. SBA also 
has kept the public informed through periodic updates on the Agency's 
Recovery Act website, fulfilling a key commitment of this 
Administration to transparency and communication. And, it has kept its 
commitment to its mission intact - to serve the interests of small 
businesses through the sound implementation and operation of Agency 
programs. 

Our efforts in implementing the Recovery Act have been comprehensive 
and focused. Your Report briefly mentions our project and support 
teams. More specifically, we have established nine project teams, six 
cross-functional teams, and separate technology project teams to lead 
the different automation efforts provided by the stimulus. Each project 
team has responsibility for implementation of a single Recovery Act 
provision, and is comprised of representatives from the Agency's 
financial, legal, budget and financial modeling, communications, 
outreach, and risk management disciplines. Each cross-functional team 
is responsible for an important activity such as reporting 
requirements, systems technology, and risk management. The teams report 
to the SBA Recovery Act Steering Committee of senior managers, ensuring 
high level oversight, coordination, and policy direction. In addition, 
all notices, regulations and guidance documents have been reviewed and 
cleared through SBA's Office of Inspector General, affording SBA the 
benefit of an additional review for ways to help manage and prevent 
fraud, waste and abuse. 

Thank you again for your Report and the opportunity to comment on it. 
We will continue to move forward with our efforts, remaining focused on 
a rapid, effective and responsible implementation of these critical 
programs that will put small businesses in the position to drive 
economic recovery and job creation across the country. We appreciate 
your thoughtful report and will look forward to working with you 
further. 

Sincerely, 

Signed by: 

Karen G. Mills: 
Administrator: 

[End of section] 

Footnotes: 

[1] In the financing of a typical 504 loan project, the small business 
borrower provides at least 10 percent of the funds, a third-party 
lender originates a mortgage, referred to as a first-lien mortgage to 
provide 50 percent of the funds, and a non-profit certified development 
company provides the remaining 40 percent of the funding through an SBA-
guaranteed debenture. 

[2] As described in this report, secondary markets have developed for 
the guaranteed portions of 7(a) loans and the guaranteed and 
unguaranteed portions of primarily real estate projects (including 
machinery and equipment) financed pursuant to the 504 program. 

[3] The guaranteed portions of 7(a) loans may be bundled into 
guaranteed securities. In this report, we refer to these as pools of 
7(a) guaranteed loans and 7(a) guaranteed securities. 

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

[5] ARRA authorizes the SBA Administrator to extend the agency's 
guarantee to pools of first-lien mortgages that are packaged into 
securities and sold to third party investors who participate in 
secondary markets for small business loans. The intent of this 
administrative provision is to help facilitate secondary market 
activity for such securities, which largely collapsed during current 
turmoil in credit markets. 

[6] The mandate also directed us to analyze whether the activities are 
accomplishing the purposes of increasing liquidity in the secondary 
market for SBA loans. 

[7] ARRA has four additional SBA provisions including (1) providing 
guarantees on loans to small businesses that have qualifying small 
business loans and are experiencing immediate financial hardship, (2) 
granting SBA authority to refinance a limited amount of certain 
existing loans as new 504 loans, (3) increasing the leverage of Small 
Business Investment Companies, and (4) increasing the maximum amount 
for contracts that qualify for SBA-guaranteed surety bonds. 

[8] ARRA requires broker-dealers that participate in the secondary 
market for 504 first-lien mortgages on which SBA guarantees may be 
extended, to assume at least 5 percent of the potential losses on 
securities established under the provision. SBA, in its discretion, 
could require broker-dealers to assume more of the potential risk. 

[9] GAO, Small Business Administration: Opportunities Exist to Build on 
Leadership's Efforts to Improve Agency Performance and Employee Morale, 
[hyperlink, http://www.gao.gov/products/GAO-08-995] (Washington, D.C.: 
Sept. 24, 2008). 

[10] Section 7(a) of the Small Business Act, as amended, codified at 15 
U.S.C. § 636(a); see also 13 C.F.R. Part 120. 

[11] 15 U.S.C. §§ 695 et seq. 

[12] Prior to the signing of ARRA, the maximum guaranty percentage for 
all 7(a) loan programs, ranged from 85 percent for loans of $150,000 or 
less to 75 percent for loans greater than $150,000. 

[13] SBA can guarantee bonds for contracts covering bid, performance, 
and payment bonds for small and emerging contractors who cannot obtain 
surety bonds through regular commercial channels. Small Business 
Investment Companies, which are licensed by the SBA, are privately 
owned and managed investment funds that use their own capital and funds 
borrowed at favorable rates through the federal government to provide 
venture capital to small independent businesses. 

[14] Federal Credit Reform Act of 1990, as amended, Pub. L. No. 101- 
508, 104 Stat. 1388-609 (1990), codified at 2 U.S.C. §§ 661-661f. 

[15] [hyperlink, http://www.gao.gov/products/GAO-08-995]. 

[End of section] 

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