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Better oversight urged for small-business loan program

December 8, 2009 | 12:32 pm

The Small Business Administration is failing to adequately monitor lenders in its $91-billion loan program, increasing the risk of defaults, a government report said this week.

Each year, the SBA guarantees more than 50,000 loans, made by thousands of lenders. Although the program successfully helps many small businesses, taxpayers can be left on the hook when loans aren’t paid back.

The SBA needs to spend more time evaluating lenders who are most likely to make risky loans, said the report released Monday by the Government Accountability Office.  In 2008, the SBA identified 1,587 of its lenders as high-risk, but it conducted on-site reviews of only 3% of them. The agency has focused its reviews on larger lenders, but the GAO found that those tend to be low-risk.

The report also criticized the SBA for failing to check whether lenders are making loans properly based on applicants’ credit.

“Without targeting the most risky lenders for on-site reviews or gathering information related to lenders’ credit decisions, SBA cannot effectively assess the risk posed by lenders,” the GAO said.

Further, the report said, the SBA hasn't followed common industry standards in assessing the effectiveness of its system for rating lender risk. The GAO urged the SBA to have an independent entity test the system and to use the agency’s data to assess how well the ratings are predicting bad loans.

Sens. John Kerry (D-Mass.) and Olympia Snowe (R-Maine) asked the GAO to investigate the SBA’s lender oversight practices in June 2008 after the agency’s inspector general found that flaws in the system had led to a loss of $329 million in one loan program.

The full report can be viewed here.

-- Scott Wilson