Background on SBA’s Lender Oversight
Program
The SBA-backed lending is a $66.7 billion dollar industry with nearly 5,000
lenders and Certified Development Companies (CDCs). About 650 lenders are
in its Preferred Lender Program (PLP). As such, SBA takes its lender oversight
responsibility very seriously. There are a variety of ways in which it
performs this duty.
To mitigate losses from a lender’s under-performing loan portfolio,
SBA has the authority to reduce the time between renewals of delegated
lending authority. It has the ability to conduct frequent on-site reviews,
work with the lender’s management to resolve portfolio deficiencies,
and establish a corrective action plan that can include quarterly or even
monthly reporting. In addition, a wide range of data is collected that
provides SBA with continual updates on the lender’s progress. These
practices allow lenders to improve loan portfolio performance while continuing
to serve the small business community.
The challenge SBA faces when deciding what corrective measures to take
against under-performing lenders is to balance implementation of appropriate
safeguards to protect taxpayers without imposing excessive regulations
that will not unnecessarily impede the flow of capital to underserved small
businesses through the program.
Lender Oversight Reforms
In 2003, a Government Accountability Office (GAO) report noted that SBA
made progress in developing its lender oversight program, but more effective
oversight was necessary, particularly of preferred lenders.
Specifically, SBA needed to improve access to lenders’ decisions
on borrowers’ creditworthiness and eligibility, and the impact of
lenders’ decisions regarding risk posed to SBA.
As a result of the GAO report, SBA has taken several steps to improve lender
oversight. New reforms include:
- Implementing a comprehensive off-site monitoring program featuring sophisticated
risk rating measurements developed by a nationally-recognized provider
of commercial credit scoring solutions;
- Instituting a risk-based on-site review/examination program that includes
qualitative analysis of a lender’s credit administration, SBA operations
management, and loan portfolio performance data;
- Drafting proposed lender oversight and enforcement regulations; and
- Developing a coordinated and more independent supervision and enforcement
process.
The agency has submitted a proposed rule for public comment that would
implement these steps in federal regulations. This rule also further establishes
the roles and responsibilities of the Office of Credit Risk Management.
In addition, it applies more comprehensive oversight regulations to 7(a)
lenders, CDCs and Microloan Intermediaries that currently have limited
or no regulatory oversight by other federal regulatory agencies.
In addition to general oversight responsibilities, SBA is considering
how to reduce the risk of fraud in its loan programs. The agency is cooperating
with its lending partners to ensure they have appropriate policies and
procedures to identify and prevent fraudulent activity. It is also working
to identify irregularities in lenders’ portfolios and to bring them
to the attention of SBA’s Office of Inspector General (OIG). SBA
relies on SBA’s OIG and the Justice Department’s experts in
fraud to investigate and prosecute fraud related activities. While processes
and policies are in place to deal with these issues, SBA is considering
using other analytical tools to facilitate fraud detection.
Lender Oversight Fees
SBA is sensitive to the regulatory burdens placed on businesses and tries
to minimize fees as much as possible. However, these fees allow SBA to
perform on-site and off-site risk management on lenders and their 7(a)
loan portfolios in order to protect taxpayers. Since SBA is the only regulator
of Small Business Lending Companies, there are no other government safeguards
or regulatory burdens for these lenders. For financial institutions regulated
by banking regulators, SBA’s fees are minimal compared to fees charged
by other banking examiners. In fact, many lenders pay no fee, depending
on the size of their portfolio.
SBA has made significant progress to improve and increase oversight on
its guaranteed loan portfolio. That oversight has enhanced SBA’s
portfolio strength, which has reduced costs to borrowers and increased
the agency’s ability to reach small businesses. SBA looks forward
to bettering its lender oversight program and assisting its lenders and
the nation’s small businesses.
Source: Small Business Administration
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