Small Business Lending Companies’ Performance in the 7(a) Loan Program and SBA’s Oversight

The Office of Inspector General (OIG) is issuing this Evaluation report to assess the performance of Small Business Lending Companies (SBLC) in the 7(a) loan program and SBA’s oversight of SBLCs to ensure program integrity and mitigate financial loss.

Opportunities exist for SBA to improve SBLCs’ 7(a) loan portfolio performance and its oversight of these lenders. Our analysis of 7(a) loans approved and disbursed from FYs 2016 to 2023 identified that loans made by SBLCs significantly underperformed, related to default rates, compared to loans made by other lender types. Additionally, early defaults increased substantially for loans made by SBLCs during this same period. While OCRM monitored SBLCs’ 7(a) loan portfolio performance, it did not sufficiently assess the root cause of the SBLCs’ loan portfolio underperformance, related to default rates, to mitigate the risk of loans made by SBLCs continuing to underperform. In addition, although OCRM reviewed SBLCs’ compliance with program requirements, these lenders continued to have repeated categories of deficiencies across multiple years. OCRM’s monitoring procedures were not sufficient to ensure SBLCs implemented appropriate corrective actions to mitigate the risk of similar future loan deficiencies and financial loss. Lastly, we noted that OCRM has not conducted safety and soundness examinations of SBLCs since April 4, 2023, due to contractual issues. Insufficient oversight of SBLCs increases the risk of financial loss and could negatively impact program integrity.

We made three recommendations to improve SBLCs’ 7(a) loan portfolio performance and SBA’s oversight of SBLCs.

Management stated that while they largely disagree with the draft report, they acknowledge the opportunities to strengthen oversight activities and agreed with two of our recommendations and partially agreed with one. Management’s planned actions resolve all recommendations, which can be closed when they provide evidence of implementation.