Audit of the SBA's Community Advantage Pilot Program

This report presents the results of our audit of the Small Business Administration’s (SBA’s) Community Advantage (CA) pilot program. Our objectives were to determine if SBA’s CA pilot program expanded capital to benefit small businesses in underserved markets and if SBA established internal controls to mitigate the risk of loss. The CA pilot began in February 2011, under the 7(a) loan program, to expand access to capital in underserved markets. The pilot provides access to 7(a) loan guaranties as high as 85 percent for loans up to $150,000 and 75 percent for loans over $150,000, up to $250,000. SBA designated underserved markets as Low-to-Moderate Income (LMI) communities, businesses where more than 50 percent of the full-time workforce is low-income or resides in LMI census tracts, Empowerment Zones and Enterprise Communities, HUBZones, new businesses, businesses eligible for SBA Veterans Advantage, and Promise Zones.

We found that SBA’s CA pilot program increased the number of lenders participating in SBA’s 7(a) loan program by approving 137 CA lenders. However, opportunities exist for SBA to enhance the program to ensure it effectively expands capital to benefit small businesses in underserved markets. The CA pilot was duplicative of the 7(a) loan programs, charged higher interest rates than non-CA 7(a) loans, and the management and technical assistance (M&TA) provided was limited and did not mitigate the risk of loss. As a result, CA borrowers in the underserved markets are projected to pay about $49.4 million more than they would have for the non-CA 7(a) loans, and loans with M&TA performed worse than those loans without M&TA.

We determined that all the borrowers for CA loans in our scope were also likely eligible for 7(a) loans. Additionally, CA lenders only provided M&TA on 34 percent of CA loans, and did not report complete M&TA information. Also, loans with M&TA had a default rate of 15 percent, while the loans without M&TA had a default rate of 13.5 percent. Further, we determined that the default rate for CA loans approved between FYs 2011 and 2016 exceeded 14 percent. Over the same period, the default rate for similarly sized non-CA 7(a) loans was 8.7 percent.

Lastly, while SBA generally established internal controls to mitigate the risk of loss, it did not always monitor and mitigate identified risk timely. SBA’s 2015 CA performance analysis found that loans with Small Business Scoring Service (SBSS) scores below 140 increased risk to the CA pilot. However, SBA did not conduct additional analyses on the CA loan performance based on SBSS scores until 2018. During this time lapse, 35 loans with SBSS scores under 140 were approved and later defaulted. SBA purchased these defaulted loans for about $2.1 million. We question about $51.5 million, which include the reasonableness of the $49.4 million in projected cost and the $2.1 million SBA guaranty purchases.

We made six recommendations, which include evaluating options to facilitate the program’s ability to effectively expand access to capital in underserved markets, strengthening controls, reducing the burden on CA borrowers, and improving the quality of loans. Management agreed with recommendations 1, 2, and 6; partially agreed with 4 and 5 and disagreed with recommendation 3. Management’s planned actions, which are discussed in the report resolved recommendations 1, 2, and 6. Its proposed actions for 4 and 5 did not fully address the recommendations and we did not reach resolution on recommendation 3.