SBA’s Corrective Actions to Improve Controls Over 7(a) Loans Sold on the Secondary Market

The U.S. Small Business Administration (SBA) is authorized under Section 7(a) of the Small Business Act to provide financial assistance to small businesses in the form of government guaranteed loans. The secondary market was established to provide greater liquidity to lenders, thereby, expanding the availability of commercial credit for small businesses. Lenders are allowed to sell the guaranteed portions of their loans in the secondary market. The lender receives cash equal to the amount of the guaranteed portion sold plus a market driven premium, while the investor gets an interest earning security that is backed by the full faith and credit of the U.S. government.

Before a loan can be sold on the secondary market, the lender must submit it to the fiscal and transfer agent (FTA) for approval. FTA reviews loans submitted for sale approval via Secondary Participation Guarantee Agreement (SBA Form 1086). For lenders under regulatory, state, or federal orders, SBA maintains a watch list. Lenders on this list may request for a loan to be sold on the secondary market through the FTA. However, due to the risk associated with these lenders, SBA’s Office of Credit Risk Management (OCRM) conducts a detailed review of each loan to determine whether it complies with SBA requirements and is eligible for sale.

We determined that the process OCRM established to document secondary market loan sale denials in the Centralized Loan Chron System (CLCS) was generally effective at communicating loan deficiencies to the appropriate loan centers. OCRM completed its process to document secondary market loan sale denials in CLCS; however, we noted that the required CLCS notes on two of eight denied applications were not made until after we announced this inspection and requested applicable information. An OCRM official stated they noted the error while compiling the requested information and made the corrections in the system prior to sending us the information.