Audit of SBA's Controls over 7(a) Loans Sold on The Secondary Market

This report presents the results of our audit of the Small Business Administration’s (SBA’s) controls over loans sold on the secondary market. The SBA secondary market program allows lenders to sell the guaranteed portions of their SBA 7(a) loans to private investors at a premium to provide expanded availability to capital for small businesses. The fiscal transfer agent for 7(a) loans that is contracted by SBA facilitates the sale process and is responsible for various other functions regarding the secondary market. Between fiscal years 2013 and 2017, approximately 59,000 7(a) loans were approved, disbursed, and sold on the secondary market, totaling $45 billion. We determined that internal controls related to the sale of loans into the secondary market and SBA’s reviews for lender compliance on defaulted loans were generally effective. However, opportunities exist to strengthen controls to further mitigate the risk of loss for loans sold on the secondary market. Specifically, we found that the Office of Credit Risk Management (OCRM) did not communicate the results of their secondary market loan sale reviews to the National Guaranty Purchase Center and the Commercial Loan Servicing Centers. Also, SBA did not always provide statutory reports to Congress timely, and SBA’s lender guidance for the secondary market was outdated. Lastly, SBA did not properly determine lender compliance with loan program requirements for one of the loans reviewed. As a result, there is a risk that SBA could improperly purchase secondary market loans that OCRM identified as having material noncompliance with SBA requirements. Additionally, Congress may not have the necessary information to make informed decisions regarding SBA’s secondary market operations, and new lenders may not have consistent and updated guidance to ensure compliance with SBA requirements. Finally, by charging off an ineligible loan, SBA incurred a loss of $130,173. We made and management agreed with five recommendations that, if implemented, will strengthen SBA’s internal controls, enhance external communication, and seek loan repair or recovery of funds on the ineligible loan that was charged off. SBA management’s proposed actions resolve all five of our recommendations.