Small Business Administration 7(a) Loan
Guaranty Program
Robert Jay Dilger
Senior Specialist in American National Government
November 8, 2011
Congressional Research Service
7-5700
www.crs.gov
R41146
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Small Business Administration 7(a) Loan Guaranty Program
Summary
The Small Business Administration (SBA) administers several programs to support small
businesses, including loan guaranty programs designed to encourage lenders to provide loans to
small businesses “that might not otherwise obtain financing on reasonable terms and conditions.”
The SBA’s 7(a) loan guaranty program is considered the agency’s flagship loan guaranty
program. It is named from Section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as
amended), which authorized the SBA to provide business loans and loan guaranties to American
small businesses. In FY2011, the SBA approved 53,706 7(a) loans amounting to more than
$19.6 billion.
Congressional interest in the 7(a) loan program has increased in recent years because of increased
concern that small businesses might be prevented from accessing sufficient capital to enable them
to assist in the economic recovery.
This report opens with a discussion of the rationale provided for the 7(a) program; the program’s
borrower and lender eligibility standards and program requirements; and program statistics,
including loan volume, loss rates, use of the proceeds, borrower satisfaction, and borrower
demographics.
It then examines congressional action taken during the 111th Congress to help small businesses
gain greater access to capital. For example, in 2009, P.L. 111-5, the American Recovery and
Reinvestment Act of 2009 (ARRA), provided additional funding to temporarily subsidize the 7(a)
program’s fees and to increase the program’s maximum loan guaranty percentage to 90%. In
2010, P.L. 111-240, the Small Business Jobs Act of 2010, provided additional funding to extend
the 7(a) program’s fee subsidies and 90% maximum loan guaranty percentage through December
31, 2010; increased the program’s loan guaranty limit from $2 million to $5 million; and
established an alternative size standard for the 7(a) and 504/CDC loan programs, which is
designed to increase the number of small businesses that can participate in the two programs.
Also, P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act,
2011, authorized the SBA to continue the fee subsidies and the 7(a) program’s 90% maximum
loan guaranty percentage through March 4, 2011, or until available funding was exhausted (which
occurred on January 3, 2011).
This report also examines issues raised concerning the SBA’s administration of the 7(a) program,
including the oversight of 7(a) lenders and the program’s lack of outcome-based performance
measures. It also provides information concerning the 7(a) program’s SBAExpress, Patriot
Express, Small Loan Advantage, and Community Advantage programs.
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Small Business Administration 7(a) Loan Guaranty Program
Contents
Small Business Administration Loan Guaranty Programs............................................................... 1
Borrower Eligibility Standards and Program Requirements............................................................ 3
Borrower Eligibility Standards.................................................................................................. 3
Borrower Program Requirements.............................................................................................. 4
Use of Proceeds................................................................................................................... 4
Loan Amounts ..................................................................................................................... 4
Loan Terms, Interest Rate, and Collateral ........................................................................... 5
Lender Eligibility Standards and Program Requirements................................................................ 6
Lender Eligibility Standards...................................................................................................... 6
Lender Program Requirements.................................................................................................. 6
The Application Process...................................................................................................... 6
SBA Guaranty and Servicing Fees ...................................................................................... 9
Lender Packaging, Servicing and Other Fees ................................................................... 11
Program Statistics .......................................................................................................................... 12
Loan Volume............................................................................................................................ 12
Loss Rate ................................................................................................................................. 13
Use of Proceeds and Borrower Satisfaction ............................................................................ 13
Borrower Demographics ......................................................................................................... 14
Congressional Issues...................................................................................................................... 15
Access to Capital ..................................................................................................................... 15
Program Administration .......................................................................................................... 16
Oversight of 7(a) Lenders ................................................................................................. 16
Outcome-Oriented Performance Measures ....................................................................... 19
Legislative Activity During the 111th Congress ............................................................................. 20
The Obama Administration’s Proposals .................................................................................. 20
Arguments for Increasing the SBA’s Maximum Loan Limits........................................... 21
Arguments Against Increasing the SBA’s Maximum Loan Limits ................................... 21
H.R. 3854, the Small Business Financing and Investment Act of 2009.................................. 22
S. 2869, the Small Business Job Creation and Access to Capital Act of 2009........................ 23
P.L. 111-240, the Small Business Jobs Act of 2010................................................................. 23
Legislative Activity During the 112th Congress............................................................................. 24
Concluding Observations............................................................................................................... 24
Tables
Table 1. 7(a) Loan Guaranty Program, Loan Volume, FY2007-FY2011....................................... 12
Appendixes
Appendix. 7(a) Specialized Programs............................................................................................ 26
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Small Business Administration 7(a) Loan Guaranty Program
Contacts
Author Contact Information........................................................................................................... 31
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Small Business Administration 7(a) Loan Guaranty Program
Small Business Administration Loan
Guaranty Programs
The Small Business Administration (SBA) administers programs to support small businesses,
including loan guaranty programs to encourage lenders to provide loans to small businesses “that
might not otherwise obtain financing on reasonable terms and conditions.”1 The SBA’s 7(a) loan
guaranty program is considered the agency’s flagship loan program.2 It is named from Section
7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended), which authorizes the SBA to
provide business loans to American small businesses. In FY2011, the SBA approved 53,706 7(a)
loans amounting to more than $19.6 billion.3
The SBA also administers several 7(a) subprograms that offer streamlined and expedited loan
procedures for particular groups of borrowers, including the SBAExpress, Patriot Express, Small
Loan Advantage, and Community Advantage Pilot programs (see the Appendix for additional
details). Although these subprograms have their own distinguishing eligibility requirements,
terms, and benefits, they operate under the 7(a) program’s authorization.4
Historically, one of the justifications presented for funding the SBA’s loan guaranty programs has
been that small businesses can be at a disadvantage, compared with other businesses, when trying
to obtain access to sufficient capital and credit.5 Congressional interest in the 7(a) loan program
has increased in recent years because of increased concern that small businesses might be
prevented from accessing sufficient capital to enable them to assist in the economic recovery. For
example, senior loan officers at private lending institutions have indicated in Federal Reserve
Board surveys that they have tightened small business lending standards, largely in reaction to
relatively high loan default rates and increased numbers of noncurrent (past due) loans.6
1 U.S. Small Business Administration, Fiscal Year 2010 Congressional Budget Justification, Washington, DC, p. 30.
2 U.S. Congress, House Committee on Small Business, Subcommittee on Finance and Tax, Subcommittee Hearing on
Improving the SBA’s Access to Capital Programs for Our Nation’s Small Business, 110th Cong., 2nd sess., March 5,
2008, H.Hrg. 110-76 (Washington: GPO, 2008), p. 2.
3 U.S. Small Business Administration, “SBA Lending Statistics for Major Programs (as of 9/30/2011),” Washington,
DC, http://www.sba.gov/sites/default/files/hppscan41.pdf. The SBA no longer publishes the number and amount of
7(a) loans disbursed. Based on previous experience, the number of loans approved annually ranges from about 7% to
10% higher than the number of loans disbursed (e.g., some borrowers decide not to accept the loan, there is a change in
business ownership, etc.).
4 U.S. Small Business Administration, “Express and Pilot Programs,” Washington, DC, http://www.sba.gov/content/
express-programs. The SBA also administers four special purpose loan guaranty programs that address particular
business needs: the Community Adjustment and Investment Program (CAIP), CAPLines Program, Employee Trusts
Program, and Pollution Control Program (currently not funded). See U.S. Small Business Administration, “Special
Purpose Loans Program,” Washington, DC, http://www.sba.gov/category/navigation-structure/loans-grants/small-
business-loans/sba-loan-programs/7a-loan-program/special-purpose-loans-program.
5 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, pp. 3, 9-11, http://www.gao.gov/new.items/d08226t.pdf;
and Veronique de Rugy, Why the Small Business Administration’s Loan Programs Should Be Abolished, American
Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, http://www.aei.org/docLib/
20060414_wp126.pdf. Proponents of federal funding for the SBA’s loan guarantee programs also argue that small
business can promote competitive markets. See, P.L. 83-163, §2(a), as amended; and 15 U.S.C. §631a.
6 Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington, DC,
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/.
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Small Business Administration 7(a) Loan Guaranty Program
This report examines the 7(a) program’s borrower and lender eligibility standards and program
requirements, and its statistics, including loan volume, loss rates, use of the proceeds, borrower
satisfaction, and borrower demographics.
It also examines congressional action taken during the 111th Congress to revise the program in an
effort to help small businesses gain greater access to capital. For example, in 2009, Congress
approved P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA). It provided
an additional $730 million for SBA programs, including $375 million to temporarily reduce fees
in the 7(a) and 504/CDC loan guaranty programs and increase the 7(a) program’s maximum
guaranty percentage from up to 85% of loans of $150,000 or less and up to 75% of loans
exceeding $150,000 to 90% for all standard 7(a) loans. Congress subsequently appropriated an
additional $265 million, and authorized the SBA to reprogram another $40 million, to extend the
fee reductions and the 7(a) program’s 90% maximum loan guaranty percentage through May 31,
2010.7
In 2010, P.L. 111-240, the Small Business Jobs Act of 2010, increased the 7(a) program’s loan
guaranty limit from $2 million to $5 million and provided $510 million to extend the 7(a)
program’s maximum loan guaranty percentage to 90% and continue the fee subsidies for the 7(a)
and 504/CDC loan guaranty programs through December 31, 2010.8 The act also directed the
SBA to establish an alternative size standard for the 7(a) and 504/CDC loan programs. This
provision was designed to increase the number of small businesses that are eligible to participate
in these programs. Also, P.L. 111-322, the Continuing Appropriations and Surface Transportation
Extensions Act, 2011, authorized the SBA to use any funds remaining from the Small Business
Jobs Act of 2010 to continue the fee subsidies and the 7(a) program’s 90% maximum loan
guaranty percentage through March 4, 2011, or until the available funding was exhausted. The
funds were exhausted on January 3, 2011.9
This report also examines issues raised concerning the SBA’s administration of the 7(a) program,
including the oversight of 7(a) lenders and the program’s lack of outcome-based performance
measures. It also provides information concerning the 7(a) program’s SBAExpress, Patriot
Express, Small Loan Advantage, and Community Advantage programs.
7 P.L. 111-118, the Department of Defense Appropriations Act, 2010, provided the SBA $125 million to continue the
fee subsides and 90% maximum loan guaranty percentage through February 28, 2010. P.L. 111-144, the Temporary
Extension Act of 2010, provided the SBA $60 million to continue the fee subsides and 90% maximum loan guaranty
percentage through March 28, 2010. P.L. 111-150, an act to extend the Small Business Loan Guarantee Program, and
for other purposes, provided the SBA authority to reprogram $40 million in previously appropriated funds to continue
the fee subsides and 90% maximum loan guaranty percentage through April 30, 2010. P.L. 111-157, the Continuing
Extension Act of 2010, provided the SBA $80 million to continue the SBA’s fee subsides and 90% maximum loan
guaranty percentage through May 31, 2010.
8 P.L. 111-240, the Small Business Jobs Act of 2010, provided $505 million to extend the 7(a) program’s temporary
increase in its maximum loan guaranty percentage and fee subsidies for the 7(a) and 504/CDC loan guaranty programs
and $5 million for related administrative expenses.
9 On January 3, 2011, the SBA announced that it had formed a SBA Loan Queue for loan applicants should any
funding with the enhancements should become available from loan cancellations. Typically, 7% to 10% of previously
approved SBA loans are later cancelled by the borrower or lender and are not disbursed for a variety of reasons. See
U.S. Small Business Administration, “Jobs Act Supported More Than $12 Billion in SBA Lending to Small Businesses
in Just Three Months,” Washington, DC, January 3, 2011, http://www.sba.gov/content/jobs-act-supported-more-12-
billion-sba-lending-small-businesses-just-three-months.
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Borrower Eligibility Standards and Program
Requirements
Borrower Eligibility Standards
To be eligible for an SBA business loan, a small business applicant must
• be located in the United States;
• be a for-profit operating business (except for loans to eligible passive
companies);
• qualify as small under the SBA’s size requirements;10
• demonstrate a need for the desired credit; and
• be certified by a lender that the desired credit is unavailable to the applicant on
reasonable terms and conditions from non-Federal sources without SBA
assistance.11
To qualify for an SBA 7(a) loan, applicants must be creditworthy and able to reasonably assure
repayment. SBA requires lenders to consider the applicant’s
• character, reputation, and credit history;
• experience and depth of management;
• strength of the business;
• past earnings, projected cash flow, and future prospects;
• ability to repay the loan with earnings from the business;
• sufficient invested equity to operate on a sound financial basis;
• potential for long-term success;
• nature and value of collateral (although inadequate collateral will not be the sole
reason for denial of a loan request); and
• affiliates’ effect on the applicant’s repayment ability.12
10 For further analysis, see CRS Report R40860, Defining Small Business: A Historical Analysis of Contemporary
Issues, by Robert Jay Dilger.
11 13 C.F.R. §120.100; and 13 C.F.R. §120.101. A list of ineligible businesses, such as non-profit businesses, insurance
companies, and businesses deriving more than one-third of gross annual revenue from legal gambling activities, are
contained in 13 C.F.R. §120.110.
12 13 C.F.R. §120.150.
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Borrower Program Requirements
Use of Proceeds
Borrowers may use 7(a) loan proceeds to establish a new business or to assist in the operation,
acquisition, or expansion of an existing business. 7(a) loan proceeds may be used to
• acquire land (by purchase or lease);
• improve a site (e.g., grading, streets, parking lots, landscaping), including up to
5% for community improvements such as curbs and sidewalks;
• purchase one or more existing buildings;
• convert, expand, or renovate one or more existing buildings;
• construct one or more new buildings;
• acquire (by purchase or lease) and install fixed assets;
• purchase inventory, supplies, and raw materials;
• finance working capital; and
• refinance certain outstanding debts.13
Borrowers are prohibited from using 7(a) loan proceeds to
• refinance existing debt where the lender is in a position to sustain a loss and the
SBA would take over that loss through refinancing;
• effect a partial change of business ownership or a change that will not benefit the
business;
• permit the reimbursement of funds owed to any owner, including any equity
injection or injection of capital for the business’s continuance until the loan
supported by the SBA is disbursed;
• repay delinquent state or federal withholding taxes or other funds that should be
held in trust or escrow; or
• pay for a non-sound business purpose.14
Loan Amounts
As mentioned previously, P.L. 111-240 increased the 7(a) program’s maximum loan amount for
any one 7(a) loan from $2 million to $5 million. The act also provided $510 million to extend the
program’s temporary 90% maximum loan guaranty percentage for all standard 7(a) loans and the
temporary fee reductions for the 7(a) and 504/CDC programs through December 31, 2010 (later
13 13 C.F.R. §120.120.
14 13 C.F.R. §120.130; and U.S. Small Business Administration, “Use of 7(a) Loan Proceeds,” Washington, DC,
http://www.sba.gov/content/use-7a-loan-proceeds.
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Small Business Administration 7(a) Loan Guaranty Program
extended to March 4, 2011), or until the available funding was exhausted.15 The available funding
was exhausted on January 3, 2011.16
Loan Terms, Interest Rate, and Collateral
Loan Terms
7(a) loans are required to have the shortest appropriate term, depending upon the borrower’s
ability to repay. The maximum term is 10 years, unless the loan finances or refinances real estate
or equipment with a useful life exceeding 10 years. In that case, the loan term can be up to 25
years, including extensions.17
Interest Rate
Lenders are allowed to charge borrowers “a reasonable fixed interest rate” or, with the SBA’s
approval, a variable interest rate.18 The SBA uses a multi-step formula to determine the maximum
allowable fixed interest rate and periodically publishes that rate and the maximum allowable
variable interest rate in the Federal Register.19
The maximum allowable fixed interest rates in November 2011 for 7(a) loans with maturities less
than seven years are 7.20% for loans greater than $50,000, 8.20% for loans over $25,000 but not
exceeding $50,000, and 9.20% for loans of $25,000 or less. The maximum allowable fixed
interest rates in November 2011 for 7(a) loans with maturities of seven years or more are 7.70%
for loans greater than $50,000, 8.70% for loans over $25,000 but not exceeding $50,000, and
9.70% for loans of $25,000 or less.20
15 P.L. 111-240, the Small Business Jobs Act of 2010, provided $505 million to extend the 7(a) program’s temporary
increase in its maximum loan guaranty percentage and the fee subsidies and $5 million for related administrative
expenses. P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorizes
the SBA to use funds remaining from the Small Business Jobs Act of 2010 to continue the fee subsidies and the 7(a)
program’s 90% maximum loan guaranty percentage through March 4, 2011, or until the available funding was
exhausted.
16 U.S. Small Business Administration, “Jobs Act Supported More Than $12 Billion in SBA Lending to Small
Businesses in Just Three Months,” Washington, DC, January 3, 2011, http://www.sba.gov/content/jobs-act-supported-
more-12-billion-sba-lending-small-businesses-just-three-months.
17 13 C.F.R. §120.212. A portion of a 7(a) loan used to acquire or improve real property may have a term of 25 years
plus an additional period needed to complete the construction or improvements.
18 13 C.F.R. §120.213.
19 For fixed interest rates, the SBA first calculates a fixed base rate using the 30 day London Interbank Offered Rate
(LIBOR) in effect on the first business day of the month as published in a national financial newspaper published each
business day, adds to that 300 basis points (3%) and the average of the 5-year and 10-year LIBOR swap rates in effect
on the first business day of the month as published in a national financial newspaper published each business day. For
7(a) fixed loans with maturities of less than seven years, the SBA adds 2.25% to the fixed base rate to arrive at the
maximum allowable fixed rate. For 7(a) fixed loans with maturities of seven years or longer, the SBA adds 2.75% to
the fixed base rate to arrive at the maximum allowable fixed rate. Lenders may increase the maximum fixed interest
rate allowed by an additional 1% if the fixed rate loan is over $25,000 but not exceeding $50,000, and by an additional
2% if the fixed rate loan is $25,000 or less. See, U.S. Small Business Administration, “Business Loan Program
Maximum Allowable Fixed Rate,” 74 Federal Register 50263, 50264, September 30, 2009.
20 Colson Services Corp., “SBA Base Rates,” New York, http://www.colsonservices.com/main/news.shtml.
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Small Business Administration 7(a) Loan Guaranty Program
The 7(a) program’s maximum allowable variable interest rate may be pegged to the lowest prime
rate (3.25% in November 2011), the 30 day LIBOR rate plus 300 basis points (3.25% in
November 2011), or the SBA optional peg rate (3.13% in the first quarter of FY2012).21 The
optional peg rate is a weighted average of rates the federal government pays for loans with
maturities similar to the average SBA loan.22
Collateral
The SBA requires lenders to collateralize the loan to the maximum extent possible up to the loan
amount. If business assets do not fully secure the loan, the lender must take available personal
assets of the principals as collateral. Loans are considered “fully secured” if the lender has taken
security interests in all available assets with a combined “liquidation value” up to the loan
amount.23
Lender Eligibility Standards and
Program Requirements
Lender Eligibility Standards
Lenders must have a continuing ability to evaluate, process, close, disburse, service, and liquidate
small business loans; be open to the public for the making of such loans (and not be a financing
subsidiary, engaged primarily in financing the operations of an affiliate); have continuing good
character and reputation; and be supervised and examined by a state or federal regulatory
authority, satisfactory to SBA. They must also maintain satisfactory performance, as determined
by SBA through on-site review/examination assessments, historical performance measures (such
as default rate, purchase rate, and loss rate), and loan volume to the extent that it affects
performance measures.24
Lender Program Requirements
The Application Process
Borrowers submit applications for a 7(a) business loan to private lenders. The lender reviews the
application and decides if it merits a loan on its own or if it has some weaknesses which, in the
lender’s opinion, do not meet standard, conventional underwriting guidelines and requires
additional support in the form of an SBA guaranty. The SBA guaranty assures the lender that if
the borrower does not repay the loan and the lender has adhered to all applicable regulations
21 Ibid.
22 U.S. Small Business Administration, “7(a) Loan Program: Terms and Conditions,” Washington, DC,
http://www.sba.gov/content/7a-terms-conditions.
23 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 185, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
24 13 C.F.R. §120.410.
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concerning the loan, the SBA will reimburse the lender for its loss, up to the percentage of the
SBA’s guaranty. The small business borrowing the money remains obligated for the full amount
due.25
If the lender determines that it is willing to provide the loan, but only with an SBA guaranty, it
submits the application for approval through the mail, website, or e-mail to the Standard 7(a)
Loan Guaranty Processing Center operating out of two locations: Citrus Heights, CA, and
Hazard, KY.26 This center has responsibility for processing 7(a) loan guaranty applications for
lenders who do not have delegated authority to make 7(a) loans without the SBA’s final
approval.27 The application must include the following documentation and forms:
• SBA Form 4, Application for Loan, which includes specific requirements for
providing financial assistance to a small business located in a floodplain or a
wetland, the use of lead-based paint, seismic safety of federal and federally
assisted or regulated new building construction, coastal barrier protections, laws
prohibiting discrimination on the grounds of race, color, national origin, religion,
sex, marital status, disability or age, and rights under the Financial Privacy Act of
1978 (P.L. 95-630);
• SBA Form 4, Schedule A—Schedule of Collateral, or the lender may use their
own form to list collateral and label it “Exhibit A”;
• SBA Form 912, Statement of Personal History—required of all principals,
officers, directors and owners of 20% or more of the small business applicant;
• 7(a) Eligibility Questionnaire;
• Personal Financial Statement, dated within 90 days of submission to the SBA, on
all owners of 20% or more (including the assets of the owner’s spouse and any
minor children), and proposed guarantors. SBA Form 413 is available. However,
lenders may use their own form;
• Business Financial Statements dated within 90 days of submission to the SBA,
consisting of (1) year end balance sheets for the last three years, (2) year end
profit and loss statements for the last three years, (3) reconciliation of net worth,
(4) interim balance sheet, (5) interim profit and loss statements, (6) affiliate and
subsidiary financial statement requirements, and (7) cash flow projection—
month-by-month for one year if less than three fiscal years provided and for all
loans with a term of 18 months or less;
• history of the business, résumés of principals, and copy of lease, if applicable;
• detailed listing of machinery and equipment to be purchased with loan proceeds
and cost quotes;
25 U.S. Small Business Administration, “7(a) Loan Program: How the Program Works,” Washington, DC,
http://archive.sba.gov/financialassistance/borrowers/guaranteed/7alp/FINANCIAL_GLP_7A_WORK.html.
26 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 221, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
27 U.S. Government Accountability Office, Small Business Administration: Opportunities Exist to Build on
Leadership’s Efforts to Improve Agency Performance and Employee Morale, GAO-08-995, September 24, 2008, p. 3,
http://www.gao.gov/new.items/d08995.pdf.
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• if real estate is to be purchased with loan proceeds an appraisal, lender’s
environmental questionnaire, cost breakdown, and copy of purchase agreement;
• if purchasing an existing business with loan proceeds a (1) copy of buy-sell
agreement, (2) pro forma balance sheet for the business being purchased as of the
date of transfer, (3) copy of seller’s financial statements for the last three
complete fiscal years or for the number of years in business if less than three
years; (4) interim statements no older than 90 days from date of submission to
SBA, and (5) if seller’s financial statements are not available the seller must
provide an alternate source of verifying revenues;
• Equity Injection Form—explanation of type and source of applicant’s equity
injection;
• Franchise Form—if listed on www.franchiseregistry.com a certification of
material change or certification of no change or non-material change is required.
If not listed on the registry, a copy of the Franchise Agreement and Federal Trade
Commission Disclosure Report of Franchisor must be submitted;
• SBA Form 159 (7a), Fee Disclosure and Compensation Agreement, must be
completed for each agent compensated by the applicant or lender and retained in
lender’s loan file;
• a copy of Internal Revenue Service (IRS) Form 4506-T, Request for Copy of Tax
Return—lender must identify the date IRS Form 4506-T was sent to IRS;
• for non-citizens, a copy of the U.S. Citizenship and Immigration Services
(USCIS) Form G-845, Document Verification Request—prior to disbursement,
lenders must verify the USCIS status of each alien who is required to submit
USCIS documents to determine eligibility. The lender must document the
findings in the loan file;
• SBA Form 4-I, Lender’s Application for Guaranty—must be completed in its
entirety, including pro forma balance sheet and submitted with (1) explanation of
use of proceeds and benefits of the loan, (2) lender’s internal credit
memorandum, (3) justification for new business, including change of ownership.
For new businesses and change of ownership where historical repayment ability
is not demonstrated, lender must provide a narrative addressing the business plan
and cite any areas of concern and justification to overcome them, and (4)
business valuation must be supplied by lender for change of ownerships;
• SBA Form 1846, Statement Regarding Lobbying, must be signed and dated by
lender; and
• SBA National 7(a) Authorization Boilerplate language on-line “wizard” must be
completed.28
A lender participating in the SBA’s Certified Lenders Program (CLP), which is designed to
provide expeditious service on loan applications received from lenders who have a successful
SBA lending track record and a thorough understanding of SBA policies and procedures, must
28 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), pp. 212-215, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
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submit all forms and exhibits listed above for the standard 7(a) application. CLP lenders also
must submit a draft Authorization. For loan applications greater than $350,000, in addition to all
of the standard 7(a) forms and exhibits, the lender must submit a copy of its written credit
analysis and must discuss SBA eligibility issues.29
A lender participating in the SBA’s Preferred Lenders Program (PLP), which is designed to
streamline the procedures necessary to provide financial assistance to small businesses by
delegating the final credit decision and most servicing and liquidation authority and responsibility
to carefully selected PLP lenders, must complete and retain in the lender’s file all forms and
exhibits listed above for the Standard 7(a) application.30 They must submit the following forms to
the SBA for review: (1) a copy of page 1 of SBA Form 4, Application for Business Loan, (2) a
copy of page 1 of SBA Form 4-I, Lender’s Application for Guaranty or Participation (signed by
two authorized officials of the lender), (3) a copy of Form 1920SX (Part B) “Supplemental
Information for PLP/SBA Express Processing,” and (4) a copy of Form 7, “Eligibility
Information for Preferred Lender Participation (PLP) Loans.” If the PLP loan is to refinance debt
(not same institution debt), a fully completed business indebtedness schedule must be attached. If
the PLP loan is to finance change of ownership and a business valuation is performed by the
lender, a synopsis of the analysis must be submitted.31
SBA Guaranty and Servicing Fees
To offset its costs, the SBA charges lenders a guaranty fee and a servicing fee for each loan
approved and disbursed. The maximum guaranty fee for 7(a) loans with maturities exceeding 12
months is set by statute. Also, the servicing fee cannot exceed 0.55% per year of the outstanding
balance of the SBA’s share of the loan. Since 2005, the SBA has recommended that these fees be
set at levels consistent with the goal of achieving a zero subsidy rate, meaning that the loan
guaranty program does not require annual appropriations of budget authority for new loan
guaranties.32 However, in recent years, the fees have not generated enough revenue to cover loan
29 Ibid., pp. 216, 217. CLP lenders are expected to perform a complete analysis of the application and, in return, the
SBA promises a faster loan decision. The SBA still makes the final credit and eligibility decision, but by completing a
credit review instead of an independently conducted analysis, the SBA attempts to arrive at its decision in three
working days. See, U.S. Small Business Administration, “The Certified Lenders Program (CLP),” Washington, DC,
http://www.sba.gov/content/steps-participating-clp.
30 There were 545 lenders participating in the Preferred Lenders Program in FY2011. They approved 15,167 7(a)
program loans in FY2011, amounting to $10.6 billion. The number of lenders participating in the Certified Lenders
Program was not available. U.S. Small Business Administration, Office of Congressional and Legislative Affairs,
“Correspondence with the author,” Washington, DC, October 12, 2011.
31 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 217, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf. Lenders are considered for PLP status based on their record
with SBA, and must have demonstrated a proficiency in processing and servicing SBA-guaranteed loans. The SBA
continues to review the submitted materials to check loan eligibility criteria. See, U.S. Small Business Administration,
“The Preferred Lenders Program (PLP),” Washington, DC, http://www.sba.gov/content/preferred-lenders-program-plp.
32 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Federal
Financial Management, Government Information, Federal Services, and International Security, Small Business
Administration: Is the 7(a) Program Achieving Measurable Outcomes?, 110th Cong., 1st sess., November 1, 2007,
S.Hrg. 110-605 (Washington: GPO, 2008), p. 13; and U.S. Government Accountability Office, Small Business
Administration: Additional Guidance on Documenting Credit Elsewhere Decisions Could Improve 7(a) Program
Oversight, GAO-09-228, February 12, 2009, p. 8, http://www.gao.gov/new.items/d09228.pdf.
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losses, resulting in the need for additional appropriations to account for the shortfall—estimated
to exceed $200 million in FY2012 for the 7(a) and 504/CDC loan guaranty programs.33
The 7(a) program’s guaranty fee is based on loan maturity and the amount of the guaranty portion
of the loan. For loans with a maturity of 12 months or less, the SBA charges the lender a 0.25%
guaranty fee, which the lender is required to submit with the application. The lender may charge
the borrower for the fee when the loan is approved by the SBA.34
For loans with a maturity exceeding 12 months, the SBA charges the lender a 2% guaranty fee for
the SBA guaranteed portion of loans of $150,000 or less, a 3% guaranty fee for the SBA
guaranteed portion of loans exceeding $150,000 but not more than $700,000, and a 3.5%
guaranty fee for the SBA guaranteed portion of loans exceeding $700,000. Loans with an SBA
guaranteed portion in excess of $1 million are charged an additional 0.25% guaranty fee on the
guaranteed amount in excess of $1 million.35 These fees are the maximum allowed by law.36 The
lender must pay the SBA guaranty fee within 90 days of the date of loan’s approval and may
charge the borrower for the fee after the lender has made the first disbursement of the loan.
Lenders are permitted to retain 25% of the up-front guaranty fee on loans with a gross amount of
$150,000 or less.37
The annual ongoing servicing fee for all 7(a) loans is required to be no more than the “rate
necessary to reduce to zero the cost to the Administration” of making guaranties and, as
mentioned previously, cannot exceed 0.55% of the outstanding balance of the guaranteed portion
of the loan.38 The current rate is the maximum allowed by law—0.55% of the outstanding balance
of the guaranteed portion of the loan.39 The lender’s annual service fee to the SBA cannot be
charged to the borrower.40
In 2009 and 2010, the SBA was provided more than $1.1 billion to subsidize fees for the 7(a) and
504/CDC loan guaranty programs and to increase the 7(a) program’s maximum loan guaranty
percentage to 90% for all standard 7(a) loans. The last extension was provided by P.L. 111-322,
33 U.S. Office of Management and Budget, The Appendix, Budget of the United States Government, Fiscal Year 2012,
Washington, DC, February 14, 2011, p. 1165, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/
sba.pdf; H.Rept. 112-136, Financial Services and General Government Appropriations Bill, 2012, and S.Rept. 112-79,
Financial Services and General Government Appropriations Bill, 2012.
34 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 161, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf. The fee is refundable if the loan application is withdrawn
prior to SBA approval, the SBA declines to guarantee the loan, or the SBA substantially changes the loan terms and
those terms are unacceptable to the lender. Also, because the SBA does not approve or decline the credit for PLP loans,
PLP lenders are required to send the guaranty fee directly to the SBA Denver Finance Center within 10 business days
from the date the loan number is assigned and before the lender signs the Authorization for SBA.
35 15 U.S.C. 636(a)(18)(a).
36 U.S. Small Business Administration, “Small Business Jobs Act: Implementation of Conforming and Technical
Amendments,” 76 Federal Register 63544, 63545, October 13, 2011.
37 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 161, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
38 15 U.S.C. 636(a)(23)(a).
39 U.S. Small Business Administration, “SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2011,”
Washington, DC, September 30, 2011, http://www.sba.gov/sites/default/files/5000-1223.pdf.
40 15 U.S.C. 636(a)(23)(b).
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the Continuing Appropriations and Surface Transportation Extensions Act, 2011. It authorized the
SBA to use any funds remaining from the Small Business Jobs Act of 2010 to continue the fee
subsidies and the 7(a) program’s 90% maximum loan guaranty percentage through March 4,
2011, or until the available funding was exhausted. The available funding was exhausted on
January 3, 2011.41
Lender Packaging, Servicing and Other Fees
The lender may charge an applicant “reasonable fees” customary for similar lenders in the
geographic area where the loan is being made for packaging and other services. The lender must
advise the applicant in writing that the applicant is not required to obtain or pay for unwanted
services. These fees are subject to SBA review at any time, and the lender must refund any such
fee considered unreasonable by the SBA.42
The lender may also charge an applicant an additional fee if, subject to prior written SBA
approval, all or part of a loan will have extraordinary servicing needs. The additional fee can not
exceed 2% per year on the outstanding balance of the part requiring special servicing (e.g., field
inspections for construction projects). The lender may also collect from the applicant necessary
out-of-pocket expenses, including filing or recording fees, photocopying, delivery charges,
collateral appraisals, environmental impact reports that are obtained in compliance with SBA
policy, and other direct charges related to loan closing.43 The lender is prohibited from requiring
the borrower to pay any fees for goods and services, including insurance, as a condition for
obtaining an SBA guaranteed loan, and from imposing on SBA loan applicants processing fees,
origination fees, application fees, points, brokerage fees, bonus points, and referral or similar
fees.44
The lender is also allowed to charge the borrower a late payment fee not to exceed 5% of the
regular loan payment when the borrower is more than 10 days delinquent on its regularly
scheduled payment. The lender may not charge a fee for full or partial prepayment of a loan.45
For loans with a maturity of 15 years or longer, the borrower must pay to the SBA a subsidy
recoupment fee when the borrower voluntarily prepays 25% or more of its loan in any one year
during the first three years after first disbursement. The fee is 5% of the prepayment amount
during the first year, 3% the second year, and 1% in the third year.46
41 P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, Sec. 153; and U.S.
Small Business Administration, “Jobs Act Supported More Than $12 Billion in SBA Lending to Small Businesses in
Just Three Months,” Washington, DC, January 3, 2011, http://www.sba.gov/content/jobs-act-supported-more-12-
billion-sba-lending-small-businesses-just-three-months.
42 13 C.F.R. §120.221.
43 Ibid.; and U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan
Programs,” Washington, DC (effective October 1, 2011), p. 169, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
44 13 C.F.R. §120.222. A commitment fee may be charged for a loan made under the Export Working Capital Loan
Program.
45 13 C.F.R. §120.221; and U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company
Loan Programs,” Washington, DC (effective October 1, 2011), p. 170, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
46 13 C.F.R. §120.223; and U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company
Loan Programs,” Washington, DC (effective October 1, 2011), p. 170, http://www.sba.gov/sites/default/files/
(continued...)
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Program Statistics
Loan Volume
As shown in Table 1, the total number and amount of 7(a) program loans approved by the SBA
declined in FY2008 and FY2009, and then increased during FY2010 and FY2011. In FY2011, the
SBA approved 53,706 7(a) loans amounting to more than $19.6 billion.47
The SBA attributed the increased number and amount of 7(a) loans approved in FY2010 and
FY2011 largely to the 7(a) program’s temporary fee subsidies and 90% maximum loan guaranty
percentage, which were in place during most of FY2010 and the first quarter of FY2011.48 Table
1 also provides data concerning the total amount of the 7(a) program’s unpaid principal balance.
Table 1. 7(a) Loan Guaranty Program, Loan Volume, FY2007-FY2011
Number of Loans
Total Unpaid
FY
Approved
Amount Approved
Principal Balance
2007
99,606
$14. 3 billion
$46.1 billion
2008
69,434
$12.7 billion
$47.7 billion
2009 41,289 $9.2
billion
$48.6
billion
2010
47,002
$12.4 billion
$50.8 billion
2011
53,706
$19.6 billion
$55.2 billion
Sources: U.S. Small Business Administration, Agency Financial Report Fiscal Year 2010, Washington, DC,
November 15, 2010, p. 7; U.S. Smal Business Administration, Fiscal Year 2011 Congressional Budget Justification and
FY 2009 Annual Performance Report, Washington, DC, pp. 36, 125; U.S. Smal Business Administration, “SBA
Lending Statistics for Major Programs (as of 9/30/2011),” Washington, DC, http://www.sba.gov/sites/default/files/
hppscan41.pdf; and U.S. Smal Business Administration, “Table 1 ─ Unpaid Principal Balance By Program,”
Washington, DC, http://www.sba.gov/sites/default/files/files/WDS_UPB_Report_2011Q3.pdf.
Notes: The SBA no longer publishes the number and amount of 7(a) loans disbursed. Based on previous
experience, the number of loans approved annual y ranges from about 7% to 10% higher than the number of
(...continued)
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
47 There were $672.8 billion in total small business bank loans (defined as loans of $1 million or less) outstanding as of
June 30, 2011. The SBA estimates that finance companies provided another $460 billion worth of credit to small
businesses in 2010, bringing the total market for small business loans to about $1.1 trillion. The SBA’s 7(a) loan
guaranty program’s loan amount for FY2011 ($19.6 billion) is about 2.9% of the total amount of small business loans
outstanding and about 1.8% of the total market for small business loans. The SBA’s 7(a) loan guaranty program’s total
unpaid principal balance in FY2011 ($55.2 billion) is about 8.2% of the total amount of small business loans
outstanding and about 5.0% of the total market for small business loans. Federal Deposit Insurance Corporation,
“Statistics on Depository Institutions,” Washington, DC, http://www2.fdic.gov/SDI/main.asp; and U.S. Small Business
Administration, Office of Advocacy, “Frequently Asked Questions About Small Business Finance,” Washington, DC,
September 2011, http://www.sba.gov/sites/default/files/Finance%20FAQ%208-25-11%20FINAL%20for%20web.pdf.
48 U.S. Small Business Administration, Press Office, “Recovery Loan Incentives Spurred Continued Rebound in SBA
Lending in FY2010,” Washington, DC, October 4, 2010, http://www.sba.gov/about-sba-services/7367/5527; and U.S.
Small Business Administration, “Jobs Act Supported More Than $12 Billion in SBA Lending to Small Businesses in
Just Three Months,” Washington, DC, January 3, 2011, http://www.sba.gov/content/jobs-act-supported-more-12-
billion-sba-lending-small-businesses-just-three-months.
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loans disbursed (e.g., some borrowers decide not to accept the loan, there is a change in business ownership,
etc.). See U.S. Smal Business Administration, “SBA Lending Report for Major Programs, Fiscal Year 2010,”
Washington, DC, October 4, 2010, http://archive.sba.gov/idc/groups/public/documents/sba_homepage/
serv_fa_lending_major_progs.pdf.
Loss Rate
Since its inception in 1953 through 2008, the SBA experienced a 5.83% loss rate (ratio of actual
losses to disbursements) on its general business loans.49 In recent years, the loss rate on the SBA’s
general business loans has exceeded historical averages. For example, the Obama Administration
reported that “due to the economic crisis and significantly higher default claims” the SBA
recorded a $3.7 billion upward re-estimate in its subsidy costs for its loan guaranty programs in
FY2010, including a $1.5 billion net upward re-estimate for the 7(a) loan guaranty program.50
The Administration also indicated that projected economic conditions and higher anticipated
defaults “have doubled the estimated cost of new 7(a) loan guaranties in FY2012 compared with
FY2010.”51 The Administration also announced that it “will submit a legislative package to
provide SBA the flexibility to adjust fees in the 7(a) program to enable it to be self-sustaining
over time” and that “these changes in the program’s fee structure would become effective for
loans originated after FY 2012.”52
Use of Proceeds and Borrower Satisfaction
In 2008, the Urban Institute released the results of an SBA-commissioned study of the SBA’s loan
guaranty programs. As part of its analysis, the Urban Institute surveyed a random sample of SBA
loan guaranty borrowers. The survey indicated that borrowers used 7(a) loan proceeds to
• purchase or install new equipment (34%);
• finance working capital (23%);
• acquire original business (21%);
• other (19%);
• expand or renovate current building (14%);
• purchase new building (10%);
• refinance existing debt (8%);
49 U.S. Small Business Administration, FY 2008 Small Business Administration (SBA) Loss Report, Washington, DC,
p. 7, http://archive.sba.gov/idc/groups/public/documents/sba_program_office/cfo_2008_loss_report.pdf. General
business loans include loans in the SBA’s 7(a), 8(A), FIS 8a, Economic Opportunity, Small Business Energy, Handicap
Assistance, Veterans, Pollution Control, Import Export, Foreign Trade, USCAIP (NAFTA) and Reconstruction Finance
Corporation Business programs.
50 U.S. Office of Management and Budget, The Appendix, Budget of the United States Government, Fiscal Year 2012,
Washington, DC, February 14, 2011, p. 1165, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/
sba.pdf; and U.S. Small Business Administration, Summary of Performance and Financial Information, Fiscal Year
2010, Washington, DC, February 15, 2011, http://www.sba.gov/sites/default/files/
Summary%20of%20Performance_2010_0.pdf.
51 Ibid.
52 Ibid.
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• hire additional staff (6%);
• build new building (4%);
• purchase new land (3%); and
• improve land (2%).53
The Urban Institute also reported that most of the 7(a) borrowers responding to their survey rated
their overall satisfaction with their 7(a) loan and loan terms as either excellent (18%) or good
(50%). One out of every five 7(a) borrowers (20%) rated their overall satisfaction with their 7(a)
loan and loan terms as fair, and 6% rated their overall satisfaction with their 7(a) loan and loan
terms as poor (7% reported don’t know or did not respond).54 In addition, 90% of the survey’s
respondents reported that the 7(a) loan was either very important (62%) or somewhat important
(28%) to their business success (2% reported somewhat unimportant, 3% reported very
unimportant, and 4% reported don’t know or did not respond).55
Borrower Demographics
The Urban Institute found that about 9.9% of conventional small business loans are issued to
minority-owned small businesses and about 16% of conventional small business loans are issued
to women-owned businesses.56 In FY2011, 21.5% of 7(a) loan recipients were minority-owned
businesses (11.5% Asian, 6.5% Hispanic, 2.6% African-American, and 0.9% other minority) and
16.6% were women-owned businesses.57 Based on its comparative analysis of conventional small
business loans and the SBA’s loan guaranty programs, the Urban Institute concluded:
SBA’s loan programs are designed to enable private lenders to make loans to creditworthy
borrowers who would otherwise not be able to qualify for a loan. As a result, there should be
differences in the types of borrowers and loan terms associated with SBA-guaranteed and
conventional small business loans.
Our comparative analysis shows such differences. Overall, loans under the 7(a) and 504
programs were more likely to be made to minority-owned, women-owned, and start-up
businesses (firms that have historically faced capital gaps) as compared to conventional
small business loans. Moreover, the average amounts for loans made under the 7(a) and 504
programs to these types of firms were substantially greater than conventional small business
loans to such firms. These findings suggest that the 7(a) and 504 programs are being used by
lenders in a manner that is consistent with SBA’s objective of making credit available to
firms that face a capital opportunity gap.58
53 Christopher Hayes, An Assessment of Small Business Administration Loan and Investment Performance: Survey of
Assisted Businesses (Washington, DC: The Urban Institute, 2008), p. 3, http://www.urban.org/UploadedPDF/
411599_assisted_business_survey.pdf. The percentage total exceeds 100 because recipients were allowed to name more
than one use for the loan proceeds.
54 Ibid., p. 5.
55 Ibid.
56 Kenneth Temkin, Brett Theodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
Analysis of the 7(A) and 504 Programs (Washington, DC: The Urban Institute, 2008), p. 13, http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf.
57 U.S. Small Business Administration, “SBA Lending Statistics for Major Programs (as of 9/30/2011),” Washington,
DC, http://www.sba.gov/sites/default/files/hppscan41.pdf.
58 Kenneth Temkin, Brett Theodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
(continued...)
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Congressional Issues
Access to Capital
Congressional interest in the 7(a) loan program has increased in recent years largely because of
increased concern that small businesses might be prevented from accessing sufficient capital to
enable them to assist in the economic recovery. During the 111th Congress, several laws were
enacted to increase the supply and demand for capital for both large and small businesses.59 For
example, in 2008, Congress adopted P.L. 110-343, the Emergency Economic Stabilization Act of
2008, which authorized the Troubled Asset Relief Program (TARP). Under TARP, the U.S.
Department of the Treasury was authorized to purchase or insure up to $700 billion in troubled
assets, including small business loans, from banks and other financial institutions. The law’s
intent was “to restore liquidity and stability to the financial system of the United States.”60 P.L.
111-203, the Dodd-Frank Wall Street Reform and Consumer Protection Act, reduced total TARP
purchase authority from $700 billion to $475 billion. The Treasury Department’s authority to
make new financial commitments under TARP ended on October 3, 2010. The Department of the
Treasury has disbursed approximately $389 billion in TARP funds, including $337 million to
purchase SBA 7(a) loan guaranty program securities.61
Also, as mentioned previously, in 2009, ARRA provided an additional $730 million for SBA
programs, including $375 million to temporarily reduce fees in the SBA’s 7(a) and 504/CDC loan
guaranty programs and increase the 7(a) program’s maximum loan guaranty percentage from up
to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90% for all
standard 7(a) loans. Congress subsequently provided another $265 million, and authorized the
SBA to reprogram another $40 million, to extend the fee reductions and loan modification
through May 31, 2010, and the Small Business Jobs Act of 2010 provided another $510 million to
extend the fee reductions and loan modification from September 27, 2010, through December 31,
2010. Also, P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions
Act, 2011, authorized the use of any funding remaining from the Small Business Jobs Act of 2010
to extend the fee subsidies and 90% maximum loan guaranty percentage through March 4, 2011,
(...continued)
Analysis of the 7(A) and 504 Programs (Washington, DC: The Urban Institute, 2008), p. 21, http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf.
59 For further analysis, see CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay
Dilger.
60 P.L. 110-343, the Emergency Economic Stabilization Act of 2008.
61 U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report – November 2010,
Washington, DC, December 10, 2010, pp. 2-4, http://www.financialstability.gov/docs/
November%20105(a)%20FINAL.pdf. On March 16, 2009, President Obama announced that the Department of the
Treasury would use TARP funds to purchase up to $15 billion of SBA-guaranteed loans to “immediately unfreeze the
secondary market for SBA loans and increase the liquidity of community banks.” The plan was deferred after it met
resistance from lenders. Some lenders objected to TARP’s requirement that participating lenders comply with
executive compensation limits and issue warrants to the federal government. Smaller, community banks objected to the
program’s paperwork requirements, such as the provision of a small-business lending plan and quarterly reports. See
The White House, “Remarks by the President to Small Business Owners, Community Leaders, and Members of
Congress,” Washington, DC, March 16, 2009, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-
to-small-business-owners/.
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or until the available funding was exhausted.62 Funding for these purposes were exhausted on
January 3, 2011.
The Obama Administration argued that TARP and the additional funding for the SBA’s loan
guaranty programs helped to improve the small business lending environment and supported “the
retention and creation of hundreds of thousands of jobs.”63 Critics argued that small business tax
reduction, reform of financial credit market regulation, and federal fiscal restraint are the best
means to assist small business economic growth and job creation.64
Program Administration
The SBA’s Office of Inspector General (OIG) and the U.S. Government Accountability Office
(GAO) have independently reviewed the SBA’s administration of the agency’s loan guaranty
programs. Both agencies have reported deficiencies in the SBA’s administration of its loan
guaranty programs that they argue need to be addressed, including issues involving the oversight
of 7(a) lenders and the lack of outcome-based performance measures.
Oversight of 7(a) Lenders
The SBA’s OIG has argued that the 7(a) loan guaranty program “is vulnerable to fraud and
unnecessary losses because it relies on numerous third parties (e.g., borrowers, loan agents, and
lenders)” to complete loan transactions for about 80% of the loans guaranteed annually by the
SBA.65 It has argued that the SBA needs to strengthen oversight of 7(a) lenders to “establish more
robust controls to prevent waste, fraud, abuse, and inefficiencies.”66
The SBA OIG has argued that the results of its review of the 7(a) program’s FY2008 lending
indicate the need for strengthened lender oversight. The SBA OIG found that the SBA’s estimate
of improper payments for FY2008 significantly understated the level of erroneous payments in
the program. The SBA reported that improper payments were 0.53% of FY2008 program outlays,
whereas the SBA’s OIG estimated the improper payment rate to be 29% (approximately $248
million) of the $869 million in loan guaranties purchased between April 1, 2007, and March 31,
2008.67 In addition, the SBA OIG’s review of a sample of 30 7(a) loans issued in FY2008 found
62 P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1111. Section 7(A) Business Loans. The Senate had adopted
H.R. 4213, the American Workers, State, and Business Relief Act of 2010, on March 10, 2010, by a 62-36 vote. It
would have provided $560 million to extend the fee reductions and 90% loan guarantee limit through December 31,
2010. The House approved an amended version of the bill, renamed the American Jobs and Closing Tax Loopholes Act
of 2010, on May 28, 2010, by a 245-171 vote. It would have provided $505 million to extend the fee reductions and
90% loan guarantee limit through December 31, 2010. The extension provision was subsequently removed from the
bill, which became P.L. 111-205, the Unemployment Compensation Extension Act of 2010.
63 U.S. Small Business Administration, “Administration Announces New Small Business Commercial Real Estate and
Working Capital Programs,” Washington, DC, February 5, 2010, http://www.sba.gov/sites/default/files/
sba_rcvry_factsheet_cre_refi.pdf.
64 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
65 U.S. Small Business Administration, Office of Inspector General, “Semiannual Report to Congress, Fall 2009,”
Washington, DC, p. 5, http://www.sba.gov/office-of-inspector-general/867/12348.
66 Ibid., p. 3.
67 Ibid., p. 5.
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that 14 of the loans lacked evidence to support lender compliance with SBA origination,
servicing, or liquidation requirements, resulting in improper payments totaling $723,293. In
contrast, the SBA reported improper payments of $4,468 on two of the sampled loans.68
In 2009, GAO also recommended that the SBA strengthen its oversight of 7(a) program lenders.
GAO argued that although the SBA’s “lender risk rating system has enabled the agency to
conduct some off-site monitoring of lenders, the agency does not use the system to target lenders
for on-site reviews or to inform the scope of the reviews.”69 It also noted that
the SBA targets for review those lenders with the largest SBA-guaranteed loan portfolios. As
a result of this approach, 97 percent of the lenders that SBA’s risk rating system identified as
high risk in 2008 were not reviewed. Further, GAO found that the scope of the on-site
reviews that SBA performs is not informed by the lenders’ risk ratings, and the reviews do
not include an assessment of lenders’ credit decisions.70
GAO argued that although the SBA “has made improvements to its off-site monitoring of lenders,
the agency will not be able to substantially improve its lender oversight efforts unless it improves
its on-site review process.”71
In a separate report concerning the SBA’s administration of the 7(a) program, GAO also argued in
2009 that the SBA needs to “improve its oversight of lenders’ compliance with the credit
elsewhere requirement.”72 The Small Business Act specifies that “no financial assistance shall be
extended pursuant to this subsection if the applicant can obtain credit elsewhere.”73 The SBA
provides lenders the following six reasons for certifying in its application that the borrower meets
the credit elsewhere requirement:
• the business needs a longer maturity than the lender’s policy permits (for
example, the business needs a loan that is not on a demand basis);
• the requested loan exceeds either the lender’s legal lending limit or policy limit
regarding the amount that it can lend to one customer;
• the lender’s liquidity depends upon selling the guaranteed portion of the loan on
the secondary market;
• the collateral does not meet the lender’s policy requirements;
• the lender’s policy normally does not allow loans to new businesses or businesses
in the applicant’s industry; or
68 Ibid.
69 U.S. Government Accountability Office, Small Business Administration: Actions Needed to Improve the Usefulness
of the Agency’s Lender Risk Rating System, GAO-1—53, November 6, 2009, p. i, http://www.gao.gov/new.items/
d1053.pdf.
70 Ibid., pp. i, 27-30.
71 Ibid., p. 35.
72 U.S. Government Accountability Office, Small Business Administration: Additional Guidance on Documenting
Credit Elsewhere Decisions Could Improve 7(a) Program Oversight, GAO-09-228, February 12, 2009, p. 3,
http://www.gao.gov/new.items/d09228.pdf.
73 15 U.S.C. 636(a)(1)(A). The act defines credit elsewhere as “the availability of credit from non-Federal sources on
reasonable terms and conditions taking into consideration the prevailing rates and terms in the community in or near
where the concern transacts business, or the homeowner resides, for similar purposes and periods of time.” See 15
U.S.C. 632(h).
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• any other factors relating to the credit that, in the lender’s opinion, cannot be
overcome except for the guaranty. These other factors must be specifically
documented in the loan file.74
GAO argued that “SBA’s guidance to lenders on documenting compliance with the credit
elsewhere requirement is limited” because it “does not specify the amount of detail lenders should
include in their explanations.”75 GAO noted that “even with the lack of detail required,” the
SBA’s own on-site reviews of 7(a) lenders over a recent six-quarter period indicated that nearly a
third of the lenders reviewed had not consistently documented that borrowers met the credit
elsewhere requirement.76
The SBA has argued that it currently “conducts a continuous risk-based, off-site analysis of
lending partners through the Loan/Lender Monitoring System (L/LMS), a state-of-the-art
portfolio monitoring system that incorporates credit scoring metrics for portfolio management
purposes.”77 According to the SBA:
The Loan/Lender Monitoring System focuses on 7(a) lenders, certified development
companies and microloan intermediaries that pose the most risk to the SBA. In addition to
overseeing lenders, the L/LMS provides policy, portfolio and program analysis. The Office
of Credit Risk Management (OCRM) is divided into four teams: large lender oversight, small
lender oversight, lender transaction, and program and policy analysis. The differentiation of
lender oversight by lender size reflects the different forms of oversight needed for large
lenders versus small lenders.78
The SBA asserts that
The OCRM is continually enhancing and updating oversight programs and practices to
provide a more robust and responsive system. Enhancements include: (1) better integration
of delegated lending decisions into oversight practices; (2) addition of different types of
lender reviews (targeted, desk, agreed upon procedures, etc.) to provide more options to
obtain information in the most timely and efficient manner possible; (3) assessment of
current on-site review practices to customize them based on risk factors and consider credit
decisions made by lenders; (4) development of a lender certification program (particularly
for community lenders); (5) quarterly reporting for non-bank lenders; (6) identification/
monitoring of risk related red flags and triggers; and (7) training for OCA staff, district office
staff and lenders in the new process.79
74 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 102, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
75 U.S. Government Accountability Office, Small Business Administration: Additional Guidance on Documenting
Credit Elsewhere Decisions Could Improve 7(a) Program Oversight, GAO-09-228, February 12, 2009, pp. 25, 26,
http://www.gao.gov/new.items/d09228.pdf.
76 Ibid., p. 26.
77 U.S. Small Business Administration, Fiscal Year 2011 Congressional Budget Justification and FY 2009 Annual
Performance Report, Washington, DC, p. 6.
78 Ibid., p. 43.
79 Ibid.
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In addition, in its FY2012 congressional budget request, the SBA reported that it had “created a
more robust risk rating system, with more transparency in portfolios, and “best practices” for
lender oversight (including more on-site and off-site lender monitoring).”80
Outcome-Oriented Performance Measures
GAO has argued that the 7(a) program’s performance measures (e.g., number of loans approved,
loans funded, and firms assisted across the subgroups of small businesses) provide limited
information about the impact of the loans on participating small businesses:
The program’s performance measures focus on indicators that are primarily output
measures–for instance, they report on the number of loans approved and funded. But none of
the measures looks at how well firms do after receiving 7(a) loans, so no information is
available on outcomes. As a result, the current measures do not indicate how well the agency
is meeting its strategic goal of helping small businesses succeed.81
The SBA OIG has made a similar argument concerning the SBA’s Microloan program’s
performance measures. Because the SBA uses similar program performance measures for its
Microloan and 7(a) programs, the SBA OIG’s recommendations could also be applied to the
SBA’s 7(a) program.
Specifically, as part of its audit of the SBA Microloan program’s use of ARRA funds, the SBA
OIG found that the SBA’s performance measures for the Microloan program are based on the
number of microloans funded, the number of small businesses assisted, and program’s loan loss
rate. It argued that these “performance metrics ... do not ensure the ultimate program
beneficiaries, the microloan borrowers, are truly assisted by the program” and “without
appropriate metrics, SBA cannot ensure the Microloan program is meeting policy goals.”82 It
noted that the SBA does not track the number of microloan borrowers who remain in business
after receiving a microloan to measure the extent to which the loans contributed to the success of
borrowers and does not determine the effect that technical training assistance may have on the
success of microloan borrowers and their ability to repay loans.83 It recommended that the SBA
“develop additional performance metrics to measure the program’s achievement in assisting
microloan borrowers in establishing and maintaining successful small businesses.”84
In its response to GAO’s recommendation to develop additional performance measures for the
7(a) program, the SBA indicated that there are legal constraints and cost considerations associated
with tracking the success or failure of SBA borrowers and that it had, at that time, “a new
administrator who may make changes to the agency’s performance measures and goals.”85 In
80 U.S. Small Business Administration, Fiscal Year 2012 Congressional Budget Justification and FY 2010 Annual
Performance Report, Washington, DC, p. 7.
81 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, p. 2, http://www.gao.gov/new.items/d08226t.pdf.
82 U.S. Small Business Administration, Office of the Inspector General, SBA’s Administration of the Microloan
Program under the Recovery Act, Washington, DC, December 28, 2009, p. 6, http://www.sba.gov/sites/default/files/
om10-10.pdf.
83 Ibid.
84 Ibid., p. 7.
85 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, p. 8, http://www.gao.gov/new.items/d08226t.pdf.
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response to the SBA OIG’s recommendation to develop additional performance metrics for the
Microloan program, the SBA reported that it has “contracted with the Aspen Institute to advise on
appropriate program and performance metrics for both microloans and technical assistance
grants.”86 It also indicated that the program metrics developed will be used to assist the agency in
measuring the Microloan program’s effectiveness. Given that the Microloan program and 7(a)
program use similar performance measures, it could be argued that the program metrics
developed for the Microloan program may be applied to the 7(a) program as well.
Legislative Activity During the 111th Congress
Congress authorized several changes to the 7(a) program during the 111th Congress in an effort to
increase the number, and amount, of 7(a) loans, including provisions contained in ARRA and the
Small Business Jobs Act of 2010. Congress has not approved any changes to the 7(a) program
during the 112th Congress.
The Obama Administration’s Proposals
During the 111th Congress, the Obama Administration supported congressional efforts to
temporarily subsidize fees for the 7(a) and 504/CDC loan guaranty programs and to increase the
7(a) program’s loan guaranty percentage from up to 85% of loans of $150,000 or less and up to
75% of loans exceeding $150,000 to 90%. As mentioned previously, Congress subsequently
provided more than $1.1 billion to subsidize fees for the 7(a) and 504/CDC loan guaranty
programs and to increase the 7(a) program’s maximum loan guaranty percentage to 90% for all
standard 7(a) loans.
The Obama Administration also proposed the following modifications to several SBA programs,
including the 7(a) program:
• increase the maximum loan size for 7(a) loans from $2 million to $5 million;
• increase the maximum loan size for the 504/CDC program from $2 million to $5
million for regular projects and from $4 million to $5.5 million for
manufacturing projects;
• increase the maximum loan size for microloans to small business concerns from
$35,000 to $50,000;
• increase the maximum loan limits for lenders in their first year of participation in
the Microloan program, from $750,000 to $1 million, and from $3.5 million to $5
million in the subsequent years;
• temporarily increase the cap on SBAExpress loans from $350,000 to $1 million;
and
86 U.S. Small Business Administration, Office of the Inspector General, SBA’s Administration of the Microloan
Program under the Recovery Act, Washington, DC, December 28, 2009, p. 9, http://www.sba.gov/sites/default/files/
om10-10.pdf.
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• temporarily allow in FY2010 and FY2011, with an option to extend into FY2012,
the refinancing of owner-occupied commercial real estate loans within one year
of maturity under the SBA’s 504/CDC program.87
Arguments for Increasing the SBA’s Maximum Loan Limits
The Obama Administration argued that increasing the maximum loan limits for the 7(a),
504/CDC, Microloan, and SBAExpress programs would allow the SBA to “support larger
projects,” which will “allow the SBA to help America’s small businesses drive long-term
economic growth and the creation of jobs in communities across the country.”88 The
Administration also argued that increasing the maximum loan limits for these programs will be
“budget neutral” over the long run and “help improve the availability of smaller loans.”89
Arguments Against Increasing the SBA’s Maximum Loan Limits
Critics of the Obama Administration’s proposals to increase the SBA’s maximum loan limits
argued that it might increase the risk of defaults, resulting in higher guaranty fees or the need to
provide the SBA additional funding, especially for the SBAExpress program, which has
experienced somewhat higher default rates than other SBA loan guaranty programs.90 Others
advocated a more modest increase in the maximum loan limits to ensure that the 7(a) program
“remains focused on startup and early-stage small firms, businesses that have historically
encountered the greatest difficulties in accessing credit” and “avoids making small borrowers
carry a disproportionate share of the risk associated with larger loans.”91
Others argued that creating a small business direct lending program within the SBA would reduce
paperwork requirements and be more efficient in providing small businesses access to capital
than modifying existing SBA programs that rely on private lenders to determine if they will issue
the loans.92 Also, as mentioned previously, others argued that providing additional resources to
the SBA or modifying the SBA’s loan programs as a means to augment small business access to
capital is ill-advised. In their view, the SBA has limited impact on small access to capital. They
argued that the best means to assist small business economic growth and job creation is to focus
87 U.S. Small Business Administration, “Administration Announces New Small Business Commercial Real Estate and
Working Capital Programs,” Washington, DC, February 5, 2010, http://www.sba.gov/sites/default/files/
sba_rcvry_factsheet_cre_refi.pdf.
88 Ibid.
89 Ibid.
90 Robb Mandelbaum, “Small Business Incentives Face a Hard Road in Congress,” New York Times, February 12,
2010, http://boss.blogs.nytimes.com/2010/02/12/small-business-incentives-face-a-hard-road-in-congress/; and U.S.
Congress, House Committee on Small Business, House Committee on Small Business Views With Regard to the Fiscal
Year (FY) 2010 Budget, Letter from Nydia Velázquez, Chair, House Committee on Small Business, to John M. Spratt,
Jr., Chair, House Committee on the Budget, 111th Cong., 2nd sess., March 11, 2009, p. 3, http://www.house.gov/smbiz/
democrats/Reports/FY%202010%20Views%20and%20Estimates%20v2.pdf.
91 U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act Of 2009, report
to accompany H.R. 3854, 111th Cong., 2nd sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), p. 1.
92 Robb Mandelbaum, “Why Won’t the S.B.A. Lend Directly to Small Businesses?” New York Times, March 10, 2010,
http://boss.blogs.nytimes.com/2010/03/10/why-wont-the-s-b-a-loan-directly-to-small-businesses/.
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on small business tax reduction, reform of financial credit market regulation, and federal fiscal
restraint.93
H.R. 3854, the Small Business Financing and Investment Act
of 2009
H.R. 3854 would have authorized several new SBA programs and change several existing SBA
programs, including the 7(a) program, in an effort to enhance job creation by increasing the
availability of credit to small businesses. The bill was passed by the House, 389-32, on October
29, 2009. The Senate did not act on the bill.94
It would have
• increased the maximum loan size for 7(a) loans from $2 million to $3 million;
• increased the maximum loan size for 504/CDC loans from $1.5 million to $3
million for regular projects, from $2 million to $4 million for projects located in
a low-income community, from $4 million to $8 million for manufacturers, and
for up to $10 million for projects that constitute “a major source of employment”
as determined by the Administration;
• extended ARRA’s fee reductions and the 7(a) program’s 90% loan guaranty limit
through September 30, 2011;
• authorized the SBA to establish an alternative size standard for the 7(a) program
that uses maximum tangible net worth and average net income as an alternative
to the use of industry standards and established an interim size standard of a
maximum tangible net worth of not more than $15 million and an average net
income after federal taxes (excluding any carryover losses) for the preceding two
fiscal years of not more than $5 million;
• extended, with modifications, ARRA’s America’s Recovery Capital Loan
Program (ARC) which temporarily provides small businesses loan assistance for
debt relief, through the end of FY2011;95 and
• provided a 100% loan guaranty for small business concerns owned and
controlled by veterans, and expanded and made permanent the SBA’s secondary
market lending authority.96
93 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
94 For further analysis, see CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay
Dilger.
95 ARC’s loan limit would be increased from $35,000 to $50,000, and to $75,000 in areas of high unemployment, and
borrowers would be allowed to use ARC loans to refinance existing SBA loan debt. The ARC program ended on
September 30, 2010.
96 H.R. 3854, the Small Business Financing and Investment Act of 2009.
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The bill would have also created a temporary SBA direct lending program following enactment
that would be available to creditworthy small business borrowers that are unable to find credit
elsewhere.97
S. 2869, the Small Business Job Creation and Access to Capital Act
of 2009
S. 2869 was ordered to be reported by the Senate Committee on Small Business and
Entrepreneurship on December 10, 2009. The Senate did not take further action on the bill, but
many of its provisions were later included in P.L. 111-240. It would have authorized changes to
several SBA programs, including the 7(a) program, and was designed to enhance job creation by
increasing the availability of credit to small businesses.
It would have
• increased the maximum loan size for 7(a) loans from $2 million to $5 million;
• increased the maximum loan size for the 504/CDC loans from $1.5 million to $5
million for regular projects, from $2 million to $5 million for projects meeting
one of the program’s specified public policy goals, and from $4 million to $5.5
million for manufacturers;
• increased the maximum loan size for the Microloan program from $35,000 to
$50,000;
• extended ARRA’s fee reductions and the 7(a) program’s 90% loan guaranty limit
through December 31, 2010;
• authorized the SBA to establish an alternative size standard for the 7(a) and
504/CDC programs that uses maximum tangible net worth and average net
income as an alternative to the use of industry standards and established an
interim size standard of a maximum tangible net worth of not more than $15
million and an average net income after federal taxes (excluding any carryover
losses) for the preceding two fiscal years of not more than $5 million; and
• allowed 504/CDC loans to be used to refinance up to $4 billion in short-term
commercial real estate debt each fiscal year for two years after enactment into
long-term fixed rate loans.98
P.L. 111-240, the Small Business Jobs Act of 2010
P.L. 111-240 was signed into law by President Obama on September 27, 2010. It increased the
7(a) program’s loan guaranty limit from $2 million to $5 million, provided $510 million to extend
the 7(a) program’s 90% maximum loan guaranty percentage and 7(a) and 504/CDC loan guaranty
programs’ fee subsidies through December 31, 2010 (later extended to March 4, 2011), or until
97 Ibid. For further analysis, see CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert
Jay Dilger.
98 S. 2869, the Small Business Job Creation and Access to Capital Act of 2009; and H.R. 4213, the American Workers,
State and Business Relief Act.
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available funding was exhausted (which occurred on January 3, 2011). The act also includes all of
the provisions listed above in S. 2869, the Small Business Job Creation and Access to Capital Act
of 2009, except that it would allow 504/CDC loans to be used to refinance up to $7.5 billion in
short-term commercial real estate debt each fiscal year for two years after enactment into long-
term fixed rate loans instead of up to $4 billion each fiscal year.99
The act also authorizes the Secretary of the Treasury to establish a $30 billion Small Business
Lending Fund (SBLF) to encourage community banks to provide small business loans ($4 billion
was issued), a $1.5 billion State Small Business Credit Initiative to provide funding to
participating states with small business capital access programs, and about $12 billion in tax relief
for small businesses.100 It also contains revenue raising provisions to offset the act’s cost and
authorizes a number of changes to other SBA loan and contracting programs.
Legislative Activity During the 112th Congress
As mentioned previously, Congress has not approved any changes to the 7(a) program during the
112th Congress. However, two bills have been introduced that would affect the 7(a) program’s
SBAExpress and Patriot Express specialized programs.
H.R. 2936, the Small Business Administration Express Loan Extension Act of 2011, introduced
on September 15, 2011 and referred to the House Committee on Small Business, would extend a
one-year increase in the maximum loan amount for the SBAExpress program from $350,000 to
$1 million for an additional year. The temporary increase in that program’s maximum loan
amount was authorized by P.L. 111-240, the Small Business Jobs Act of 2010, and expired on
September 26, 2011 (see Appendix).
S. 532, the Patriot Express Authorization Act of 2011, introduced on March 9, 2011 and referred
to the Senate Committee on Small Business and Entrepreneurship, would provide statutory
authorization for the Patriot Express Pilot Program (see Appendix). The bill would also increase
the program’s maximum loan amount from $500,000 to $1 million, and increase the guaranty
percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding
$150,000 to up to 85% of loans of $500,000 or less and up to 80% of loans exceeding $500,000.
Concluding Observations
The congressional debate concerning the SBA’s 7(a) program during the 111th Congress was not
whether the federal government should act, but which federal policies would most likely enhance
small business access to capital and result in job retention and creation. As a general proposition,
some, including President Obama, argued that economic conditions made it imperative that the
SBA be provided additional resources to assist small businesses in acquiring capital necessary to
start, continue, or expand operations with the expectation that in so doing small businesses will
99 P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1122. Low-Interest Refinancing Under the Local
Development Business Loan Program.
100 For further analysis of P.L. 111-240, the Small Business Jobs Act of 2010, see CRS Report R41385, Small Business
Legislation During the 111th Congress, by Robert Jay Dilger and Gary Guenther. For further analysis of the Small
Business Lending Fund, see CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger.
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create jobs.101 Others worried about the long-term adverse economic effects of spending programs
that increase the federal deficit. They advocated business tax reduction, reform of financial credit
market regulation, and federal fiscal restraint as the best means to assist small business economic
growth and job creation.102
In terms of specific program changes, increasing the 7(a) program’s loan limit, extending the 7(a)
program’s temporary fee subsidies and 90% maximum loan guaranty percentage, and establishing
an alternative size standard for the 7(a) program were all designed to achieve the same goal: to
enhance job creation by increasing the ability of 7(a) borrowers to access credit at affordable
rates. However, determining how specific changes in federal policy are most likely to enhance job
creation is a challenging question. For example, a 2008 Urban Institute study concluded that
differences in the term, interest rate, and amount of SBA financing “was not significantly
associated with increasing sales or employment among firms receiving SBA financing.”103
However, they also reported that their analysis accounted for less than 10% of the variation in
firm performance. The Urban Institute suggested that local economic conditions, local zoning
regulations, state and local tax rates, state and local business assistance programs, and the
business owner’s charisma or business acumen also “may play a role in determining how well a
business performs after receipt of SBA financing.”104
As the Urban Institute study suggests, given the many factors that influence business success,
measuring the SBA’s 7(a) program’s effect on job retention and creation is complicated. That task
is made even more challenging by the absence of performance-oriented measures that could serve
as a guide. Both GAO and the SBA’s OIG have recommended that the SBA adopt outcome
performance oriented measures for its loan guaranty programs, such as tracking the number of
borrowers who remain in business after receiving a loan to measure the extent to which the
program contributed to their ability to stay in business.105 Other performance-oriented measures
that Congress might also consider include requiring the SBA to survey 7(a) borrowers to measure
the difficulty they experienced in obtaining a loan from the private sector and the extent to which
the 7(a) loan or technical assistance received contributed to their ability to create jobs or expand
their scope of operations.
101 Representative Nydia Velázquez, “Small Business Financing and Investment Act of 2009,” House debate,
Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12074, H12075; Senator Mary
Landrieu, “Statements on Introduced Bills and Joint Resolutions,” remarks in the Senate, Congressional Record, daily
edition, vol. 155, no. 185 (December 10, 2009), p. S12910; and The White House, “Remarks by the President on Job
Creation and Economic Growth,” December 8, 2009, http://www.whitehouse.gov/the-press-office/remarks-president-
job-creation-and-economic-growth.
102 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
103 Shelli B. Rossman and Brett Theodos, with Rachel Brash, Megan Gallagher, Christopher Hayes, and Kenneth
Temkin, Key Findings from the Evaluation of the Small Business Administration’s Loan and Investment Programs:
Executive Summary (Washington, DC: The Urban Institute, January 2008), p. 58, http://www.urban.org/UploadedPDF/
411602_executive_summary.pdf.
104 Ibid.
105 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, p. 2, http://www.gao.gov/new.items/d08226t.pdf; and U.S.
Small Business Administration, Office of the Inspector General, SBA’s Administration of the Microloan Program
under the Recovery Act, Washington, DC, December 28, 2009, pp. 6, 7, http://www.sba.gov/sites/default/files/om10-
10.pdf.
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Appendix. 7(a) Specialized Programs
The 7(a) program has four specialized programs that offer streamlined and expedited loan
procedures for particular groups of borrowers, the SBAExpress, Patriot Express, Small Loan
Advantage, and Community Advantage programs. Lenders must be approved by the SBA for
participation in these programs.
SBAExpress Program
The SBAExpress program was established as a pilot program by the SBA on February 27, 1995,
and made permanent through legislation, subject to reauthorization, in 2004 (P.L. 108-447, the
Consolidated Appropriations Act, 2005). The program was designed to increase the availability of
credit to small businesses by permitting lenders to use their existing documentation and
procedures in return for receiving a reduced SBA guaranty on loans.106 It provides a 50% loan
guaranty on loan amounts up to $350,000.
In FY2011, the SBA approved 26,836 SBAExpress loans amounting to $2.87 billion.107 In
FY2010, the SBA approved 20,450 SBAExpress loans amounting to $1.55 billion.108 The higher
loan volume for the program in FY2011 was due, at least in part, to P.L. 111-240, the Small
Business Jobs Act of 2010, which temporarily increased the SBAExpress program’s loan limit to
$1 million for one year following enactment (through September 26, 2011).109
SBAExpress loan proceeds can be used for the same purposes as the 7(a) program (expansion,
renovation, new construction, the purchase of land or buildings, the purchase of equipment,
fixtures, and lease-hold improvements, working capital, to refinance debt for compelling reasons,
seasonal line of credit, and inventory) except participant debt restructure cannot exceed 50% of
the project and may be used for revolving credit. The program’s loan terms are the same as the
7(a) program (the loan maturity for working capital, machinery, and equipment (not to exceed the
life of the equipment) is typically 5 to 10 years and the loan maturity for real estate is up to 25
years), except that the term for a revolving line of credit cannot exceed 7 years.
The SBAExpress loan’s interest rates are negotiable with the lender, subject to maximums. Rates
can be fixed or variable. Fixed rates may not exceed prime plus 6.5% on loans of $50,000 or less
and prime plus 4.5% on loans over $50,000. Variable interest rates are based on either the prime
rate (as published in The Wall Street Journal), the 30-day LIBOR plus 3.0%, or the SBA’s
optional peg rate (published quarterly in the Federal Register) plus 6.5% on loans of $50,000 or
less and plus 4.5% on loans over $50,000.110 The program’s fees are the same as the 7(a)
program. To account for the program’s lower guaranty rate of 50%, lenders are allowed to
106 U.S. Small Business Administration, “The SBA Express Pilot Program: Inspection Report,” Washington, DC, June
1998, p. 3, http://archive.sba.gov/idc/groups/public/documents/sba/oig_loarchive_980601.pdf.
107 U.S. Small Business Administration, “SBA Lending Statistics for Major Programs (as of 9/30/2011),” Washington,
DC, http://www.sba.gov/sites/default/files/hppscan41.pdf.
108 Ibid.
109 H.R. 2936, the Small Business Administration Express Loan Extension Act of 2011, would extend the higher loan
limit for an additional year.
110 U.S. Small Business Administration, “SBAExpress,” Washington, DC, http://archive.sba.gov/financialassistance/
prospectivelenders/7a/ep/FA_PL_7ALOAN_SBAEXPRESS.html.
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perform their own loan analysis and procedures and receive SBA approval with a targeted 36-
hour maximum turnaround time.111 Also, collateral is not required for loans of $25,000 or less.
Lenders are allowed to use their own established collateral policy for loans over $25,000.
Patriot Express Pilot Program
In 2007, the SBA created the Patriot Express Pilot Program “to support the entrepreneur segment
of the Nation’s military community (including spouses).”112 Eligible businesses must be owned
and controlled (51% or more) by one or more of the following groups: veteran, active duty
military participating in the military’s Transition Assistance Program, reservist or national guard
member or a spouse of any of these groups, a widowed spouse of a service member who died
while in service, or a widowed spouse of a veteran who died of a service-connected disability.113
The SBA announced on December 10, 2010, that it will continue to operate the program for at
least three more years.114
The Patriot Express Pilot Program provides the same loan guaranty as the 7(a) program on loan
amounts up to $500,000 (up to 85% of loans of $150,000 or less and up to 75% of loans
exceeding $150,000). The loan proceeds can be used for the same purposes as the 7(a) program
(expansion, renovation, new construction, the purchase of land or buildings, the purchase of
equipment, fixtures, and lease-hold improvements, working capital, to refinance debt for
compelling reasons, seasonal line of credit, and inventory) except participant debt restructure
cannot exceed 15-25% of the project and may be used for revolving lines of credit. The loan
terms are the same as the 7(a) program (the loan maturity for working capital, machinery, and
equipment (not to exceed the life of the equipment) is typically 5 to 10 years and the loan
maturity for real estate is up to 25 years), except that the term for a revolving line of credit cannot
exceed 7 years. Also, collateral is not required for loans of $25,000 or less. Lenders are allowed
to use their own established collateral policy for loans over $25,000 and up to $350,000. For
loans exceeding $350,000, lenders must follow the SBA’s regulations on collateral for standard
7(a) loans.115
The Patriot Express Pilot Program features streamlined documentation and processing features
similar to the SBAExpress program, with a targeted SBA processing time of one business day.
The program’s interest rates are negotiable with the lender, subject to the same maximum rate
limitations as the 7(a) program. It also has the same fees as the 7(a) program.116
111 Ibid.
112 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 42, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
113 Ibid., pp. 83, 127.
114 U.S. Small Business Administration, “Popular SBA Patriot Express Loan Initiative Renewed for Three More
Years,” Washington, DC, December 10, 2010, http://www.sba.gov/content/popular-sba-patriot-express-loan-initiative-
renewed-three-more-years. S. 532, the Patriot Express Authorization Act of 2011, would provide the program statutory
authorization.
115 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2011), p. 83, 147, 150-152, http://www.sba.gov/sites/default/files/
SOP%2050%2010%205(D)%20(9-15-11)%20clean_0.pdf.
116 Ibid., pp. 86, 178.
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The SBA has indicated in both testimony at congressional hearings and in press releases that it
views the Patriot Express Program as a success. For example, in 2007, William Elmore, Associate
Director of the SBA’s Office of Veterans Business Development, testified at a congressional
hearing shortly after the Patriot Express program’s rollout that
so far, the results have been good. The number of loans made to veterans increased from
4,800 in fiscal year 2000 to approximately 8,000 loans in fiscal year 2006.117
In 2010, Joseph Jordan, SBA’s Associate Administrator for Contracting and Business
Development, testified at a congressional hearing that
SBA is committed to assisting veteran-owned small businesses access the capital they need.
All of SBA’s loan programs are available to veterans. In FY2009, veteran-owned small
businesses received 8.00% of all 7(a) loans, totaling approximately $523 million, and 4.56%
of all 504 development company loans, or $176 million. Additionally, veteran-owned small
businesses received 4.33% of all microloans, totaling approximately $1.9 million. In total,
SBA has supported more than $2 billion in recovery lending to veteran-owned small
businesses. SBA also has a loan program dedicated to the military community—Patriot
Express…. It features our lowest interest rates and fastest turnaround times, often within
days…. In FY2009, we approved more than 2,300 Patriot Express loans and are on track to
increase those numbers in FY2010.118
More recently, when the SBA announced in a December 10, 2010, press release that it was
extending the Patriot Express Loan Program for another three years, the SBA characterized the
program as “a very popular initiative that in just three-and-a-half years has provided more than
$560 million in loan guarantees to nearly 7,000 veterans to start or expand their small
businesses.”119
Congressional testimony provided by various veteran service organizations provides a different
perspective. For example, a representative of the American Legion testified at a congressional
hearing in 2010 that being turned down for a SBA Patriot Express loan “is probably the largest,
most frequent complaint that we receive from our business owners.”120 At that same
congressional hearing, a representative of the Vietnam Veterans of America testified in response
to that statement that
I would have to concur … in talking with some of the veterans with regard to the Patriot
Express Loan, they are having difficulties also to acquire that capital. The rationale seems to
117 U.S. Congress, Senate Committee on Small Business and Entrepreneurship, Assessing Federal Small Business
Assistance Programs for Veterans and Reservists, hearing, 110th Cong., 1st sess., January 31, 2007, S.Hrg. 110-209
(Washington: GPO, 2007), p. 32.
118 U.S. Congress, House Committee on Veterans’ Affairs, Subcommittee on Economic Opportunity, Status of Veterans
Small Business, hearing, 111th Cong., 2nd sess., April 29, 2010, House Committee on Veterans’ Affairs Serial No. 111-
74 (Washington: GPO, 2010), p. 75.
119 U.S. Small Business Administration, “Popular SBA Patriot Express Loan Initiative Renewed for Three More
Years,” Washington, DC, December 10, 2010, http://www.sba.gov/content/popular-sba-patriot-express-loan-initiative-
renewed-three-more-years.
120 U.S. Congress, House Committee on Veterans’ Affairs, Subcommittee on Economic Opportunity, Status of Veterans
Small Business, hearing, 111th Cong., 2nd sess., April 29, 2010, House Committee on Veterans’ Affairs Serial No. 111-
74 (Washington: GPO, 2010), p. 17.
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be … the banks in general seem to be tightening the credit, their lending practices, so that is
… what we are hearing.121
There are no empirical assessments of veterans’ experiences with the SBA Patriot Express Loan
program that would be useful for determining the relative ease or difficulty of veteran-owned
small business owners accessing capital through the program.122 The SBA does not conduct
annual surveys of veteran-owned small businesses applying for SBA Patriot Express Loans
similar to the annual survey the SBA currently sponsors for small businesses receiving services
from the SBA’s management and training programs.123
Small Loan Advantage and Community Advantage Programs
The Small Loan Advantage and Community Advantage programs became operational on
February 15, 2011.124 They are designed to increase lending to underserved low- and moderate-
income communities. Both programs offer a streamlined application process for loans up to
$250,000. The two programs replaced the Community Express Pilot Program, which was also
designed to increase lending to underserved communities. It was created by the SBA in May
1999, and ended on April 30, 2011.125
The Small Loan Advantage program “is structured to encourage larger, existing SBA lenders to
make lower-dollar loans, which often benefit businesses in underserved markets.”126 It provides
the same loan guaranty as the 7(a) program on loan amounts up to $250,000 (85% for loans up to
$150,000 and 75% for those greater than $150,000). The loan proceeds can be used for the same
purposes as the 7(a) program (expansion, renovation, new construction, the purchase of land or
buildings, the purchase of equipment, fixtures, and lease-hold improvements, working capital, to
121 Ibid.
122 In FY2010, the SBA’s Veterans Business Outreach Centers Program, which provides management and technical
assistance training for veteran-owned small businesses, conducted its sixth annual “Customer Satisfaction Survey.” The
centers surveyed 1% of their total veteran customer population (408 of the 485 clients surveyed responded). The
FY2010 survey found that 85% of the clients using the centers were satisfied or highly satisfied with the quality,
relevance and timeliness of the assistance provided. Clients evaluating the centers gave 85% ratings for the training
programs provided and 85% ratings for program evaluation. See U.S. Small Business Administration, “FY2012
Congressional Budget Justification and FY2010 Annual Performance Report,” Washington, DC, p. 73.
123 For further information and analysis, see CRS Report R41352, Small Business Management and Technical
Assistance Training Programs, by Robert Jay Dilger; U.S. Small Business Administration, Office of Entrepreneurial
Development, “Impact Study of Entrepreneurial Development Resources,” Washington, DC, September 13, 2010,
http://www.sba.gov/sites/default/files/09-
10%20SBA%20ED%20Resources%20Impact%20Study%20Final%20Report.pdf; and P.L. 96-302, the Small Business
Development Center Act of 1980.
124 U.S. Small Business Administration, “Small Loan Advantage,” Washington, DC, http://www.sba.gov/content/small-
loan-advantage; and U.S. Small Business Administration, “SBA Announces New Initiatives Aimed at Increasing
Lending in Underserved Communities,” Washington, DC, December 15, 2010, http://www.sba.gov/content/sba-
announces-new-initiatives-aimed-increasing-lending-underserved-communities.
125 U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act Of 2009, report
to accompany H.R. 3854, 111th Cong., 2nd sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), p. 7.
The SBA indicated that the Community Express Pilot Program “has had mixed outcomes,” providing loans “to new
businesses, minority businesses and other underserved sectors” but with “significantly higher default rates (almost 40%
of loans defaulted in certain cohorts) compared with other similarly sized 7(a) loans.” See U.S. Small Business
Administration, “Community Express Pilot Program,” 75 Federal Register 80562, December 22, 2010.
126 U.S. Small Business Administration, “Advantage Loan Initiatives,” Washington, DC, http://www.sba.gov/
advantage.
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refinance debt for compelling reasons, seasonal line of credit, and inventory). The loan terms and
guaranty fees are also the same as the 7(a) program.127 The program’s interest rates are negotiable
with the lender, subject to the same maximum rate limitations as the 7(a) program.128
The program is available to lenders participating in the SBA’s Preferred Lender Program (about
545 lenders, including most of the SBA’s highest volume lenders). These lenders are authorized to
use expedited loan processing procedures, which include a two-page application for borrowers
and allow lenders to use their own note and guaranty agreements. Most Small Loan Advantage
loans are expected “to be approved in a matter of minutes through electronic submission” or
“within 5 to 10 days” otherwise.129
The Community Advantage pilot program is designed to increase lending in underserved
communities by increasing “the number of SBA 7(a) lenders who reach underserved
communities, targeting community-based, mission-focused financial institutions which were
previously not able to offer SBA loan.”130 These mission-focused financial institutions include
“Community Development Financial Institutions, SBA’s Certified Development Companies and
SBA’s nonprofit microlending intermediaries.”131 They are expected “to maintain at least 60% of
their SBA loan portfolio in underserved markets, including loans to small businesses in, or that
have more than 50% of their workforce residing in, low-to-moderate income (LMI) communities;
in Empowerment Zones and Enterprise Communities; in HUBZones; start-ups (firms in business
less than 2 years); and veteran-owned businesses and those that would be eligible for Patriot
Express.”132
The Community Advantage program is a three-year pilot program that provides the same loan
guaranty as the 7(a) program on loan amounts up to $250,000 (85% for loans up to $150,000 and
75% for those greater than $150,000). The loan proceeds can be used for the same purposes as the
7(a) program (expansion, renovation, new construction, the purchase of land or buildings, the
purchase of equipment, fixtures, and lease-hold improvements, working capital, to refinance debt
for compelling reasons, seasonal line of credit, and inventory). The loan terms and guaranty fees
are also the same as the 7(a) program.133 The loan’s maximum interest rate is prime, plus 4%.134
The program has an expedited approval process which includes a two-page application for
borrowers and a goal of completing the loan approval process within 5 to 10 days.135
The SBA has indicated that the Community Advantage program’s goal is to “leverage the
experience these institutions already have in lending to minority, women-owned and start-up
127 U.S. Small Business Administration, “Small Loan Advantage,” Washington, DC, http://www.sba.gov/content/small-
loan-advantage.
128 Ibid.
129 Ibid.
130 U.S. Small Business Administration, “Advantage Loan Initiatives,” Washington, DC, http://www.sba.gov/
advantage.
131 Ibid.
132 Ibid.
133 Ibid..
134 U.S. Small Business Administration, “Community Advantage Participant Guide,” Washington, DC, p. 18,
http://www.sba.gov/sites/default/files/files/CA%20-%20Participants%20Guide.pdf
135 U.S. Small Business Administration, “Community Advantage,” Washington, DC, http://www.sba.gov/content/
community-advantage.
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companies in economically challenged markets, along with their management and technical
assistance expertise, to help make their borrowers successful.”136
Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110
136 U.S. Small Business Administration, “SBA Announces New Initiatives Aimed at Increasing Lending in
Underserved Communities,” Washington, DC, December 15, 2010, http://www.sba.gov/content/sba-announces-new-
initiatives-aimed-increasing-lending-underserved-communities. The SBA maintains a list of approved Community
Advantage pilot program lenders on its website at http://www.sba.gov/content/community-advantage-approved-
lenders.
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