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GAO-10-298R 1 (2010-01-19)

handle is hein.gao/gaobaanqv0001 and id is 1 raw text is: i ~G A 0 . A~couintabilty I Integrity * Reliability United States Government Accountability Office Washington, DC 20548 January 19, 2010 The Honorable Nydia M. Veldzquez Chairwoman Committee on Small Business House of Representatives Subject: Status of the Small Business Administration's Implementation of Administrative Provisions in the American Recovery and Reinvestment Act of 2009 Dear Madam Chairwoman: Due to recent turmoil in U.S. credit markets, many lenders have been reluctant to offer conventional loans-that is, loans not guaranteed by the federal government- to small businesses so that they can finance their operations and capital needs. While the Small Business Administration's (SBA) principal loan guarantee programs, the 7(a) and 504 programs, are intended to help small businesses raise critical financing that they may have difficulty obtaining from other sources, the availability of such loans has also declined. Under the 7(a) program, SBA traditionally has provided lenders guarantees on up to 85 percent of the value of loans to qualifying small businesses in exchange for fees to help offset the costs of the program. Under the 504 program, which generally applies to small business real estate and other fixed assets, SBA provides certified development companies with a guarantee on up to 40 percent of the financing of the projects' costs in exchange for fees-the small business borrowers and other lenders provide the remaining 60 percent of the financing on an unguaranteed basis.' Traditionally, lenders, such as banks, that participate in the 7(a) or 504 programs often sell qualifying small business loans on the 7(a) and 504 secondary markets to raise funds necessary for additional lending.2 However, from mid-2008 to early-2009, investors that had typically purchased securities collateralized by the pools of 7(a) guaranteed small business loans and certain 504 loans largely withdrew from the secondary markets due to potential 'In the financing of a typical 504 loan project, the small business borrower provides at least 10 percent of the funds; a third-party lender originates a mortgage, referred to as a first-lien mortgage, to provide 50 percent of the funds; and a nonprofit certified development company provides the remaining 40 percent of the funding through an SBA-guaranteed debenture. 2As described in this report, secondary markets have developed for the guaranteed portions of 7(a) loans and the guaranteed and unguaranteed portions of primarily real estate projects (including machinery and equipment) financed pursuant to the 504 program. GAO-10-298R SBA's Economic Stimulus Provisions

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