On March 21, 2023, the SBA Office of the Inspector General (OIG) issued a COVID follow-up report, White Paper:  7(a) Loan Program During SBA’s Response to the COVID-19 Pandemic (OIG Report 23-95).  The report examined 7(a) program performance during the pandemic and identified a number of potential risks that it recommended SBA consider in managing the program going forward.

The OIG review included an analysis of 7(a) loan data for fiscal years 2018 through 2022; reviews of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (enacted March 27, 2020), the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) (enacted December 27, 2020), and SBA’s implementing guidance; and interviews with SBA officials regarding 7(a) program oversight. 

As a result of those activities, the OIG identified a number of post-CARES Act factors that it concluded “could impact the 7(a) program and should be considered in SBA’s program risk strategy”, including:

  • Changes to loan activity, i.e.,
    • Temporary increases in loan volume and
    • Higher average loan amounts;
  • A significant decline in defaults and charge off rates likely resulting from Section 1112 payments, and borrowers’ access to other pandemic-related resources including the Paycheck Protection Program (PPP) and the Restaurant Revitalization Act, Economic Injury Disaster Loans (EIDLs), and liberalized loan deferment policies;
  • Staffing shortages in the Office of Credit Risk Management (OCRM) which saw staff reduced by 38% from 42 to 26 employees; and,  
  • Rising interest rates.

The report describes the OIG concern that the effects of the pandemic combined with rising interest rates could increase the risk for future 7(a) loan defaults and charge-offs.  Based on those findings, the OIG recommended that, when developing its 7(a) program risk strategy, SBA consider the risks identified in the report.  It indicated that such action was necessary to “ensure program integrity, reduce risk of financial loss, and facilitate meeting its zero-subsidy rate goal”.

The OIG and SBA management held on exit interview on March 3, 2023, to discuss the report findings.  According to the White Paper, SBA management “generally agreed with the OIG findings and key considerations” and stated that they would continue to consider the OIG key considerations in their risk strategy.  In this regard, SBA management acknowledged that the lasting impact of the relief payments, the effects of the higher loan amounts and rising interest rates were unknown, but concluded that “as of December 31, 2022, the 7(a) loan program performance metrics were stable and depicted low risk and strong portfolio performance”.  SBA management also indicated that steps are being taking to address the OCRM staffing shortage.   

Please see the OIG White Paper for additional information including the statistics relating to the identified risk factors.