Detailed Information on the
Section 504 Certified Development Company Guaranteed Loan Program Assessment

The Agency is developing baseline for its revenue growth outcome measure.

SBA is re-writing the Standard Operating Procedure for Loan Processing and Approval.

The Office of Capital Access promulgated new liquidation regulations governing the liquidation of loans by Certified Development Companies. These regulations become effective May 15, 2007. On May 10, 2007, SBA published a notice providing guidance on the new regulations.

Measure: Estimate number of job created or retained

Explanation:SBA is developing target for this long-term outcome goal as part of its 2007 Improvement Plan.

Measure: Number of 504 loans Approved.

Explanation:Starting 2006, Agency stopped reporting loans approved as a Performance Measure, therefore the total 504 loans approved as a Performance Measure will not be available beyond 2006.

Measure: Loan Approving Cost Per Small Business Loan Funded

Explanation:

Measure: Revenue growth for small businesses receiving SBA assistance

Explanation:Next Urban Institute report will compare revenue growth and business longevity between SBA assisted businesses and those that did not receive assistance. This report is to be available within the next month or two. Upon receiving the Urban Institute Report, SBA will complete a program evaluation on revenue growth and longevity for businesses receiving SBA assistance. At that time the SBA will be able to set a baseline and establish long term targets for these measures.

Measure: Number of 504 loans funded for small businesses (New measure, added February 2008)

Explanation:

Measure: Number of Small Businesses Assisted - 504 (New measure, added February 2008)

Explanation:

Measure: Number of 504 loans in Unerserved Markets (New measure, added February 2008)

Explanation:

Is the program purpose clear?

Explanation: The 504 program provides economic development financing and is specifically designed to stimulate private sector investment in long-term fixed assets to increase productivity, create new jobs, and increase the local tax base. The stimulus is provided by making long-term, low down payment, reasonably priced fixed-rate financing to healthy and expanding businesses which have the highest probability of successfully creating new jobs and competing in the world marketplace.

Evidence: Small Business Investment Act: Title V: Loans to State and Local Development Companies.

Does the program address a specific and existing problem, interest, or need?

Explanation: The 504 program's purpose, as defined in the Small Business Investment Act, is to foster economic development and to create or preserve job opportunities in both urban and rural areas by providing long-term financing for small business concerns. The project has to meet one of several economic development objectives: creation of job opportunities within two years of the completion of the project or the preservation or retention of jobs attributable to the project; improving the economy of the locality, such as stimulating other business development in the community; or achieving one or more specific public policy goals (business district revitalization, expansion of exports, expansion of minority business development, women-owned business development or veteran-owned business development, rural development, enhanced economic competition, or business restructuring arising from Federally mandated standards or policies affecting the environment). A typical project is the purchase or construction of a building to be occupied by the business borrower. The typical financing structure is made up of private sector financing (no SBA guaranty) that finances 50 percent of the project costs and receives a senior lien on the project assets; a loan funded by an SBA 100 percent guaranteed debenture financing 40 percent (or less) of the projects costs (the debenture is sold to the private sector at a low fixed rate with a maturity of 10 or 20 years); and a low (10 percent or more) equity injection from the borrower. Project financing can range from $3.75 million for a project that creates jobs to $10.0 million for a manufacturer.

Evidence: Standard Operating Procedures; Regulations; Small Business Investment Act of 1958; The Urban Institute: An Analysis of Overlap between Federal, State, and Local Programs Providing Financial Assistance to Small Businesses - 2007

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: Other federal, state, and local loan programs are available to small businesses; however differences in target recipients, eligibility, and program design mitigate excessive duplication. Specifically: Within the SBA, Urban Institute research found potential duplication between SBA's 7a and 504 loan guaranty programs where 7(a) loans where used to finance real estate; however, The 7(a) and 504 programs differ in their interest rate and fee structure, maturity term, loan structure, maximum allowable amount, and type of lender. Across federal programs Urban Institute research suggests a small degree of potential duplication exists between SBA programs and similar programs run by other federal agencies with the greatest potential for duplication with USDA. Urban Institute research found that similarities between SBA and state and local loan programs vary by state and program. SBA programs have higher maximum loan guarantees and longer term maturities resulting in less duplication among borrowers seeking these characteristics. Eligibility restrictions imposed by some states and local programs that reduce duplication include credit rating, geographic, business sector, and business maturity restrictions.

Evidence: General Accountability Office Study 00-220, pp 30-32 stated that "although some of the programs appear to share the same purpose and applicant, in practice additional requirements limit the number of applicants that would be eligible for the programs." Urban Institute Report: Public Sector Duplication of Small Business Administration Loan and Investment Programs: An Analysis of Overlap Between Federal, State, and Local Programs Providing Financial Assistance to Small Businesses.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: Competition among Certified Development Companies (CDCs) was vastly increased when final regulations were published in August, 2003 (effective November, 2003) expanding all CDCs area of opertions (mostly several counties) to the state in which they were incorporated. This gave borrowers and lenders far greater choice as to which CDC to work with. Structurally, the program involves three entities. A bank provides 50% of the required project funding in a first lien position. SBA, through the CDC, provides 40% of the project funding and receives a second lien on assets. Finally, the borrower must make a 10% equity injection into the project.

Evidence: Regulations; FY 2008 Budget

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: FY 2004 regulatory changes in the 504 program's rules have improved borrower access to loans by increasing competition among the CDCs. By broadening every CDC's area of operation to a minimum of an entire state, borrowers and lenders have far more choices among which CDCs to work with. These changes to the rules governing CDCs have also resulted in many CDCs expanding their areas of operation into contiguous states. Currently 41 CDCs (out of 275) have areas of operations of more than 1 state. In addition, a survey of 504 loan recipients stated, " Very few recipients (12%) thought they could have obtained a commercial loan on equal terms." The survey also states that 68% of recipients went to a bank first and were referred to a CDC. The Urban Institute study reinforces that the 504 Loan Program is unique as to the public/private two-tiered financing, the low fixed rate and the low equity injection.

Evidence: Regulations; Urban Institute Study - 2007

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The 504 Loan Program, as explained in the answer to 1.1, is designed as an economic development program principally to create or retain jobs by assisting businesses in financing the acquisition of long-term fixed assets, usually real estate, at a reasonable cost. In addition to establishing annual targets for the number of businesses assisted and guaranteed loans, the 504 program contributes towards the SBA's second strategic goal "Increase small business success by bridging competitive opportunity gaps" with a long-term outcome measure focused on job creation and retention. The following two additional long-term outcome goals were added: "Revenue growth for small businesses receiving SBA assistance" and "Business longevity for small businesses receiving SBA assistance".

Evidence: SBA Strategic Plan FY 2006 - FY 2011; Next Urban Institute Report on Revenue and Business Longevity.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: For "Number of jobs created/retained" long-term outcome goal, while the SBA tracks and reports the number of jobs created and retained by firms receiving 504 loans, the agency does not set targets. For the following two long-term outcome goals, "Revenue growth for small businesses receiving SBA assistance" and "Business longevity for for small businesses receiving SBA assistance", the next Urban Institute report will compare revenue growth and business longevity between SBA assisted businesses and those that did not receive assistance. Upon receiving the Urban Institute Report, SBA will complete a program evaluation on revenue growth and longevity for businesses receiving SBA assistance. At that time the SBA will be able to set a baseline and establish long term targets for these measures.

Evidence: SBA Strategic Plan FY 2006 - FY 2011; Next Urban Institute Report on Revenue and Business Longevity.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: SBA has established two long term outcome measures based on Urban Institute Studies and those measures are Job Created/Retained and Revenue Growth. SBA has also established four annual output measures to be in alignment with the Agency's FY2008-FY2013 Strategic Plan and those measures are Loan Approvals, Loan Funded, Small Business Assisted and Loans in Underserved Markets. SBA also has established the efficiency measures and they are Unit Cost per small businesse assisted and Unit Cost per loan funded.

Evidence: SBA Strategic Plan: FY 2008- FY 2013

Does the program have baselines and ambitious targets for its annual measures?

Explanation: Baselines are the historical approvals broken down by fiscal year. Targets are a 10 percent growth in numbers of loan approvals each year for loans to existing businesses.

Evidence: SBA Strategic Plan: FY 2006 - FY 2011

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: The Office of Capital Access (OCA) partners with SBA district offices to achieve its performance goals. The marketing role of district offices to our lending partners is important and critical to SBA's success in this program area. OCA forms part of the Goals Team. This is the team that sets the goals for the district offices and through it, OCA and the district offices coordinate their efforts and enjoin the lender partners to meet the annual and/or long-term goals of the program.

Evidence: The Goals Team meets every year to establish the goals for the district offices. These goals are tracked through the agency's Execution Scorecard. The annual performance of the district offices is measured against their goals.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: In 2007, SBA completed an independent study on program duplication (the results of which are summarized under question 1.3, above). The Urban Institute is completing a performance assessment to measure the performance of firms assisted through the 7(a), 504, & SBIC Debenture programs. In 2000, SBA completed a study, in conjunction with the Bureau of Labor Statistics (BLS), investigating small businesses that have received financing from SBA partners. In the future, SBA will be conducting an evaluation of the number of jobs per dollars financed which will serve two goals: 1. Expand already existing data from SBA's 2000 study and provide additional data to validate current program statistics; 2. Verify the accuracy of data submitted to the Agency by small businesses.

Evidence: Urban Institute Duplication study, Urban Institute Work Plan (dated 11/13/2007), BLS study and new study will serve to validate the data that is gathered from the 7(a) applications on each borrower by comparing data received by SBA with data gathered independently.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Each year the Agency delivers an integrated budget request and performance plan. The budget request is based on the annual and long-term performance goals. This request represents a total of the resources that is needed for the program as calculated under SBA's activity-based costing system.

Evidence: SBA's Annual Performance Budget submissions, and the Five Year Strategic plan.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: SBA's Strategic Plan for the 504 Program addresses job creation, assisting existing businesses and reaching underserved markets.

Evidence: SBA 's Budget Request and Performance Plan for Fiscal Year 2008.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: The Offices of Capital Access (OCA) and Chief Financial Officer (CFO) collaborate on four fronts to ensure peformance data is used to manage the program: 1. Re-established the Risk Subcommittee (comprising Capital Access and CFO) to maintain a line of communication between the two offices. The Risk Subcommittee meets monthly to review program data and trend analysis. 2. Implementation of the Lender/Loan Monitoring System (L/LMS) provides broad portfolio analysis capabilities to track performance of lenders. 3. Benchmark and track the losses in the portfolio against what was budgeted to eliminate surprises and improve forecasts. 4. Adoption of an econometric model allows the Agency to better predict portfolio performance.

Evidence: SBA maintains performance date on each lender through the Office of Lender Oversight. SBA reviews up to 30 percent of each lender's portfolio of SBA loans to check compliance with Agency requirements. SBA annually re-computes its 504 Subsidy Rate to reflect current conditions. The 2007 Model is currently in place.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: SBA employees' personnel appraisal requirements are linked directly to agency and program goals. Additionally, Certified Development Companies who perform well and whose processing activity meets or exceeds specific benchmarks can receive delegated credit authority from SBA in exchange for establishing loss reserves (for most 504 loans, CDCs have no financial risk in a default situation. SBA guarantees the debentures 100 percent to the investors.). SBA is also the regulatory agency for CDCs. As such, SBA can and does control a CDC's area of operations. If a CDC wants to expand its area of operations beyond the state in which it is incorporated, it must meet certain portfolio performance criteria. In addition, if the portfolio begins to underperform (as measured by the Office of Lender Oversight's Loan/Lender Monitoring System), any CDC with delegated authority risks losing this authority. Over the past several years, the overall 504 loan portfolio performance has continued to perform better than predicted resulting in a decrease in fees each year to cover costs (it is a zero subsidy program). For 2008, one of these fees, an upfront fee of .50 percent of the debenture amount paid by the borrower to SBA, will be eliminated for the first time.

Evidence: Personnel plans. Standard Operating Procedures. Regulations. SBA Performance Budget for Fiscal Year 2008

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: Funds are obligated at the time of loan approval. This is generally within 1 to 6 business days of the receipt by SBA of a complete application from the lender. SBA reviews the application to determine if the small business and the use of proceeds are eligible. Once approved, SBA issues a loan authorization that describes in detail all the requirements that must be met by the small business borrower and any interim lender in order to close the debenture. Between approval and closing, the small business borrower uses an interim loan to construct or purchase the building. The closing of the debenture (which is take-out financing) includes a legal review that all requirements, including use of proceeds, were met. If either the small business applicant or the use of proceeds has become ineligible or not creditworthy during the interim period, SBA will not close and fund the debenture. The Trustee provides data to update SBA's budget and accounting records for new debenture guaranties. The SBA's loan allotment system checks to assure adequate funds are allotted to fund debenture guaranties. Semiannual payments of interest and principal to the secondary holders by the Trustee are automatically recorded to the debenture guaranty in SBA accounting records, and debenture prepayments are recorded based on data provided by the Trustee. Purchases by SBA of defaulted debentures are recorded and a loan receivable is established in Agency accounting records for the balance due on the defaulted debenture. Collections on loans in liquidation activity are recorded, and charge offs are processed when liquidation is complete. The SBA updates its estimated cost of the CDC program annually and budgetary controls are maintained to assure disbursements are within budgetary authority.

Evidence: All 504 loans are centrally processed. A weekly report by OFA tracks turnaround times (from the time a complete loan application is submitted to the time it is approved). For FY 2007, the turnaround time is approximately 4 days compared to FY 2006 year-to-date which was 5 days. SBA additionally has files for each loan that include all the loan closing documentation as well as an assignment to SBA of all collateral securing the loan. All the documentation is reviewed prior to closing by the CDC, the CDC's closing attorney, and an SBA attorney. If there is any evidence of non-compliance, the debenture is not closed and funded. SBA maintains internal control over CDC accounting activity to assure that activity is within budgetary authority and recorded properly. An annual independent audit of SBA's accounting records includes review of CDC program activity, and no internal control weaknesses have been reported. Credit program cost estimates are reviewed internally and by an independent validator, as well as by the IPA, and no findings have been reported.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The efficiencies of the program are continually measured through the agency's activity based costing system and necessary improvements are implemented, including simplifying and centralizing the Agency's lending programs, reducing Agency staffing requirements and conducting periodic competitive sourcing of its functions. Private sector contractors are used by SBA to provide much of the processing, servicing and purchase centers staffing. These contracts are awarded on a competitive technical and cost basis through an RFP process. In addition, lenders do the bulk of the work associated with loan credit applications, loan servicing and loan resolution activities, and are encouraged through less paperwork and quicker turn around times which results in a more cost effective use of SBA's limited staff and resources.

Evidence: Activity based costing reports.

Does the program collaborate and coordinate effectively with related programs?

Explanation: The 7(a) program is used by many lenders in conjunction with the 504 loan program when the small business's requirements are for the acquisition of real estate together with working capital requirements; especially when the small business requirements exceed the $1.5 million 7(a) guarantee limit. The 504 program's guarantee limits can go up to $2 million for a project that meets a public policy goal and up to $4 million for a manufacturer. It is also a public/private funding program in that the project is financed, usually 50 percent, by private sector, non-guaranteed financing that has a senior lien to SBA's. Collaboration often takes place among SBA field office lending professionals, 7(a) lending participants and Certified Development Companies. This generally results in a strong combination of a long-term fixed rate mortgage financing under the 504 program leveraged with an unguaranteed first mortgage loan and a variable rate 7(a) working capital, equipment and inventory loan.

Evidence: 7(a) and 504 loan program comparison matrix.

Does the program use strong financial management practices?

Explanation: The agency uses private-sector financial concerns under contract to manage disbursement of funds from the sale of debentures to borrowers, semi-annual debenture payments to investors, purchasing or paying in full the balance on debentures, and the collection of payments directly from the small business borrowers via automated clearinghouse transactions. The concerns also are responsible for CDC loan reporting and collection of on-going borrower and CDC fees. In addition, SBA implemented an econometric credit model to improve subsidy cost estimates. Finally, SBA contracted in FY 2003 with a private-sector business credit reporting organization to provide a Loan/Lender Monitoring System (L/LMS) that allows the agency to track lender performance relative to the credit scores of borrowers in the lenders' portfolios in combination with traditional portfolio stress identifiers such as delinquencies and defaults. This tool provides SBA with the ability to identify concerns in SBA's overall portfolio as well as concerns with specific lenders and take necessary corrective actions. OIG did identify concerns about the guaranty purchase process and the possibility of improper payments due to the centralization of the purchase process and an 85 percent reduction in the guaranty purchase review staff when the process was centralized. SBA continues to work in addressing these concerns by providing on-line training to lenders and fully staffing the center.

Evidence: Performance and Accountability Report - FY 2006, contracts with Colson.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: Capital Access, the Chief Financial Officer, and Lender Oversight have developed a process to exchange information on the status of the 504 program. Office of Lender Oversight (OLO) has implemented a plan to review all CDCs in a risk-based review process to broaden SBA's oversight of the program. Additionally, the L/LMS system allows for overall 504 portfolio evaluation. Monthly portfolio assessment meetings are held to identify any indications for concern. The Performance and Accountability Report for 2006 listed several management challenges. Management Challenge No.6 covered implementation of SBA's participant oversight plan. One of the items listed was the commencement of on-site reviews of section 504 entities.

Evidence: Performance and Accountability Report - 2006

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: The quality of the portfolio is managed through the relatively new (est. 2003) Loan/Lender Monitoring System utilized by the Office of Lender Oversight and the Office of Capital Access to monitor the performance of each lender as well as the overall portfolio. The lenders and CDCs with the larger portfolios that exhibit higher (worse) ratings than their peers are given the most attention through audits and close reviews of any delegated authority. The delegated authority can be suspended or not renewed. From these reports SBA can determine the delinquency and currency rates for each lender and know where to direct the agency's resources to correct any shortcomings

Evidence: Standard Operating Procedures and regulations.

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: SBA's econometric model for the 504 Loan program provides very reliable, consistent and accurate cost estimates. The model is continuously reviewed for accuracy and updated as appropriate for trends in the 504 Loan program. Updates to the model are reviewed by Ernst & Young, LLP twice annually as part of SBA's Independent Validation and Verification process. The model, documentation, analysis of changes, actual to estimates comparison, sensitivity analysis, and control procedures are audited annually by SBA's external financial statement auditors.

Evidence: No write-ups were issued by Cotton & Company LLP, SBA's external financial statement auditor for fiscal year 2005, or KPMG LLP, SBA's external financial statement auditor for fiscal year 2006.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: For "Number of jobs created/retained" long-term outcome goal, while the SBA tracks and reports the number of jobs created and retained by firms receiving 504 loans, the agency does not set targets. For the following two long-term outcome goals, "Revenue growth for small businesses receiving SBA assistance" and "Business longevity for small businesses receiving SBA assistance", the next Urban Institute report will compare revenue growth and business longevity between SBA assisted businesses and those that did not receive assistance. This report is to be available within the next month or two. Upon receiving the Urban Institute Report, SBA will complete a program evaluation on revenue growth and longevity for businesses receiving SBA assistance. At that time the SBA will be able to set a baseline and establish long term targets for these measures.

Evidence: Performance and Accountability Report. Five-year Strategic Plan. Next Urban Institute Report on Revenue and Business Longevity.

Does the program (including program partners) achieve its annual performance goals?

Explanation: The 504 Loan program has significantly contributed to overall annual Agency lending goals, which focus on expanding loan volume and increasing penetration into the underserved markets. The number of loans approved over the last 5 years has increased over 81 percent. However, SBA failed to achieve a significant number of annual goals for 2006.

Evidence: SBA's FY2006 Performance and Accountability Report.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: Program costs have been reduced by increasingly relying on lending partners for origination, servicing, and liquidation functions as well as through centralization of all 504 processing, servicing, and liquidation.

Evidence: Regulations, Standard Operating Procedures.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The overall performance of the 504 program has been favorable. This public/private partnership facilitates community development and job retention/creation. As a zero subsidy program since 1996, taxpayers only bear administrative costs for providing approximately $7.5 billion in annual lending. While there is no other program (government or private) with the same goals, the performance is consistent with, and complementary to, the performance of private sector lenders, making similar types of loans. The loans guaranteed by SBA are of a lower quality from what the private sector is willing to make. Yet the purchase rate for FY 2008 is projected to be 3.39 percent.

Evidence: SBA Performance Budget - Fiscal Year 2008

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: The Office of Advocacy conducts various, independent studies regarding small businesses. An independent study dated May 2005 indicates that certain segments of the small business community experience a greater application decline rate. This supports one of SBA's long-term goals of providing financing to businesses facing special competitive opportunity gaps by providing SBA's guaranty to loans approved by lenders to this segment, reducing a lender's perceived risk regarding these types of loans. In addition, the Urban Institute published a study as of January, 2007, entitled "An Analysis of Overlap between Federal, State, and Local Programs Providing Financial Assistance to Small Businesses. One of its conclusions was that even though there were similarities among federal, state, and local loan and loan guarantee programs, SBA programs have higher maximum loan and loan guarantee amounts and longer terms than state and local programs.

Evidence: May 2005 - Research Study, Availability of Financing to Small Firms Using the Survey of Small Business Finances, submitted by Karlyn Mitchell and Douglas K. Pearce; Urban Institute study dated January, 2007, entitled "An Analysis of