oversight

Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury's Programs

Published by the Government Accountability Office on 2012-12-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office

GAO             Report to Congressional Committees




                SMALL BUSINESS
December 2012



                LENDING

                Opportunities Exist to
                Improve Performance
                Reporting of
                Treasury’s Programs




GAO-13-76
                                               December 2012

                                               SMALL BUSINESS LENDING
                                               Opportunities Exist to Improve Performance
                                               Reporting of Treasury’s Programs
Highlights of GAO-13-76, a report to
congressional committees




Why GAO Did This Study                         What GAO Found
The Small Business Jobs Act of 2010            The U.S. Department of the Treasury (Treasury) has made progress in
aimed to stimulate job growth by,              developing guidance and procedures to monitor participants’ compliance with
among other things, establishing the           requirements for the Small Business Lending Fund (SBLF) and the State Small
SBLF and SSBCI programs within                 Business Credit Initiative (SSBCI) programs. In response to GAO’s previous
Treasury. SBLF uses capital                    recommendation on SBLF monitoring, Treasury has developed procedures for
investments to encourage community             monitoring SBLF participant compliance with legal and reporting requirements.
banks with assets of less than $10             Treasury also issued standards to provide states with best practices for reviewing
billion to increase their small business       participants’ compliance with SSBCI’s legal and policy requirements and
lending. SSBCI provides funding to
                                               developed procedures for sampling transaction-level data to evaluate the
strengthen state and municipal
                                               accuracy of the states’ SSBCI annual reports.
programs that support lending to small
businesses. Under the act, GAO is              As of June 30, 2012, SBLF participants had increased their business lending
required to conduct an audit of both           over the 2010 baseline. The median SBLF participant had a 31 percent increase
programs annually. GAO’s first reports         in total business lending and a 14 percent increase for small business loans
were on the programs’ implementation           under $1 million, according to GAO’s analysis. For SSBCI, states had used about
and made recommendations. This                 10 percent of the funds as of June 30, 2012. The act provides Treasury with
second report examines (1) the status          authority to terminate funds that have not been allocated to states within 2 years
of Treasury’s efforts to monitor               of Treasury’s approval of the state’s participation in SSBCI. However, Treasury
participants’ compliance with program
                                               has not yet developed a formal written policy explaining what actions it will take if
requirements under SBLF and SSBCI,
                                               SSBCI participants have not met the requirements to receive their full allocation
(2) the status of SBLF’s and SSBCI’s
small business lending, and (3)                of funds within the 2-year time frame. Treasury officials said that they currently
Treasury’s evaluation of SBLF and              have no plans to use this authority but retain the ability to do so in the future.
SSBCI and communication of                     Nevertheless, formal guidelines on how Treasury will use this authority could
outcomes to Congress and interested            help ensure consistent use of the authority if used in the future and provide clarity
parties. GAO reviewed Treasury                 to states about the consequences of not using the funds in a timely manner.
documents on SBLF and SSBCI                    Treasury has taken steps to evaluate SBLF’s and SSBCI’s performance but
procedures; analyzed the most recent
                                               could enhance public reporting of program outcome information. In a quarterly
available performance information for
                                               report to Congress, Treasury compares business lending in SBLF participants to
both programs and data on financial
institutions; and interviewed officials
                                               a large comparison group that it adjusted for certain aspects of bank size and
from Treasury and nine states                  geography. GAO’s analysis using a peer group that was adjusted for financial
participating in SSBCI.                        health as well geography and size showed that in nearly every case, the
                                               difference in total business lending growth was somewhat smaller than in
What GAO Recommends                            Treasury’s analysis. Treasury considered using a more refined peer group that
                                               adjusted for these factors but judged that the differences were not significant.
Treasury should develop a policy on
                                               However, Treasury did not disclose these options in the report or explain why the
how it will use its authority to terminate
SSBCI funds. Treasury should also              larger comparison group was chosen, which compromised the transparency of
expand its methodology discussion in           Treasury’s methodology. Furthermore, Treasury’s approach did not isolate the
SBLF reports and make the results of           impact of SBLF from other factors that could affect lending, as GAO
SSBCI performance measures public.             recommended in its first SBLF report. Treasury officials said they are continuing
In written comments on a draft of this         to explore evaluation approaches, including collecting additional data from a
report, Treasury agreed to implement           survey of SBLF institutions. In response to GAO’s 2011 recommendation on
these recommendations.                         SSBCI performance measures, Treasury has designed performance measures,
                                               such as the amount of private leverage states have achieved with SSBCI funds.
                                               However, Treasury has not yet developed a way to make this performance
                                               information public. Treasury shares information with the states through
View GAO-13-76. For more information,
contact Daniel Garcia-Diaz (202) 512-8678 or   conferences and technical assistance, but performance information could help
garciadiazd@gao.gov.                           Congress and the states to better understand the effectiveness of SSBCI’s
                                               various programs.
                                                                                        United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 4
               Treasury Has Made Progress in Developing Compliance Guidance
                 and Processes for SBLF and SSBCI                                         9
               SBLF-Funded Institutions and SSBCI-Funded States Have Begun to
                 Support Small Business Lending, but Treasury’s Policy for
                 Timely Use of SSBCI Funds Is Unclear                                   16
               Treasury Could Enhance Its Reporting of Program Performance
                 Information                                                            26
               Conclusions                                                              38
               Recommendations for Executive Action                                     40
               Agency Comments and Our Evaluation                                       41

Appendix I     Objectives, Scope, and Methodology                                       44



Appendix II    Comments from the Department of the Treasury                             49



Appendix III   GAO Contact and Staff Acknowledgments                                    51



Table
               Table 1: Summary Data on SBLF Participants, GAO’s Peer Group,
                        and Treasury’s Comparison Group                                 48


Figures
               Figure 1: Distribution of Dividend or Interest Rates Paid by
                        Institutions on SBLF Funds, as of June 30, 2012                 18
               Figure 2: Distribution of SBLF Participants’ Changes in Business
                        Lending, from Baseline Level to the Quarter Ended June
                        30, 2012                                                        20
               Figure 3: Median Changes in SBLF Participants’ Business Lending
                        by CPP Status, from Baseline Level to the Quarter Ended
                        June 30, 2012                                                   21
               Figure 4: Cumulative SSBCI Funds Used by Program Type, as of
                        June 30, 2012                                                   22



               Page i                              GAO-13-76 Small Business Lending Programs
Figure 5: SSBCI Allocation by State, Territory, or Municipality and
         Cumulative SSBCI Funds Transferred and Used, as of
         June 30, 2012                                                                    23
Figure 6: Distribution of Changes in Total Business Lending, from
         Baseline Level to the Quarter Ending June 30, 2012                               29
Figure 7: Median Changes in Total Business Lending by
         Geographical Region, from Baseline Level to the Quarter
         Ending June 30, 2012                                                             30
Figure 8: Median Changes in Total Business Lending by Institution
         Size in Total Assets, from Baseline Level to the Quarter
         Ended June 30, 2012                                                              31




Abbreviations

CAMELS            capital adequacy, asset quality, management, earnings,
                   liquidity, and sensitivity to market risk
CAP               capital access programs
CDFI              community development financial institution
CDLF              community development loan funds
CPP               Capital Purchase Program
FDIC              Federal Deposit Insurance Corporation
GPRAMA            Government Performance and Results Act
                   Modernization Act
OCSP              other credit support programs
OIG               Office of Inspector General (Treasury)
SBLF              Small Business Lending Fund
SSBCI             State Small Business Credit Initiative
TARP              Troubled Asset Relief Program


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Page ii                                       GAO-13-76 Small Business Lending Programs
United States Government Accountability Office
Washington, DC 20548




                                   December 5, 2012

                                   Congressional Committees

                                   Small businesses play a vital role in the U.S. economy, accounting for
                                   about half of private-sector output and employing more than half of
                                   private-sector workers. Congressional interest in assisting small
                                   businesses has increased in recent years, primarily because of continued
                                   concerns about unemployment and the sustainability of the current
                                   economic recovery. In 2008 and early 2009, major disruptions of business
                                   credit markets made accessing credit difficult for small businesses.
                                   Currently, there is still concern that small businesses might not be able to
                                   access enough capital to create jobs. Recent data show that net
                                   employment growth at small businesses is not increasing at the same
                                   rate as in previous economic recoveries.

                                   To address these concerns, Congress passed the Small Business Jobs
                                   Act of 2010, which was signed by the President on September 27, 2010. 1
                                   Among other things, this legislation aims to stimulate job growth by
                                   establishing the Small Business Lending Fund (SBLF) and the State
                                   Small Business Credit Initiative (SSBCI). The SBLF program is designed
                                   to encourage banks and community development loan funds (CDLF) with
                                   assets of less than $10 billion to increase their lending to small
                                   businesses with up to $50 million in annual revenues. 2 The act authorized
                                   the Secretary of the Treasury to make up to $30 billion of capital available
                                   and offered incentives to increase small business lending. However,
                                   interest in SBLF was lower than anticipated, with 935 financial institutions
                                   applying to the program for a combined funding request of $11.7 billion.
                                   By September 2011, the Department of the Treasury (Treasury) had
                                   ultimately approved $4.0 billion for 332 institutions through Treasury
                                   purchases of preferred stock or debt instruments—$3.9 billion to 281
                                   banks and $104 million to 51 CDLFs. No additional SBLF funds will be
                                   awarded to banks or CDLFs.


                                   1
                                    Pub. L. No. 111-240, 124 Stat. 2504 (2010).
                                   2
                                     In this report, “banks” refers to banks, thrifts, and bank and thrift holding companies. For
                                   purposes of the SBLF program, a CDLF is an entity that is certified by Treasury as a
                                   community development financial institution (CDFI) loan fund. A CDFI is a specialized
                                   financial institution that works in market niches that are underserved by traditional financial
                                   institutions.




                                   Page 1                                          GAO-13-76 Small Business Lending Programs
Funded with $1.5 billion, SSBCI is designed to strengthen state programs
that support private financing to small businesses and small
manufacturers that, according to Treasury, are not obtaining the loans or
investments they need to expand and to create jobs. States are expected
to use their SSBCI funds to leverage private financing and investment
that is at least ten times the amount of their SSBCI funds (a leverage ratio
of 10:1) by December 31, 2016. Forty-seven states, American Samoa;
the District of Columbia; Guam; the Northern Mariana Islands; Puerto
Rico; the U.S. Virgin Islands; Carrington, North Dakota; Mandan, North
Dakota; and Anchorage, Alaska currently participate in the program. 3

The 2010 Small Business Jobs Act requires us to conduct an annual audit
of the SBLF and SSBCI programs. 4 In our first reports, we reviewed the
implementation of SBLF and SSBCI and made recommendations to
improve the management oversight of the programs. 5 This second report
examines (1) the status of Treasury’s efforts to monitor participants’
compliance with program requirements under SBLF and SSBCI; (2) the
status of SBLF and SSBCI participants’ small business lending; and (3)
the extent to which Treasury evaluates the SBLF and SSBCI programs
and communicates their outcomes, such as an increase in small business
lending, to Congress and interested parties.

To examine the status of Treasury’s efforts to monitor participants’
compliance with program requirements under SBLF and SSBCI, we
analyzed Treasury’s documentation and interviewed relevant officials. For
SBLF, we reviewed and analyzed Treasury’s compliance procedures. We
interviewed Treasury officials on the process by which staff review the
Quarterly Supplemental Reports for accuracy. For SSBCI, we reviewed
SSBCI National Standards for Compliance and Oversight and SSBCI
Policy Guidelines. We interviewed Treasury officials on implementing the


3
 North Dakota and Wyoming did not submit an SSBCI application. Alaska initially applied
for its maximum SSBCI allocation before the June 27, 2011, deadline but subsequently
withdrew its application. SSBCI also accepted applications from municipalities in states
that did not apply and territories. For purposes of this report, when we refer to “states” we
are referring generally to all SSBCI participants.
4
 12 U.S.C. § 4107(c) and 12 U.S.C. § 5710 (b).
5
 GAO, Small Business Lending Fund: Additional Actions Needed to Improve
Transparency and Accountability, GAO-12-183 (Washington, D.C.: Dec. 14, 2011) and
State Small Business Credit Initiative: Opportunities Exist to Improve Program Oversight,
GAO-12-173, (Washington, D.C.: Dec. 7, 2011).




Page 2                                         GAO-13-76 Small Business Lending Programs
SSBCI compliance procedures and officials from the states of Colorado,
Florida, Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon,
and Texas. Factors we used for selecting these states included the
amount of funding provided by Treasury, geographic diversity, number
and types of small business programs, and status of use of funds. Our
selection process is more fully described in appendix I. We reviewed the
Allocation Agreements between Treasury and each of the nine
participating states that we interviewed to analyze the conditions and the
requirements placed on the states.

To determine the status of SBLF participants’ small business lending, we
reviewed Treasury’s Use of Funds Reports to determine the most current
level of qualified small business lending and the distribution of dividend or
interest rates paid by program participants. 6 Because Treasury requires
only SBLF participants to submit data on qualified small business
lending—generally, lending below $10 million—we also analyzed total
business lending as well as small business lending under $1 million,
which is available through the Call Reports. 7 We accessed Call Report
data using SNL Financial—a private financial database that contains
publicly filed regulatory and financial reports—and analyzed lending by
SBLF participants for the quarter ending June 30, 2012. For the SSBCI
program, we collected and reviewed data from the quarterly reports as of
June 30, 2012, of all SSBCI participants. 8 These data were the most
recent available for our analysis. We determined that the data collected
by Treasury on SBLF and SSBCI were sufficiently reliable for our
purposes.

To examine the extent to which Treasury evaluates and communicates
SBLF and SSBCI program outcomes, we reviewed Treasury
documentation for both programs. To determine the extent to which
Treasury evaluates the performance of SBLF, we reviewed Treasury’s
Use of Funds Report to identify how Treasury analyzed the performance



6
 The Use of Funds Report is a quarterly report to Congress describing how participating
institutions have used the funds they have received under the program.
7
 A Call Report is the common reference name for the quarterly reports of condition and
income filed with regulators by every national bank, state-chartered Federal Reserve
member bank, and insured state nonmember bank.
8
 The act requires that SSBCI participants provide to Treasury a quarterly report on the
use of SSBCI funds during the previous quarter.




Page 3                                        GAO-13-76 Small Business Lending Programs
                         of SBLF. We assessed the methodology and the comparison group
                         Treasury used in evaluating the performance of SBLF participants as well
                         as institutions that did not participate in SBLF. We interviewed Treasury
                         officials on their comparison group analysis to understand the process by
                         which the analysis was developed. To help understand the usefulness of
                         the comparison group, we chose a peer group of non-SBLF institutions
                         that we adjusted for geographical and size distribution as well as financial
                         health. By analyzing a peer group, we could account for differences
                         between SBLF participants and other financial institutions. For
                         determining the extent to which Treasury evaluates SSBCI performance
                         outcomes, we collected and reviewed the performance measures that
                         Treasury developed for evaluating SSBCI. In addition, we interviewed
                         officials from the nine selected states to collect information on their
                         evaluation relating to their state’s SSBCI performance and identify what
                         type of performance information they think would be helpful in
                         administering their state small business programs.

                         We conducted this performance audit from March 2012 to December
                         2012 in accordance with generally accepted government auditing
                         standards. Those standards require that we plan and perform the audit to
                         obtain sufficient, appropriate evidence to provide a reasonable basis for
                         our findings and conclusions based on our audit objectives. We believe
                         that the evidence obtained provides a reasonable basis for our findings
                         and conclusions based on our audit objectives.



Background
Small Business Lending   For the purpose of the SBLF program, the Small Business Jobs Act of
Fund                     2010 defines qualified small business lending—as defined in an
                         institution’s quarterly regulatory filings (Call Reports)—as one of the
                         following:

                         •   commercial and industrial loans;
                         •   owner-occupied nonfarm, nonresidential real -estate loans;
                         •   loans to finance agricultural production and other loans to farmers;
                             and
                         •   loans secured by farmland.

                         In addition, qualifying small business loans cannot be for more than $10
                         million, and the business may not have more than $50 million in revenue.
                         The act specifically prohibits Treasury from accepting applications from


                         Page 4                                GAO-13-76 Small Business Lending Programs
institutions that are on the Federal Deposit Insurance Corporation’s
(FDIC) problem bank list or have been removed from that list during the
previous 90 days. 9 The initial baseline small business lending amount for
the SBLF program was the average amount of qualified small business
lending that was outstanding for the four full quarters ending on June 30,
2010, and the dividend or interest rates paid by an institution are adjusted
by comparing future lending against this baseline. Also, the institution is
required to list any loans resulting from mergers and acquisitions so that
its qualified small business lending baseline is adjusted accordingly.

Fewer institutions applied to SBLF than initially anticipated, in part
because many banks did not anticipate that demand for small business
loans would increase. The institutions that applied to and were funded by
SBLF were primarily institutions with total assets of less than $500 million.
In addition, in our 2011 report, we reported that the lack of clarity by
Treasury in explaining the program’s requirements created confusion
among applications and Treasury faced multiple delays in implementing
the SBLF program and disbursing SBLF funds by the statutory deadline
of September 27, 2011. 10

The amount of funding a bank received under the SBLF program
depended on its asset size as of the end of the fourth quarter of calendar
year 2009. Specifically, if the qualifying bank had total assets of $1 billion
or less, it was eligible for SBLF funding that equaled up to 5 percent of its
risk-weighted assets. 11 If the qualifying bank had assets of more than $1
billion but less than $10 billion, it was eligible for funding that equaled up



9
  The problem bank list is a confidential list created and maintained by the FDIC of banks
that are in jeopardy of failing. In general, “problem” institutions are those institutions with
financial, operational, or managerial weaknesses that threaten their continued financial
condition. Depending upon the degree of risk and supervisory concern, they received a
composite CAMELS rating of either “4” or “5.” The CAMELS rating system is a U.S.
supervisory tool that describes a bank’s overall condition and that is used to classify the
nation’s banks. The composite rating is based on financial statements and regulators’ on-
site examinations and has six components—capital adequacy, asset quality,
management, earnings, liquidity, and sensitivity to market risk—that make up the
acronym. It rates banks on a scale of 1 to 5, with 1 being the strongest.
10
  GAO-12-183.
11
  Risk-weighted assets are weighted according to credit risk and are used in the
calculation of required capital levels. Specifically, all assets are assigned a risk weight
according to the credit risk of the obligor or the nature of the exposure and the nature of
any qualifying collateral or guarantee, where relevant.




Page 5                                          GAO-13-76 Small Business Lending Programs
to 3 percent of its risk-weighted assets. The SBLF program provided an
option for eligible institutions to refinance preferred stock or subordinated
debt issued to the Treasury through the Troubled Asset Relief Program’s
(TARP) Capital Purchase Program (CPP). 12 Participating SBLF banks
must pay dividends or interest of 5 percent per year initially to Treasury,
with reduced rates available if they increase their small business lending.
Specifically, the dividend rate payable will decrease as banks increase
small business lending over their baselines. While the dividend rate will
be no more than 5 percent for the first 2 years, a bank can reduce the
rate to 1 percent by generating a 10 percent increase in its lending to
small businesses compared with its baseline. After 2 years, the dividend
rate on the capital will increase to 7 percent if participating banks have
not increased their small business lending. After 4.5 years, the dividend
rate on the capital will increase to 9 percent for all banks regardless of a
bank’s small business lending. For S-corporations and mutual institutions,
the initial interest rate was at most 7.7 percent. The rate would fall as low
as 1.5 percent if these institutions increase their small business lending
by 10 percent or more from the previous quarter. 13 For CDLFs, the initial
dividend rate will be 2 percent for the first 8 years. After 8 years, the rate
will increase to 9 percent if the CDLF has not repaid the SBLF funding.
This structure is designed to encourage CDLFs to repay the capital
investment by the end of the 8-year period. Treasury will allow an SBLF
participant to exit the program at any time, with the approval of its
regulator, by repaying the funding provided along with dividends owed for
that period.

Under the act, Treasury has a number of reporting requirements to
Congress related to SBLF: (1) monthly reports describing all of the
transactions made under the program during the reporting period; (2) a
semiannual report (for the periods ending each March and September)


12
  As the largest TARP program, the Capital Purchase Program was designed to provide
capital investments to financially viable financial institutions. Treasury received preferred
shares and subordinated debentures, along with warrants.
13
  Some banking institutions are formed as either S-corporations or mutual organizations,
which will affect the form of Treasury’s investment. An S-corporation makes a valid
election to be taxed under subchapter S of chapter 1 of the Internal Revenue Code and
thus does not pay any income taxes. Instead, the corporation’s income or losses are
divided among and passed through to its shareholders. A mutual organization is a
company that does not issue capital stock and, therefore, has no shareholders. It is also
“owned” by its members (e.g., deposit customers) rather than by stockholders. Many
thrifts and insurance companies are mutuals.




Page 6                                          GAO-13-76 Small Business Lending Programs
                       providing all projected costs and liabilities and all operating expenses;
                       and (3) a quarterly report known as the Use of Funds Report.


State Small Business   SSBCI was established to support existing and new state programs that
Credit Initiative      support private financing to small businesses and small manufacturers
                       that, according to Treasury, are not obtaining the loans or investments
                       they need to expand and to create jobs. The act allowed Treasury to
                       provide SSBCI funding for two state program categories: capital access
                       programs (CAP) and other credit support programs (OCSP). For both
                       CAP and OCSPs, lenders are required to have at least 20 percent of their
                       own capital at risk in each loan. Also, origination and annual utilization
                       fees are determined by each state to defray the program’s cost. Loan
                       terms, such as interest and collateral, are typically negotiated between
                       the lender and the borrower, although in some cases loan terms are
                       subject to state approval and, in many cases, the state and lender will
                       discuss and negotiate loan terms and guarantee options prior to reaching
                       agreement to approve the loan and issue a guarantee. A CAP is a loan
                       portfolio insurance program wherein the borrower and lender, such as a
                       small business owner and a bank, contribute to a reserve fund held by the
                       lender. Under a CAP, when a participating lender originates a loan, the
                       lender and borrower combine to contribute an amount equal to a
                       percentage of the loan to a loan reserve fund, which is held by the lender.
                       Under SSBCI, the contribution must be from 2 percent to 7 percent of the
                       amount borrowed. Typically, the contribution ranges from 3 percent to 4
                       percent. The state then matches the combined contribution and sends
                       that amount to the lender, which deposits the funds into the lender-held
                       reserve fund. Under SSBCI, approved CAPs are eligible to receive
                       federal contributions to the reserve funds held by each participating
                       financial institution in an amount equal to the total amount of the
                       contributions paid by the borrower and the lender on a loan-by-loan basis.

                       In addition, the following OCSPs are examples of programs eligible to
                       receive funding under the act:

                       •   Collateral support programs: A Collateral Support Program is
                           designed to enable financing that might otherwise be unavailable due
                           to a collateral shortfall. It provides pledged cash collateral to lenders
                           to enhance the collateral coverage of individual loans. The state and
                           lender negotiate the amount of cash collateral to be pledged by the
                           state.
                       •   Loan participation programs: States may structure a loan participation
                           program in two ways: (1) through purchase transactions, also known


                       Page 7                                 GAO-13-76 Small Business Lending Programs
    as purchase participation, in which the state purchases a portion of a
    loan originated by a lender, or (2) by participating in a loan as a co-
    lender, where a lender originates a senior loan and the state
    originates a second loan to the same borrower that is usually
    subordinate to the lender’s senior loan should a default occur. State
    loan participation programs encourage lending to small businesses
    because the lender is able to reduce its potential loss by sharing its
    exposure to loan losses with the state.
•   Loan guarantee programs: These programs enable small businesses
    to obtain a term loan or line of credit by providing the lender with the
    necessary security in the form of a partial guarantee. In most cases, a
    state sets aside funds in a dedicated reserve or account to
    collateralize the guarantee of a specified percentage of each
    approved loan. The guarantee percentage is determined by the states
    and lenders but, under SSBCI, may not exceed 80 percent of loan
    losses.
•   Venture capital programs: These programs provide investment capital
    to create and grow start-ups and early-stage businesses, often in one
    of two forms: (1) a state-run venture capital fund (which may include
    other private investors) that invests directly in businesses, or (2) a
    fund of funds, which is a fund that invests in other venture capital
    funds that in turn invest in individual businesses.
•   Direct loan programs: Although Treasury does not consider these
    programs to be a separate SSBCI program type, it acknowledges that
    some states may identify programs that they plan to support with
    SSBCI funds as direct loan programs. The programs that some states
    label as direct loan programs are viewed by Treasury as co-lending
    programs categorized as loan participation programs, which have
    lending structures that are allowable under the statute.

OCSPs approved to receive SSBCI funds are required to target small
businesses with an average size of 500 or fewer employees and to target
support towards loans with an average principal amount of $5 million or
less. In addition, these programs cannot lend to borrowers with more than
750 employees or make any loans in excess of $20 million.

After their applications were approved, the states entered into Allocation
Agreements with Treasury before they received their funds. SSBCI
Allocation Agreements are the primary tool signed by Treasury and each
participating state and outline how recipients are to comply with program
requirements. The act requires that each state receive its SSBCI funds in
three disbursements or tranches of approximately one-third of its
approved allocation. Prior to receipt of the second and third



Page 8                                GAO-13-76 Small Business Lending Programs
                           disbursements, a state must certify that it has expended, transferred, or
                           obligated 80 percent or more of the previous disbursement. Treasury may
                           terminate any portion of a state’s allocation that Treasury has not yet
                           transferred to the state within 2 years of the date on which its SSBCI
                           Allocation Agreement was signed. Treasury may also reduce, suspend or
                           terminate a state’s allocation at any time during the term of the Allocation
                           Agreement upon an event of default under the agreement. Under the act,
                           states are required to submit quarterly and annual reports on their use of
                           SSBCI funds. All SSBCI Allocation Agreements will expire on March 31,
                           2017.


                           In response to our previous recommendation on SBLF compliance
Treasury Has Made          procedures, Treasury has developed procedures for monitoring SBLF
Progress in                participant compliance with legal and reporting requirements. Treasury
                           has also issued compliance standards for SSBCI and procedures to
Developing                 review states’ annual reports. The standards provide the participating
Compliance Guidance        states with best practices for reviewing borrower and lender compliance
                           with SSBCI’s legal and policy requirements.
and Processes for
SBLF and SSBCI

Treasury Has Developed     We recommended in December 2011 that Treasury should finalize
Procedures to Monitor      procedures for monitoring SBLF participants, including procedures to
SBLF Participant           better ensure that Treasury is receiving accurate information on
                           participants’ small business lending. 14 In response to the
Compliance and Report of   recommendation, Treasury officials told us they had written compliance
Lending Data               procedures in March 2012 and finalized compliance procedures on
                           September 28, 2012, for monitoring participant conformance with
                           program terms, including documentation requirements, certification
                           requirements, and other requirements under the Securities Purchase
                           Agreement. 15 In addition, according to Treasury officials, SBLF
                           compliance procedures include a review of the Quarterly Supplemental




                           14
                            GAO-12-183.
                           15
                             The Securities Purchase Agreement is the terms between Treasury and SBLF
                           participants on which the SBLF participants issued preferred stock to the Treasury, which
                           Treasury purchased using SBLF funds.




                           Page 9                                       GAO-13-76 Small Business Lending Programs
Reports (quarterly reports) for accuracy to monitor that the dividend or
interest rates paid by the institutions are correct. 16

As mandated by the act, Treasury requires each SBLF participant to
submit two annual certifications:

          (1) Any businesses receiving a loan from an SBLF participant
          using SBLF funds must certify to the institution that the principals
          of the business have not been convicted of a sex offense against
          a minor. Under the Securities Purchase Agreement, annually until
          redemption, the SBLF participant is required to provide the
          certifications to Treasury that businesses receiving loans from the
          bank have certified that their principals have not been convicted of
          a sex offense against a minor.

          (2) Each SBLF participant must certify that it is in compliance with
          the requirements of the Customer Identification Program, which is
          intended to enable the bank to form a reasonable belief that it
          knows the true identity of each customer.

In addition to these certifications, Treasury requires, through the
Securities Purchase Agreement, that SBLF participants meet certain
additional conditions and certifications, such as the bank’s Chief
Executive Officer and Chief Financial Officer attesting to the accuracy of
the bank’s Call Report and certifying to Treasury that information provided
on each supplemental quarterly report, is complete and accurate.
Treasury developed a compliance monitoring tool for verifying the proper
certification submission by SBLF participants. The tool is a set of
spreadsheets Treasury uses to track the receipt of documents from SBLF
participants, as required by the Securities Purchase Agreement, including
annual financial statements, independent auditor certifications, and
executive officer certifications.

An important SBLF compliance focus is the review and monitoring of the
quarterly reports. Each SBLF participant is required to correctly calculate
its quarter-end adjusted small business lending baseline and the qualified



16
  Quarterly Supplemental Reports supplement the Call Reports filed by the SBLF
participants and include the calculations for the qualified small business lending for the
quarter and the dividend or interest rate to be paid by the SBLF participants.




Page 10                                        GAO-13-76 Small Business Lending Programs
small business lending for that quarter. 17 The quarterly reports are the
primary source on which Treasury bases its Use of Funds Report of
qualified small business lending and the dividend or interest rate paid by
the SBLF participants. The quarterly reports are forms in which the SBLF
participants calculate their qualified small business lending for the quarter
and the resulting dividend or interest rate. The dividend or interest
payment depends on the growth or the decline of qualified small business
lending. Thus, if the baseline or the qualified small business lending is
incorrectly calculated, Treasury will not receive an accurate dividend or
interest payment amounts.

According to Treasury documentation, Treasury will review the following
elements in the quarterly reports:

•   certification of accuracy by the institution’s executives (including Chief
    Executive Officer, Chief Financial Officer, and all directors or trustees
    who attested to the Call Report);
•   independent auditor certification;
•   real-time validation of the calculations for the quarterly reports;
•   analysis of the quarterly reports; and
•   explanation letters and auditor attestations if the quarterly report is a
    resubmission.

According to Treasury officials, the review performed by SBLF
compliance staff is primarily to identify discrepancies between data on the
quarterly reports and the Call Reports. According to Treasury staff, they
use a system that allows staff to monitor discrepancies or errors and
follow up with participants. Treasury staff review participants’ quarterly
reports to identify any potential errors or missing information. Staff
compare the quarterly report submissions to the Call Reports to check for
discrepancies for the same period. According to Treasury officials, staff
also compare quarterly reports to prior Call Reports to check for errors in
reported changes in loan balances and net charge-offs and apply
statistical tests, such as a comparison of government guaranteed lending
amounts in the quarterly reports, to lending figures publicly reported by



17
  The SBLF qualified baseline is adjusted each quarter to take into account any gains
resulting from mergers, acquisitions, and loan purchases during the period that SBLF
participants may have acquired during the period. The baseline is adjusted so that the
small business lending being measured is new small business lending, not lending from
mergers, acquisitions, or purchases of small business loans.




Page 11                                     GAO-13-76 Small Business Lending Programs
the Small Business Administration. 18 Treasury staff said they use a
verification check for arithmetic errors for calculating the adjusted
baseline exclusions and qualified small business lending. Treasury
follows up with institutions to address identified issues and errors and
requests resubmission of corrected quarterly reports, as appropriate.

Treasury has also responded to the findings and recommendations of the
Treasury’s Office of Inspector General (OIG). In August 2012, Treasury’s
OIG reported on a small judgmental sample of 10 initial supplemental
reports submitted by SBLF participants. 19 To establish initial dividend
rates, SBLF participants completed the initial supplemental reports using
small business lending data from their quarterly Call Reports and loans
records and submitted them to Treasury. The OIG reviewed the
calculations for the small business lending baseline and the initial
dividend rate payment and found errors in 8 of the 10 reviewed reports.
OIG’s recommendations included the following:

•    follow up with the 8 banks where errors were identified and determine
     whether corrected initial supplemental reports and quarterly reports
     should be submitted and make the necessary adjustments to dividend
     rates for the banks, as appropriate;
•    notify all SBLF participants about the types of errors identified by this
     audit to help prevent similar errors from occurring in the future; and
•    ensure that the October 2012 Use of Funds Report contains
     corrections for errors identified by this audit.

Treasury agreed with the OIG’s recommendations and commented that it
would review the identified errors with each institution and direct these
institutions to resolve any errors in the third quarter of 2012, including
resubmitting corrected initial and quarterly supplemental reports, as
appropriate. Further, Treasury conducted training webinars in July and
August 2012 to address common errors identified in their reviews of
quarterly report submissions. According to Treasury officials, they
completed the review of the eight banks where quarterly report errors


18
  Net charge-offs are total loans and leases charged off (removed from balance sheet
because of uncollectibility), less amounts recovered on loans and leases previously
charged off.
19
  Department of the Treasury, Office of Inspector General, Small Business Lending Fund:
Initial Dividend Rate Calculations Used Incorrect Lending Information, (Washington, D.C.:
Aug. 21, 2012).




Page 12                                      GAO-13-76 Small Business Lending Programs
                             were identified and banks resubmitted quarterly reports as appropriate.
                             Two banks submitted revised reports identifying a combined total of
                             $258.00 in overpayments to Treasury.


Treasury Has Developed       Treasury has developed SSBCI Policy Guidelines and compliance
Guidance to Assist SSBCI-    standards for participating states to follow in implementing their state
Participating States in      small business programs using SSBCI funds. According to Treasury
                             officials, primary oversight of the use of SSBCI funds is the responsibility
Their Oversight of Lenders   of each participating state. The participating states we interviewed viewed
and Borrowers                their responsibility as monitoring SSBCI lender and borrower compliance
                             with program requirements. Under the act, specific lender and borrower
                             assurances and certifications must be delivered before a transaction is
                             enrolled in the participating state’s approved program. For example,
                             borrowers must provide assurance that proceeds will be used for an
                             eligible business purpose and that the borrower is not an executive
                             officer, director, or principal shareholder (or a member or the immediate
                             family or a related interest of such individual) of the lender. Similarly,
                             lenders must submit certifications to the participating state providing
                             assurance that, for example, the loan is not a refinancing of a loan
                             previously made to that borrower by the lender or an affiliate of the
                             lender. In addition to these certifications, the act requires that borrowers
                             and the lenders certify that their principals have not been convicted of a
                             sex offense against a minor as such terms are defined in section 111 of
                             the Sex Offender Registration and Notification Act. 20 Eight states we
                             interviewed told us that they reviewed borrower and lender certifications
                             for meeting the legal requirements and assurances before enrolling the
                             loans.

                             In May 2012 Treasury issued the SSBCI National Standards for
                             Compliance and Oversight, which was intended to provide the states with
                             guidance for reviewing, monitoring, and managing compliance. 21 Treasury
                             considers the standards as best practices that the states should adopt or
                             incorporate, as appropriate, into existing procedures. For example,
                             according to the standards, if a participating state delegates to an
                             administrative entity the responsibility to obtain the certifications to


                             20
                              42 U.S.C. § 16911.
                             21
                              U.S. Department of the Treasury, SSBCI National Standards for Compliance and
                             Oversight, (Washington, D.C.: May 15, 2012).




                             Page 13                                   GAO-13-76 Small Business Lending Programs
individual lenders, the participating state must exercise oversight to
ensure compliance. One means of ensuring oversight would be for the
participating state to conduct an annual audit of each lender’s transaction
files to verify that the use of proceeds certifications are on file and signed
by an authorized representative of the lender. As another example of a
best practice, the standards recommend that, when overseeing entities
that administer the state small business programs, states should perform
site visits, require periodic status update reports, or conduct regular
conference calls with the administering entity.

The participating states we interviewed found the SSBCI National
Standards for Compliance and Oversight to be helpful as they were
developing their compliance procedures. Three of the nine states already
had similar compliance procedures in place for their small business
lending and amended their procedures to include SSBCI compliance
standards. Six states told us that they established or are establishing
compliance standards using the SSBCI National Standards for
Compliance and Oversight as guidance. According to state officials of the
nine states we interviewed, as part of their procedures, staff reviewed the
borrower and lender documentation for compliance.

Under the act, SSBCI participants are subject to two reporting
requirements: annual reports and quarterly reports. As part of its
responsibilities for overseeing the use of SSBCI funds, Treasury is
planning to conduct a review of the Annual Report data submitted to them
by the states. Under the act, SSBCI participants are to submit to Treasury
an Annual Report no later than March 31 of each year. The data included

•   transaction-level data for each loan or investment made using SSBCI
    funds for that year;
•   the number of borrowers that received new loans originated under the
    approved state program;
•   the total amount of such new loans;
•   breakdowns by industry type, loan size, annual sales, and number of
    employees of the borrowers that received such new loans;
•   the zip code of each borrower that received such a new loan; and
•   other data that the Secretary may require to carry out the purposes of
    the program.

As part of its review of the 2012 Annual Report data, Treasury plans to
review a sample of loans and investments for the appropriate
documentation of borrower and lender assurances and certifications for
data accuracy. To conduct this review, SSBCI staff designed an



Page 14                                GAO-13-76 Small Business Lending Programs
evaluation form to review the certifications and the Annual Report data.
SSBCI participants are required to submit their 2012 annual data to
Treasury by March 31, 2013. The loans or investment will be reviewed
for the following assurances and certifications:

•   Each lender or investor that has received credit support for a
    particular transaction has at least 20 percent of their own capital at
    risk unless Treasury has waived this requirement.
•   Signed borrower and lender use-of-proceeds certifications have been
    provided, and the borrower/lender signature block matches the
    borrower on the loan documents.
•   Signed borrower and lender sex offender certifications have been
    provided.

In the data accuracy review, Treasury plans to verify a sample of SSBCI
Annual Report data submitted by the states with the actual loan or
investment documentation. The types of data that Treasury intends to
verify include the following:

•   date of disbursement for the loan or investment;
•   borrower’s annual revenue and the year of business incorporation;
•   enrolled loan amount and any public subsidy associated with the
    enrolled loan or venture capital investment;
•   SSBCI federal contribution to CAP loan; and
•   amount the state had contributed to a loan participation, loan
    guarantee, or loan collateral program.

Treasury also intends to verify that the amount of subsequent private
financing matches the documentation provided and that the
documentation supports the relationship between the SSBCI loan
program and the private financing.

The states are required to submit to Treasury a quarterly report on the
use of SSBCI funds during the previous quarter. Under the act, states are
required to report the total amount of federal funding used and to certify
that the information provided is accurate and that the state is
implementing its approved programs in accordance with the act and the
regulations or other guidance issued by Treasury. As part of the
Allocation Agreements, Treasury also requires states to submit reports on
the total amount of allocated funds used for administrative costs, the
amount of program income generated, and the amount of charge-offs
against the federal contributions to the reserve funds. Treasury conducts
a more limited review of the SSBCI quarterly reports compared to the



Page 15                               GAO-13-76 Small Business Lending Programs
                        Annual Report. Specifically, Treasury staff conduct checks on the
                        administrative costs to ensure that the costs do not exceed the statutory
                        caps. In addition, staff verify that the amount of funds used does not
                        exceed the amount allocated to the state and that the state official signing
                        the SSBCI quarterly reports is authorized to do so.

                        According to Treasury officials, they would not approve a new
                        disbursement of funds if they had substantial evidence that a state’s
                        compliance with SSBCI program requirements was inadequate. When a
                        participating state requests a disbursement of funds, according to
                        Treasury staff, they will conduct a pre-disbursement review. In addition to
                        confirming that the participating state has expended, obligated, or
                        transferred 80 percent of its previous disbursement, Treasury staff review
                        the results of Treasury’s SSBCI compliance monitoring. According to
                        Treasury documentation, this review will include a review of a sample of
                        transactions in which SSBCI funds were used; a review of financial
                        audits, if submitted; the review of the quarterly reports and if available, the
                        annual reports for accuracy and completeness; and the review of any of
                        the states’ compliance activities or records that would indicate whether a
                        participating state had failed to comply with any program requirements.


                        As of June 30, 2012, SBLF participants had increased their business
SBLF-Funded             lending over the baseline from 2010. 22 For SSBCI, Treasury had
Institutions and        transferred to the states nearly one-third of the program’s $1.5 billion in
                        total funding as of June 30, 2012. States had used about $154 million
SSBCI-Funded States     (about 10 percent) of these funds through a variety of programs. States
Have Begun to           had received and used funds at differing levels, but some states were
                        concerned that Treasury may take actions to suspend disbursements
Support Small           after participants have been in the program for more than 2 years.
Business Lending, but   Treasury has the authority to terminate disbursements to SSBCI
Treasury’s Policy for   participants who have not met the requirements to receive their full
                        allocation within 2 years of having been accepted into the program.
Timely Use of SSBCI     Treasury has not yet developed a policy that reflects how it will use this
Funds Is Unclear        authority even though this 2-year period will end for most states sometime
                        in 2013. Treasury officials stated that they do not plan to use this authority




                        22
                          These financial data are reported on a quarterly basis, and June 30, 2012, represents
                        the most recent data available.




                        Page 16                                      GAO-13-76 Small Business Lending Programs
                            at this time and that Treasury will provide all participants with sufficient
                            lead time so that they can modify or adjust their programs, as necessary.


SBLF Participants Have      According to Treasury, SBLF participants have increased their qualified
Generally Increased Their   small business lending by $6.7 billion over their $36.0 billion baseline, as
Levels of Both Small        of June 30, 2012. This number includes a $1.5 billion increase over the
                            prior quarter. Further, Treasury reported that 89 percent of participants
Business and Total          had increased their qualified small business lending over baseline levels
Business Lending            and about 76 percent of participants had increased their qualified small
                            business lending by 10 percent or more. As previously discussed, SBLF
                            uses a dividend or interest rate incentive structure to encourage
                            participating institutions to increase qualified small business lending.
                            SBLF participants paid an average dividend or interest rate of 2.1 percent
                            on their SBLF funds as of June 30, 2012. Over half of SBLF participants
                            paid a dividend or interest rate of 1 percent on their SBLF funds—
                            because their qualified small business lending growth was 10 percent or
                            higher—and 15 percent of institutions paid 5 percent or more (see
                            fig. 1). 23




                            23
                              As mentioned earlier, dividends or interest rates for S-corporations range from 1.5
                            percent to 7.7 percent depending on their increases in qualified small business lending.
                            Treasury used these differing rates to ensure that S-corporations’ after-tax rate was equal
                            to that of other participating institutions (1.0 percent to 5.0 percent). Figure 1 displays the
                            pre-tax dividend or interest rates, but groups the rates in a way that more closely mirrors
                            the corresponding loan growth changes.




                            Page 17                                         GAO-13-76 Small Business Lending Programs
Figure 1: Distribution of Dividend or Interest Rates Paid by Institutions on SBLF
Funds, as of June 30, 2012




SBLF participants also showed increases in small business loans under
$1 million, as well as total business lending. While the Small Business
Jobs Act set the threshold for qualified small business lending at $10
million, depository institutions are required to submit Call Reports with
detailed financial information including small business lending, which the
reports define as loans under $1 million. 24 Such data are useful for
comparing certain small business lending of SBLF participants with that of
institutions that did not participate in SBLF. 25 Total business lending—
which includes all business loans, including loans over $10 million and


24
  Call Reports require reporting only on loans up to $500,000 for two of the loan
categories—loans to finance agricultural production and loans secured by farmland. The
$1 million threshold applies to the other two categories—commercial and industrial loans
and nonfarm, nonresidential real estate loans.
25
  Because qualified small business lending—lending below the $10 million threshold—is
defined by the Small Business Jobs Act, only SBLF participants are required to submit
these data, leaving the data unavailable for institutions that did not participate in SBLF.




Page 18                                        GAO-13-76 Small Business Lending Programs
those to businesses with over $50 million in revenue—can also help
illustrate differences in lending activity between these two groups. 26
Treasury uses total business lending in its reporting to compare SBLF
participants to non-SBLF institutions and noted that qualified small
business lending makes up a large part of total business lending for SBLF
participants. For example, qualified small business lending totaled 95
percent of total business lending for the median SBLF participant as of
December 31, 2011.

SBLF participants increased both small business loans under $1 million
as well as total business lending. In particular, the median SBLF
participant had a 31 percent increase in total business lending for the
quarter ending June 30, 2012, over the baseline level. 27 The median
SBLF participant had a 14 percent increase for small business loans
under $1 million over the same period. When categorizing SBLF
participants by the changes in their lending, the SBLF participants fell into
the higher growth categories for total business lending, but were more
evenly distributed for small business loans under $1 million except for
participants whose lending increased over 40 percent (see fig. 2).




26
  Total business lending only includes lending to the same four loan categories as
qualified small business lending.
27
  The act establishes the baseline for measuring the change in small business lending as
the average of the amounts that were reported for each of the four calendar quarters
ended June 30, 2010. Call Reports did not begin requiring quarterly reporting of small
business lending under $1 million until the second quarter of this four quarter baseline
period. Accordingly, we calculated the baseline for small business lending under $1 million
using the average of each of the three calendar quarters ended June 30, 2010. The act
also defines one of the categories of qualified small business lending as owner-occupied
nonfarm, nonresidential real estate loans. For quarterly reports of small business lending,
Call Reports use a broader category of all nonfarm, nonresidential real estate without a
distinction for owner occupancy. As a result, the small business lending under $1 million
includes the broader category. The total business lending numbers use the full baseline
and the narrower categorization of owner-occupied nonfarm, nonresidential real estate
and should therefore not be compared to the numbers for small business lending under $1
million.




Page 19                                       GAO-13-76 Small Business Lending Programs
Figure 2: Distribution of SBLF Participants’ Changes in Business Lending, from Baseline Level to the Quarter Ended June 30,
2012




                                         About half of SBLF participants used their program funds to repay and
                                         exit TARP’s CPP. These CPP refinance participants had noticeably lower
                                         lending growth than SBLF participants that did not participate in CPP (see
                                         fig. 3). In particular, CPP refinance participants increased small business
                                         loans under $1 million by 5 percent compared with 33 percent for non-
                                         CPP participants. For total business lending, CPP refinance participants
                                         saw increases of 17 percent compared with 45 percent for non-CPP
                                         participants. Treasury officials said that one possible reason for this
                                         difference is that CPP refinance participants were only eligible for a
                                         limited amount of incremental SBLF funds, beyond the amount of CPP
                                         funds refinanced. As a result, unlike other SBLF participants, these
                                         institutions did not receive as much “new” capital to increase small
                                         business lending. Nevertheless, all SBLF participants are subject to the
                                         same incentive structure based on the dividend or interest rate.
                                         Furthermore, Treasury officials also noted that in many instances the
                                         CPP refinance participants may have already experienced an increase in
                                         lending from the CPP capital they originally received.




                                         Page 20                                  GAO-13-76 Small Business Lending Programs
                           Figure 3: Median Changes in SBLF Participants’ Business Lending by CPP Status,
                           from Baseline Level to the Quarter Ended June 30, 2012




States Disbursed SSBCI     As of June 30, 2012, Treasury had transferred $468 million in SSBCI
Funds through Different    funding to the states, representing about one-third of the $1.5 billion that
Types of Programs and at   was set aside for the program. States had used $150 million of these
                           funds—about 10 percent of the program total—disbursing them to lending
Varying Rates              institutions through a variety of programs. Loan participation programs
                           accounted for 47 percent of the funds used, as of June 30, 2012, followed
                           by venture capital programs (28 percent), collateral support programs (17
                           percent), and loan guarantee programs (6 percent), as shown in figure 4.
                           The remaining program categories—capital access programs, direct
                           lending, and other—combined for the remaining 2 percent of funds used.




                           Page 21                                 GAO-13-76 Small Business Lending Programs
Figure 4: Cumulative SSBCI Funds Used by Program Type, as of June 30, 2012




Participating states have received and used SSBCI funds at differing
levels, partially because of when applications were approved and funds
were allocated (see fig. 5). Of the 53 states, territories, or municipalities
that received SSBCI funding, 47 had used a proportion of their funds as
of June 30, 2012. Montana had the highest proportion used of the amount
that Treasury had allocated, as of June 30, 2012. States we interviewed
said that disbursing funds was much faster for state programs that were
in existence before SSBCI because the infrastructure was already in
place and lenders were already familiar with the programs. Moreover,
some states implementing new programs told us that it could take time to
use the funds because they had to conduct extensive outreach to lenders
to make them aware of the programs and encourage them to commit to
small business lending.




Page 22                                 GAO-13-76 Small Business Lending Programs
Figure 5: SSBCI Allocation by State, Territory, or Municipality and Cumulative SSBCI Funds Transferred and Used, as of June
30, 2012




                                         Note: States are in order of the largest to smallest allocation amount. California had been allocated
                                         $168.6 million, but its transferred and used amounts were not available for the June 30, 2012,
                                         quarterly report due to an extension granted. Washington’s amount used is greater than its
                                         transferred amount because it includes loan commitments that are contingent upon receipt of its next
                                         disbursement. Alaska did not participate in SSBCI, and “AK” reflects the city of Anchorage, which
                                         applied for funding at the municipal level. “N” refers to the Northern Mariana Islands. North Dakota did
                                         not apply for SSBCI funds, but two consortia of municipalities in North Dakota—the Mandan
                                         Consortium and the Carrington Consortium—applied, approved, and received funding on August 31,
                                         2012, and September 28, 2012, respectively. Wyoming did not apply for SSBCI funds, but one
                                         consortium of municipalities—the Laramie Consortium—applied for funds and was approved.




                                         Page 23                                             GAO-13-76 Small Business Lending Programs
Treasury Has Not Yet       Under the act, the Secretary may revoke any portion of a participating
Developed a Policy on      state’s allocated amount that has not been transferred to the state by the
How to Treat States That   end of the 2-year period beginning on the date the state received
                           approval, but Treasury has not developed a written policy on how it will
Do Not Meet SSBCI’s 2-     use this authority. For most of the participating states, this 2-year period
Year Time Frame            will end sometime during 2013, but it is still unknown if they all will be able
                           to use their funds in time to obtain the third and final disbursement within
                           this time frame. This time frame is quickly approaching for five states
                           (California, Hawaii, Missouri, North Carolina, and Vermont) that signed
                           their Allocation Agreements with Treasury before May 2011. For 39 states
                           the 2-year time frame will end by September 30, 2013, in terms of their
                           allocation agreement. As of November 16, 2012, according to Treasury,
                           ten states (Idaho, Indiana, Kansas, Michigan, Missouri, Montana, North
                           Carolina, South Carolina, South Dakota, and Washington) had requested
                           and received their second disbursement; eight states (Arkansas,
                           Delaware, Florida, Louisiana, Massachusetts, New Hampshire, New
                           Jersey, and West Virginia) had requested their second disbursement but
                           had not yet received it; and one state, Montana, had requested and
                           received a partial third disbursement. The remaining 38 SSBCI
                           participants were still working to use their first disbursement, as of
                           November 16, 2012.

                           Some states told us that the 2-year time frame is short for disbursing
                           SSBCI funds especially for states with new state small business
                           programs. One state official told us that because their programs are
                           relatively new and lending institutions are unfamiliar with them, the 2-year
                           time frame is too tight for lenders to make informed decisions about
                           participating in the program. Similarly, officials from two states told us that
                           the 2-year time frame for disbursing the SSBCI funds is short because
                           their state small business programs were newly created.

                           According to Treasury officials, Treasury is aware of the 2-year time
                           frame and the potential concerns of the states. After reviewing the law,
                           Treasury officials told us that the Secretary has discretion on whether or
                           not to revoke the undisbursed allocation if it has not been transferred to a
                           participating state as of the 2-year anniversary. According to Treasury
                           officials, they have not drafted a policy or procedures on what actions
                           they may implement if the states miss the 2-year time frame for their final
                           disbursement of funds. However, they told us that the states were
                           encouraged to describe in their applications how they would disburse the
                           funds within the 2-year time frame and that they advised the states of the
                           importance of meeting the 2-year time frame. Moreover, they said that
                           they do not consider the 2-year time frame to be a requirement that funds


                           Page 24                                 GAO-13-76 Small Business Lending Programs
not yet transferred must be deemed unavailable at that time. At an
October 2012 conference attended by many SSBCI participants,
according to Treasury staff, the Deputy Assistant Secretary for Small
Business, Community Development, and Affordable Housing Policy told
the participants that Treasury did not currently plan to exercise this
authority in the near future. However, these statements are not currently
documented in a written or formal policy statement explaining its position.
Treasury staff told us when Treasury develops a policy on its
discretionary authority, it will provide all participants with sufficient lead
time so that they can modify or adjust their programs, as necessary.
Treasury officials told us that the purpose of the Deputy Assistant
Secretary’s conference announcement was to address the concern and
clarify that Treasury would not be taking action at this time if an SSBCI
participant had not met the 2-year requirement and to affirm that Treasury
retains its discretionary authority going forward.

In prior work, we have recommended that when states are required to
spend federal funds to meet a statutory deadline or specific program
requirements, agencies should provide guidance to the states on what
they should expect if they are unable to meet the deadline. 28 The act
provides Treasury’s discretionary authority to encourage the states to use
the funds in a timely manner, but without a formal written policy, how
Treasury would use this authority in a consistent manner is unclear.
Having clear guidelines on how Treasury plans to use its discretionary
authority to terminate funds could help ensure consistent application of
the authority. In addition, such guidelines could help states understand
the need to use the funds in a timely manner while meeting program
requirements and could provide clarity to states about the associated
consequences of not meeting the 2-year time frame.




28
 GAO, Recovery Act: Progress and Challenges in Spending Weatherization Funds,
GAO-12-195 (Washington, D.C.: Dec. 16, 2011) and Recovery Act: States’ and Localities’
Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster
Accountability, GAO-10-604 (Washington, D.C.: May 26, 2010).




Page 25                                    GAO-13-76 Small Business Lending Programs
                            Treasury has established performance measures to manage its programs
Treasury Could              but could enhance its public reporting of program performance
Enhance Its Reporting       information. In its Use of Funds Report, Treasury compared business
                            lending by SBLF participants to that of non-SBLF institutions, but the
of Program                  report does not disclose Treasury’s rationale for choosing its comparison
Performance                 group over other possibly more representative alternatives. Treasury
                            officials told us that they are continuing to consider different approaches
Information                 for evaluating SBLF. In addition, Treasury has designed SSBCI timeliness
                            and outcome performance measures but has not made this information
                            publicly available. Treasury officials are considering different options for
                            presenting this information and said they plan to eventually to make some
                            of it public. However, Treasury has not made any decisions on the
                            specific SSBCI performance information that it might publicly release.
                            Treasury has also taken actions to enhance its communications with
                            SBLF and SSBCI program participants, such as dedicating staff to assist
                            with participants’ inquiries.


Additional Information on   Our review found that SBLF participants had noticeably higher changes in
Treasury’s Methods for      lending rates when compared to similar non-SBLF institutions, but that
Analyzing SBLF Outcomes     Treasury’s methods for analyzing SBLF participants’ lending may
                            somewhat overstate differences between SBLF participants’ lending and
Would Enhance               that of other eligible banks. In our December 2011 report on SBLF, we
Transparency                recommended that Treasury finalize plans for assessing the performance
                            of the SBLF program, including measures that can isolate the impact of
                            SBLF from other factors that affect small business lending. 29 Treasury
                            officials explained to us that they explored different comparison methods
                            that more closely mirror SBLF participants, but this information is not
                            disclosed in its Use of Funds Report to Congress.

                            In its Use of Funds Report, Treasury compared total business lending by
                            SBLF participants to that of a comparison group of non-SBLF institutions
                            and found that SBLF participants had noticeably higher increases in total
                            business lending. In its analysis, Treasury adjusted the comparison group
                            for a number of factors, including an institution’s asset size and
                            geography, thereby excluding institutions that fell outside the asset size
                            range of SBLF participants and that were headquartered in states that did




                            29
                             GAO-12-183.




                            Page 26                               GAO-13-76 Small Business Lending Programs
not have an institution participating in SBLF. 30 Such a comparison is a
helpful step in understanding the possible effects of SBLF funding.
However, Treasury did not adjust its comparison group to better ensure
that its distribution among various asset sizes and states mirrored that of
SBLF participants. Moreover, Treasury did not adjust its comparison
group to account for differences in financial health despite requiring SBLF
applicants to demonstrate a certain degree of financial health before
approving them for funding. For example, the act specifically restricted
Treasury from accepting applications from institutions that were on or
recently removed from the FDIC problem bank list. Because the
comparison group did not exclude such institutions that were unable to
qualify for SBLF funding, these institutions may have downwardly skewed
the group’s small business lending growth rate, thus causing Treasury’s
results to overstate the implied effect of the program. As a result,
Treasury’s analysis seemingly links SBLF funding to the increase in small
business lending when that increase, to some extent, may have been
associated with the factors mentioned above or other factors such as
improved local economic growth.

To analyze the differences in lending between SBLF participants and
non-SBLF institutions, we chose a peer group that we adjusted for
geographical and size distribution as well as financial health. 31 In nearly
every case, the loan growth of our peer group was slightly closer than
Treasury’s comparison group to the loan growth of SBLF participants,
implying that Treasury’s choice not to adjust for these differences may
have resulted in it slightly overstating the differences between these
groups, and by implication, the program’s effect on small business loan




30
  Treasury’s comparison group was comprised of the 6,463 non-SBLF insured depository
institutions that were established prior to September 30, 2009, had total assets between
$7.0 million and $6.4 billion (the range of total assets for SBLF participants) as of March
31, 2011 (the end of the first quarter prior to SBLF participants receiving funding), and are
located in one of the jurisdictions (44 states and the District of Columbia) in which SBLF
participants are headquartered.
31
  We used the Texas Ratio as a proxy for financial health. It is defined as nonperforming
assets plus loans 90 or more days past due divided by tangible equity and reserves. The
Texas Ratio helps determine a bank’s likelihood of failure by comparing its troubled loans
to its capital. Because SBLF funding increases the equity portion of the ratio, we used
Texas Ratios as of March 31, 2011, which was the last quarter preceding the initial
disbursements of SBLF funding.




Page 27                                        GAO-13-76 Small Business Lending Programs
growth. 32 That is, growth rates of SBLF participants remained noticeably
higher than those of our peer group. This growth could indicate a
beneficial effect of SBLF funding on lending, or it could be due to other
factors, including differences between SBLF participants and our peer
group for which we were not able to adjust. When categorizing institutions
by the level of change in their business lending, SBLF participants were
more heavily concentrated in the higher growth categories compared with
the peer and comparison groups (see fig. 6). 33 Moreover, the median
SBLF participant had a 31 percent increase in total business lending,
compared with a 2 percent increase for the comparison group and a 6
percent increase for the peer group.




32
  We replicated Treasury’s comparison group using the methodology it outlined in its Use
of Funds Report. This replication may not be identical to Treasury’s actual comparison
group, but we determined that it was sufficiently similar for the purposes of our analysis. In
all comparisons of total business lending growth between SBLF, peer, and comparison
groups, we calculated the baseline using the average of the four quarters ending June 30,
2010. The data limitation mentioned earlier that required us to use only three quarters in
the calculation of the baseline only applied to the availability of data on small business
loans under $1 million, and the three-quarter baseline was used only in those earlier
sections.
33
  As mentioned earlier, Treasury used total business lending to compare lending between
SBLF participants and the comparison group because qualified small business lending
data were not available for non-SBLF institutions and because qualified small business
lending totaled 95 percent of total business lending for the median SBLF participant as of
December 31, 2011.




Page 28                                        GAO-13-76 Small Business Lending Programs
Figure 6: Distribution of Changes in Total Business Lending, from Baseline Level to
the Quarter Ending June 30, 2012




Further, SBLF participants had a higher median growth rate of total
business lending than both our peer group and Treasury’s comparison
group in all six geographical regions (see fig. 7). Moreover, the peer
group had higher rates of growth than the comparison group in five of the
six regions.




Page 29                                   GAO-13-76 Small Business Lending Programs
Figure 7: Median Changes in Total Business Lending by Geographical Region, from
Baseline Level to the Quarter Ending June 30, 2012




SBLF participants also had a higher median growth rate of total business
lending across all five asset size categories (see fig. 8). Again, the peer
group’s growth rate was slightly closer to that of SBLF participants than
the comparison group was for all five asset groups, yet it remained well
below it. Moreover, SBLF participants in the larger asset categories had
lower growth rates in total business lending. However, the peer and
comparison groups had no noticeable trend across different asset size
groups. In addition, the peer and comparison groups were closest to
SBLF participants among institutions with assets over $1 billion.




Page 30                                 GAO-13-76 Small Business Lending Programs
Figure 8: Median Changes in Total Business Lending by Institution Size in Total
Assets, from Baseline Level to the Quarter Ended June 30, 2012




Treasury officials said that in determining the comparison group to use in
their analysis, they analyzed distributional differences in asset size and
geography between the groups, as well as some indicators of financial
health. They judged that the differences in the variables they analyzed
were modest and believed that adjusting for these differences—that is,
making the comparison group more representative of SBLF participants—
would only provide a limited benefit while making the analysis less
transparent and more difficult for others to replicate. They were also
concerned that using what they considered to be a more judgmental
approach, such as selecting a peer group, would require certain arbitrary
decisions which might raise concerns about the validity of their selection
criteria. As a result, Treasury determined that the differences found in
their analyses did not warrant an approach that would adjust for these
factors.

In addition, although Treasury officials told us they considered but
decided against using a comparison group that would have been adjusted


Page 31                                   GAO-13-76 Small Business Lending Programs
to more closely mirror SBLF participants; they did not explain this
decision in the methodology section of the Use of Funds Report. In prior
work on another Treasury program, we said that Treasury should
enhance its communications relating to financial assistance so that they
are transparent to the Congress and the public. 34 Without disclosing its
rationale for choosing its comparison group over other possibly more
representative alternatives, Treasury may not be providing policymakers
with a full understanding of its approach and may not be transparent
regarding the potential for its analysis to overstate the effects of SBLF.

Treasury’s comparison group analysis in its Use of Funds Report also
does not isolate the impact of SBLF relative to other factors affecting
small business lending to the extent that other approaches would. While a
comparison group is an important step and provides useful context, a
more rigorous analysis of peer banks to help assess what might have
happened without SBLF, as our 2011 report on SBLF recommends, may
help Treasury better understand the effects of the program. Our prior
work on program evaluation suggests that a carefully constructed control
group should be as similar to program participants as possible to help
identify the impact of a program, and a number of statistical methods can
help account for differences. 35 Furthermore, Treasury’s concerns about
making arbitrary judgments in the selection of peers could be addressed
by conducting a sensitivity analysis—a best practice also identified by the
Office of Management and Budget—which involves varying assumptions
to determine how sensitive results are to changes in those assumptions. 36

Treasury officials said they are looking for a way to improve their analysis
of SBLF and they have designed a lending survey to collect information
from SBLF participants on their small business lending and outreach
activities. They said that the survey will help them assess SBLF. The
survey covers the following issues: the participant’s standards for



34
  See GAO, Troubled Asset Relief Program: As Treasury Continues to Exit Programs
Opportunities to Enhance Communication on Cost Exist, GAO-12-229 (Washington, D.C.:
Jan. 9, 2012).
35
  See GAO, Program Evaluation: A Variety of Rigorous Methods Can Help Identify
Effective Interventions, GAO-10-30 (Washington, D.C.: Nov. 23, 2009) and Designing
Evaluations: 2012 Revision, GAO-12-208G (Washington, D.C.: Jan. 2012).
36
  Office of Management and Budget, Circular A-4: Regulatory Analysis, September 17,
2003.




Page 32                                    GAO-13-76 Small Business Lending Programs
                             approving applications for small business loans or credit lines; the
                             demand for small business loans; the participant’s practices regarding
                             approvals of loans and lines of credit for small business; use of SBLF
                             funding or the type of actions the institution has taken because of SBLF
                             funding; and outreach activities to minority, women, and veteran
                             communities. Treasury also leveraged the Federal Reserve’s Senior Loan
                             Officer Opinion Survey on Bank Lending Practices as it developed
                             questions for the survey and is exploring how it may analyze results from
                             both surveys to assess SBLF. Responses were due from the SBLF
                             participants by October 4, 2012. Treasury plans to issue the results in a
                             report at a later date.


Treasury Has Developed       In our December 2011 SSBCI report, we recommended that Treasury
Performance Indicators for   develop and finalize SSBCI-specific performance measures for evaluating
SSBCI                        the effectiveness of the program and when developing these measures
                             consider key attributes of successful performance measures. 37 In
                             response to the recommendation, Treasury developed measures for both
                             the timeliness of program administration and program performance. In
                             establishing measures on timeliness, Treasury considered its own role in
                             administering the program, which includes evaluating the eligibility of the
                             participating states and approving state programs; overseeing compliance
                             with the provisions of the act, the SSBCI policy guidelines, and the terms
                             and conditions of the Allocation Agreement; and providing ongoing
                             technical assistance for each state’s and municipality’s program
                             implementation. According to Treasury, the timeliness measures will
                             assess the quality of the direction provided by Treasury to the states,
                             including the efficiency of Treasury’s administration of program resources
                             and program oversight. These goals for these measures are

                             •     90 percent of requests for modifications to Allocation Agreements are
                                   approved or rejected within 90 days of receiving a final submission,
                             •     90 percent of requests for subsequent disbursements under existing
                                   Allocation Agreements are approved or rejected within 90 days of
                                   receipt of a formal submission, and
                             •     90 percent of quarterly reports received within 5 days of the deadline.




                             37
                                 GAO-12-173.




                             Page 33                                 GAO-13-76 Small Business Lending Programs
According to Treasury staff, for the first two goals, the measurement
period starts once Treasury has received all documentation required by
the established procedures for each underlying activity from the state
requesting a modification or disbursement. Treasury staff advised us that
these measures are tracked continuously and that Treasury reports the
12-month data to the Office of Management and Budget annually as part
of SSBCI’s annual budget submission, which should be publicly available.

In addition, Treasury has developed measures for evaluating
performance for SSBCI:

•   amount of SSBCI funds used over time, as reported on SSBCI
    quarterly reports;
•   volume and dollar amount of loans or investments supported by
    SSBCI funds, as reported on SSBCI annual report;
•   amount, in dollars, of private-sector leverage in SSBCI annual reports;
    and
•   estimated number of jobs created or retained in SSBCI annual
    reports.

Although Treasury has established measures for SSBCI performance,
Treasury is considering how it will use these program performance
indicators for evaluating the overall progress of SSBCI. Treasury staff
recognized that performance indicators can help policymakers
understand the results of the policy, but they emphasized that they do not
have a full year of SSBCI data to use in evaluating the program. Many
states did not receive their first SSBCI allocation until late 2011 and thus,
Treasury had limited data to evaluate SSBCI. For example, Treasury told
us that only 23 states reported using SSBCI funds to support small
business loans or investments as of December 31, 2011. Treasury
officials told us that after they have received the 2012 annual report data
in early 2013, which would constitute a full year of SSBCI funds for almost
all participants, they will be able to decide how they will review and
analyze the performance measures going forward.

In addition, Treasury explained that SSBCI’s performance cannot be
evaluated using a single number or performance indicator because
SSBCI consists of 140 different programs, and most states have multiple
small business programs. For instance, Treasury has not created a
specific number of estimated jobs as a target because so many factors
can determine the use of funds—for example, the degree of interest by
financial institutions and private investors, the performance of the state
agency and any contractors that operate the approved program, and the



Page 34                                GAO-13-76 Small Business Lending Programs
                       effectiveness of the program features designed by the state. How this
                       program activity affects the level of employment in a state introduces
                       many variables that can be difficult to predict. According to Treasury
                       officials, specific numeric indicators, such as the number of loans
                       resulting from state business programs, may or may not be indicative of
                       the performance of SSBCI. In analyzing performance outcomes for
                       SSBCI, Treasury staff advised us that outcomes are highly dependent on
                       factors outside of the program’s control, such as the demand for credit in
                       a given locality and the quality of the small business borrowers’ requests
                       for such funds. Also, the states have different economies that may affect
                       the results of the SSBCI funds. For example, Michigan’s SSBCI funds are
                       more concentrated in manufacturing, while other states may be more
                       focused on providing assistance to small technological firms.


Information on SSBCI   In contrast to SBLF, the act does not require Treasury or the states and
Performance Measures   municipalities to report to Congress or the public on the status of SSBCI.
May Be Useful for      Rather, the act requires that SSBCI participants include certain data, such
                       as the number and the dollar amounts of the loans resulting from SSBCI
Stakeholders           funds, in annual reports to Treasury. Treasury’s performance measures
                       will rely on the data from these annual reports. Treasury officials told us
                       that they are considering making public some of the SSBCI performance
                       data, but have not decided what specific SSBCI information will be
                       released publicly or how it will be presented because they want to make
                       sure the information reflects the outcomes in an appropriate context. As
                       noted earlier, SSBCI covers a large number of programs across the
                       country and other factors, such as local demand for credit, could lead to
                       different performance outcomes across the participating states. Officials
                       told us they plan to decide after they receive and review the 2012 annual
                       reports. The GPRA Modernization Act (GPRAMA) requires agency
                       performance information to be publicly available. 38 In reporting on the
                       governmentwide implementation of GPRAMA in 2011, we noted that
                       agencies need to consider the differing needs of various stakeholders,
                       including Congress, to ensure that performance information will be both
                       useful and used. 39 We reported that federal officials must understand how



                       38
                        Pub. L. No. 111-352, 124 Stat. 3866 (2011).
                       39
                         See, GAO, Managing for Results: GPRA Modernization Act Implementation Provides
                       Important Opportunities to Address Government Challenges, GAO-11-617T (Washington,
                       D.C.: May 10, 2011).




                       Page 35                                    GAO-13-76 Small Business Lending Programs
                         the performance information they gather can be used to provide insight
                         into the factors that impede or contribute to program successes; to
                         assess the effect of the program; or to help explain the relationships
                         between program inputs, activities, outputs, and outcomes.

                         Information on SSBCI’s performance measures regarding the amount of
                         small business loans or investments and the amount of private leveraging
                         resulting from SSBCI funds would provide Congress and SSBCI
                         participants with useful information on the progress of SSBCI and its
                         effectiveness in increasing small business lending. For example, two
                         states told us that they would like more information on the performance
                         measures of the other states’ programs in order to better implement their
                         own programs. Making the 2012 performance outcome data publicly
                         available may assist the participating states in identifying successful small
                         business state programs and the level of private leveraging that the states
                         have achieved at this point in the SSBCI program. SSBCI applications
                         were required to demonstrate a reasonable expectation that the programs
                         would achieve a 10:1 ratio of new small business lending to SSBCI funds
                         within specified timeframes. Information on the progress of SSBCI
                         programs may help participating states to make necessary adjustments to
                         their programs to more efficiently and effectively use their entire allocation
                         of SSBCI funds.


Treasury Has Taken
Actions to Enhance
Communications with
SBLF and SSBCI Program
Participants

SBLF                     Treasury has taken steps to address our December 2011
                         recommendation that it apply lessons learned from the SBLF application
                         review process in order to improve how it communicates with program
                         participants and other stakeholders, such as the bank regulators and
                         Congress. 40 In response to the recommendation, Treasury officials told us
                         that they have enhanced their communication strategy with SBLF
                         participants and stakeholders and that they are better positioned to



                         40
                          GAO-12-183.




                         Page 36                                GAO-13-76 Small Business Lending Programs
        respond to questions about SBLF. Shortly after the application review and
        approval period ended, Treasury assigned points of contact for each of
        the SBLF participants. Each point of contact was responsible for
        responding to inquiries from a designated group of participants and
        generally helping to ensure that the participants understood the
        compliance and reporting requirements. As the volume of inquiries has
        declined, Treasury shifted to a more centralized approach for handling
        inquiries. For example, all inquiries from SBLF participants are submitted
        to a centralized e-mail system, and they are then assigned to the staff
        responsible for (1) compliance, (2) investment management, and (3)
        operations. Compliance staff address questions about the Securities
        Purchase Agreements and the quarterly reports, and the reporting of
        qualified small business lending and the investment rates paid by SBLF
        participants. Investment management responds to inquiries relating to
        acquisitions and mergers and operations handle questions about
        redemption of SBLF shares and dividend payments. In addition, Treasury
        has assigned a staff member to handle external communications with
        Congress, the media, and the general public, including the reporting of
        qualified small business and the investment rates paid by SBLF
        participants. According to Treasury officials, they also communicate with
        industry and trade associations. Other communication methods
        established by Treasury included a webinar for instructing SBLF
        participants on completing the quarterly reports. Treasury staff told us that
        the purpose of the webinars was to reduce the number of errors in the
        quarterly reports.

        In addition, on September 28, 2012, Treasury finalized written procedures
        to provide guidelines for answering inquiries to provide for consistency,
        continuity, and validity in communications with SBLF participants and
        their representatives. The guidelines describe the process by which a
        contact manager or staff member will communicate with SBLF
        participants. The process steps include the tracking and handling of
        incoming inquiries, outgoing mass communications, periodic reviews by
        business lines for potential Frequently Asked Questions, and the control
        manager’s reviews of control effectiveness. The procedures outline the
        communication roles and responsibilities of SBLF employees, the contact
        manager, and management.

SSBCI   SSBCI has also developed communication mechanisms to assist states
        in developing and implementing their state small business programs.
        Treasury has assigned three relationship managers whose role is to work
        with an assigned group of states in successfully allocating the funds to
        lenders and subsequently to borrowers. Moreover, Treasury has assigned


        Page 37                                GAO-13-76 Small Business Lending Programs
              a consultant for three states that requested additional technical expertise
              in implementing their small business programs. Additionally, according to
              Treasury officials, Treasury has engaged a consultant to assist in
              educating lenders nationwide about the approved state programs and two
              consultants to assist with expertise in state-run venture capital to support
              SSBCI staff in providing technical assistance to state program managers

              In addition to the relationship managers and consultants, Treasury has
              held two conferences for communicating with SSBCI participants. Under
              the act, Treasury is generally required to disseminate best practices to
              the states, and Treasury staff view the conferences as one method of
              doing so. The SSBCI National Standards for Compliance and Oversight
              are another example of disseminating best practices. According to
              Treasury staff, conferences provide state officials with the opportunity to
              discuss their programs with peers that are running similar programs and
              can potentially make modifications to their applications. During the March
              2012 conference, states received information on the different types of
              small business programs, lenders, and Treasury assistance. The
              conference agenda showed that several panels were held. Generally, the
              panels consisted of state officials, who discussed their small business
              programs, such as the Loan Participation Program and the Venture
              Capital Program. In addition, four banks participated in the panels.
              Training sessions were held during the conference on the National
              Compliance Standards, on requests for modifications to the Allocation
              Agreements, and on subsequent disbursement requests of SSBCI funds.
              Officials from two states we interviewed told us that they found the March
              2012 conference helpful. For example, one official stated that she found
              the conference assisted her in answering questions on compliance and
              on SSBCI small business programs. Treasury held a similar conference in
              early October 2012.


              SBLF and SSBCI officials have made progress in developing procedures
Conclusions   to monitor participants’ compliance. In response to our previous
              recommendation on SBLF monitoring, Treasury has developed
              procedures for monitoring SBLF participant compliance with legal and
              reporting requirements. Treasury also issued the standards for
              compliance to provide states with best practices for reviewing
              participants’ compliance with SSBCI’s legal and policy requirements and
              developed procedures for sampling transaction-level data to evaluate the
              accuracy of the states’ annual reports.




              Page 38                               GAO-13-76 Small Business Lending Programs
Most SSBCI participants have only received the first of three
disbursements of their full allocation approved by Treasury, and some
participants were concerned that they may have difficulty using the funds
in time to meet the requirements to get their third and final allocation
within 2 years. SSBCI participants lack a clear understanding of what
actions Treasury plans to take if they do not meet the 2-year time frame.
Although a Treasury official has publicly indicated that Treasury does not
currently plan to exercise the authority to terminate funds that have not
been allocated within 2 years from the states’ approval date, it retains the
authority to do so in the future. Treasury has yet to develop a formal
written policy or guidance explaining its position. Clear and specific
guidelines on how Treasury plans to use this authority to terminate funds
will help ensure Treasury is consistent in how it applies this authority and
may further encourage participants to develop programs and approaches
to use the funds in a timely manner. Moreover, such a policy could also
facilitate the ongoing communication between Treasury and the
participants on how best to allocate and use the funds.

Treasury has taken some steps to evaluate the performance of SBLF and
the extent to which SBLF participants are increasing their small business
lending, but further refinements could provide a better assessment of the
effectiveness of SBLF. As we found in our December 2011 SBLF report,
Treasury has yet to finalize plans for assessing the performance of the
program, including measures that can isolate the impact of SBLF from
other factors that affect small business lending. As we found in Treasury’s
analysis as well as our own, SBLF participants appear to be increasing
their small business lending since entering the program. However, as we
recommended in our 2011 report, many factors can contribute to such
increases, and Treasury should assess these trends taking other factors
into account. While Treasury compared SBLF participants to non-SBLF
institutions and reported this analysis in its Use of Funds Report, it did not
provide important information on why it selected the comparison group
that it used rather than using a peer group more closely matched to the
SBLF participants. Our own analysis using a peer group showed that
SBLF participants had increased their lending compared to peers, but
also showed that the difference in small business lending growth was
somewhat smaller than what Treasury’s analysis suggests. The lack of
explanation for Treasury’s approach in the Use of Funds Report could
create confusion about the rigorousness of the comparison. Furthermore,
a more transparent description of the methodological decisions would
help to enhance the transparency of the information reported. In addition,
as we recommended in the 2011 report, Treasury should include in its
plans for assessing the program a more robust evaluation that controls for


Page 39                                GAO-13-76 Small Business Lending Programs
                      factors that affect small business lending, such as improved local
                      economic growth. Without such an evaluation, policymakers, including
                      Congress, may not have the information they need to assess whether the
                      SBLF approach of using capital injections is a desirable policy option for
                      increasing small business lending. Furthermore, a more transparent
                      description of the methodological decisions would help to enhance the
                      transparency of the information reported.

                      In addition, as we recommended last year, Treasury has created
                      performance indicators to help monitor and measure the effectiveness of
                      SSBCI. However, Treasury has not yet determined how and when it will
                      make this information public. Treasury officials acknowledged the
                      importance of this information for policymakers and have said they hope
                      to develop a method for sharing this information publicly after they have
                      had time to review the second annual reports that will be completed by
                      the states next year. While we recognize that it is still early in the program
                      and results vary greatly across the program participants for a variety of
                      reasons, performance information is an important tool for policymakers,
                      particularly as Congress reviews and considers programs to assist small
                      businesses going forward. In addition, making this information public in a
                      timely manner may help program participants, who could observe how
                      their peers are performing and use this information to help them improve
                      their own programs.


                      We recommend that the Secretary of the Treasury take the following
Recommendations for   three actions:
Executive Action
                      •   To help ensure that Treasury is transparent and accountable in its
                          decision making, Treasury should develop a written policy explaining
                          how it will use the Secretary’s discretionary authority to terminate the
                          availability of allocated funds to SSBCI participating states if funds
                          have not been transferred to the participant by the end of the 2-year
                          period beginning on the date that the Secretary approved the state for
                          participation.

                      •   To enhance the transparency of its reporting on SBLF, Treasury
                          should expand its methodology discussion in its Use of Funds Report
                          to include the rationale for its methodology and alternative
                          methodologies it considered.

                      •   To provide Congress and the participating states with information on
                          the progress of SSBCI, Treasury should make information publicly



                      Page 40                                GAO-13-76 Small Business Lending Programs
                         available on its performance indicators measuring SSBCI’s
                         performance.

                     We provided a draft of this report to Treasury for review and comment.
Agency Comments      The Deputy Assistant Secretary for Small Business, Community
and Our Evaluation   Development, and Affordable Housing Policy provided written comments,
                     which are reprinted in appendix II. Treasury also provided technical
                     comments on the draft report, which we incorporated as appropriate. In
                     the written comments, Treasury agreed with the three recommendations
                     and stated that it has begun to take steps to implement each of them.
                     Specifically, Treasury said it has begun to develop a written policy for
                     exercising its discretion to terminate any portion of a state’s allocation not
                     yet transferred to the state after two years. Treasury said it also will
                     include the rationale for Treasury’s methodology along with alternative
                     methodologies that were considered in the methodology section of the
                     next Use of Funds Report and that work is underway on publishing
                     performance indicators that measure SSBCI outcomes. Treasury noted
                     that the report reflected the progress SBLF and SSBCI had made in
                     setting up compliance procedures and taking steps to improve
                     communication with program participants. Treasury also stated that both
                     programs are working as intended and that it expects both programs to
                     continue to promote lending to small businesses.


                     We are sending copies of this report to the appropriate congressional
                     committees and Treasury. The report also is available at no charge on the
                     GAO website at http://www.gao.gov. If you or your staff members have
                     any questions about this report, please contact Daniel Garcia-Diaz at
                     (202) 512-8678 or garciadiazd@gao.gov. Contact points for our Offices of
                     Congressional Relations and Public Affairs may be found on the last page
                     of this report. GAO staff who made major contributions to this report are
                     listed in appendix III.




                     Daniel Garcia-Diaz
                     Acting Director
                     Financial Markets and Community Investment



                     Page 41                                GAO-13-76 Small Business Lending Programs
List of Committees

The Honorable Debbie Stabenow
Chairwoman
The Honorable Pat Roberts
Ranking Member
Committee on Agriculture, Nutrition, and Forestry
United States Senate

The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate

The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Kent Conrad
Chairman
The Honorable Jeff Sessions
Ranking Member
Committee on the Budget
United States Senate

The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate

The Honorable Mary L. Landrieu
Chairman
The Honorable Olympia J. Snowe
Ranking Member
Committee on Small Business and Entrepreneurship
United States Senate


Page 42                              GAO-13-76 Small Business Lending Programs
The Honorable Frank Lucas
Chairman
The Honorable Collin Peterson
Ranking Member
Committee on Agriculture
House of Representatives

The Honorable Harold Rogers
Chairman
The Honorable Norman D. Dicks
Ranking Member
Committee on Appropriations
House of Representatives

The Honorable Paul Ryan
Chairman
The Honorable Chris Van Hollen
Ranking Member
Committee on the Budget
House of Representatives

The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Sam Graves
Chairman
The Honorable Nydia Velazquez
Ranking Member
Committee on Small Business
House of Representatives

The Honorable Dave Camp
Chairman
The Honorable Sander Levin
Ranking Member
Committee on Ways and Means
House of Representatives




Page 43                           GAO-13-76 Small Business Lending Programs
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              Our objectives were to examine: (1) the status of the U.S. Department of
              the Treasury’s (Treasury) efforts to monitor participants’ compliance with
              program requirements under the Small Business Lending Fund (SBLF)
              and the State Small Business Credit Initiative (SSBCI); (2) the status of
              SBLF and SSBCI participants’ small business lending; and (3) the extent
              to which Treasury evaluates and communicates SBLF and SSBCI
              program outcomes.

              To examine the status of Treasury’s efforts to monitor participants’
              compliance with program requirements under SBLF and SSBCI, we
              analyzed Treasury’s documentation. For SBLF, we reviewed and
              analyzed SBLF’s Participant Compliance Monitoring Procedures, which
              were issued on September 28, 2012. We interviewed Treasury officials on
              their compliance program and the process by which staff review the
              Quarterly Supplemental Reports for their accuracy.

              For SSBCI, we reviewed SSBCI National Standards for Compliance and
              Oversight and SSBCI Policy Guidelines. We reviewed the Allocation
              Agreements between Treasury and nine participating states that we
              interviewed to analyze the conditions and the requirements placed on the
              states. We interviewed Treasury officials on implementing the SSBCI
              compliance standards and officials from the states of Colorado, Florida,
              Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, and
              Texas. We judgmentally selected these nine states based on the
              following criteria: (1) the top 25 states awarded the most SSBCI funds; (2)
              geographical diversity; (3) states with at least two small business
              programs; (4) states that began using funds as of March 31, 2012, and
              states that had not yet used funds for any loans or investments as of
              March 31, 2012; and (5) avoiding states which have been reviewed
              previously by GAO or the Treasury’s Office of the Inspector General.
              Because a large number of states had not spent their first allocation as of
              December 31, 2011, we used both the 2011 Annual Report and the
              Quarterly Report for March 31, 2012, to identify states’ progress in
              allocating their funds. In terms of geographical diversity, we selected at




              Page 44                               GAO-13-76 Small Business Lending Programs
Appendix I: Objectives, Scope, and
Methodology




least two states from each of four regions: Midwest, Northeast, South,
and West. 1

To determine the status of SBLF, we reviewed the SBLF Use of Funds
Reports to determine the most current level of qualified small business
lending and the distribution of dividend or interest rates paid by program
participants. Because Treasury requires only SBLF participants to submit
data on qualified small business lending—generally, lending below $10
million— we also analyzed total business lending as well as small
business loans under $1 million, which is available through the Call
Reports. 2 We accessed the Call Report data using SNL Financial—a
private financial database that contains publicly filed regulatory and
financial reports—and analyzed lending by SBLF participants for the
quarter ending June 30, 2012. The Small Business Jobs Act of 2010 (the
act) establishes the baseline for measuring the change in small business
lending as the average of the amounts that were reported for each of the
four calendar quarters ended June 30, 2010. Call Reports did not begin
requiring quarterly reporting of small business loans under $1 million until
the second quarter of this four quarter baseline period. Accordingly, we
calculated the baseline for small business loans under $1 million using
the average of each of the three calendar quarters ended June 30, 2010.
The act also defines one of the categories of qualified small business
lending as owner-occupied nonfarm, nonresidential real estate loans. For
quarterly reports of small business lending, Call Reports use a broader
category of all nonfarm, nonresidential real estate without a distinction for
owner occupancy. As a result, the small business loans under $1 million
include the broader category. The total business lending numbers use the
full baseline and the narrower categorization of owner-occupied nonfarm,
nonresidential real estate and should therefore not be compared to the


1
 The Midwest region includes: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota,
Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. The Northeast
region includes: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New
York, and Pennsylvania. The South region includes: Alabama, Arkansas, Delaware,
District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North
Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. The
West region includes: Arizona, California, Colorado, Idaho, Montana, Nevada, Utah,
Oregon, Washington, and Wyoming.
2
 Call Reports require reporting only on loans up to $500,000 for two of the loan
categories—loans to finance agricultural production and loans secured by farmland. The
$1 million threshold still applies to the other two categories—commercial and industrial
loans and nonfarm, nonresidential real estate loans.




Page 45                                      GAO-13-76 Small Business Lending Programs
Appendix I: Objectives, Scope, and
Methodology




numbers for small business loans under $1 million. We assessed the
reliability of these data, for example, by analyzing missing data and
performing various logic tests and determined that the data were
sufficiently reliable for the purpose of reporting on SBLF lending.

To review SSBCI participants’ small business lending, we collected and
reviewed data from the Quarterly Report as of June 30, 2012—the most
recent quarter available. We conducted data reliability checks on the
SSBCI quarterly data for the dollar amounts transferred to the states and
the dollar amounts used by each participating state to identify any
potential discrepancies in the data. We interviewed Treasury officials on
how they assessed these data. In addition, we verified with three states
the data that they had sent to Treasury on the SSBCI Quarterly Report as
of June 30, 2012. We also interviewed state and Treasury officials about
the status of the use of SSBCI funds and Treasury’s authority to suspend
disbursements to SSBCI participants. Based on these steps, we
determined that the data collected by Treasury for SSBCI were
sufficiently reliable for the purpose of reporting total amounts of funds
allocated and used by the states.

To examine the extent to which Treasury evaluates and communicates
SBLF and SSBCI program outcomes, we reviewed Treasury
documentation for both programs. For determining the extent to which
Treasury evaluates the performance of SBLF, we reviewed the Use of
Funds Report to evaluate the methodology Treasury used to assess the
performance of SBLF participants against a comparison group of
institutions that did not participate in SBLF. We interviewed Treasury
officials to understand the process for developing the comparison group
as well as the alternatives they considered. We used the methodology in
the report to replicate Treasury’s group for our analysis. To help
understand the usefulness of the comparison group, we also chose a
peer group of non-SBLF institutions that we adjusted for geographical and
size distribution as well as financial health, using the Texas Ratio as a
proxy. 3 To select the peer group, we started with our replication of
Treasury’s comparison group of 6,175 institutions and categorized them



3
 The Texas Ratio is defined as nonperforming assets plus loans 90 or more days past due
divided by tangible equity and reserves. It helps determine a bank’s likelihood of failure by
comparing its troubled loans to its capital. Because SBLF funding increases the equity
portion of the ratio, we used Texas Ratios as of March 31, 2011, which was the last
quarter preceding the initial disbursements of SBLF funding.




Page 46                                        GAO-13-76 Small Business Lending Programs
Appendix I: Objectives, Scope, and
Methodology




into six asset-size groups. We then sorted the institutions by state, asset
group, and Texas Ratio and generally assigned two peer institutions to
each SBLF participant with the closest Texas Ratios, within the same
state and asset group. In some cases, we had to make judgments in
choosing the peers—for example, when two SBLF participants were
similar to one another and when too few potential peers existed. We
determined that any potential judgment factors were mitigated by the fact
that the peer group mirrored the SBLF more closely than the comparison
group across geographical and size distribution as well as financial health
(see table 1). Consistent with the Use of Funds Report, we analyzed the
growth in total business lending because qualified small business lending
data were not available for non-SBLF institutions and because qualified
small business lending totaled 95 percent of total business lending for the
median SBLF participant as of December 31, 2011. Here we calculated
the baseline using the average of the four quarters ending June 30, 2010.
The data limitation mentioned earlier that required us to use only three
quarters in the calculation of the baseline only applied to the availability of
small business lending data, and the three-quarter baseline was used
only in those earlier sections. We compared our peer group with
Treasury’s comparison group and compared both to SBLF participants.
We also compared Treasury’s analysis against our previous work on
program evaluation as well as best practices identified by the Office of
Management and Budget. In assessing the SBLF communication
process, we reviewed and analyzed SBLF’s Contact Management
Procedures and interviewed Treasury officials on how they communicated
with SBLF participants.




Page 47                                 GAO-13-76 Small Business Lending Programs
                                           Appendix I: Objectives, Scope, and
                                           Methodology




Table 1: Summary Data on SBLF Participants, GAO’s Peer Group, and Treasury’s Comparison Group

                                                                                        SBLF                    GAO              Treasury
                                                                                 participants             peer group     comparison group
Number of institutions                                                                        267                 503                 6,175
Small business lending growth, under $1 million (median)                                    14.4%                 N/A                   N/A
Total business lending growth (median)                                                      31.0%               6.1%                   2.2%
Assets (median)                                                                       $356,082               $356,687              $155,354
Texas Ratio (median)                                                                        15.74               17.29                 18.21
Southeast                                                                                    23%                 23%                   19%
West                                                                                         12%                 11%                     7%
Southwest                                                                                    15%                 15%                   16%
Northeast                                                                                     6%                  6%                     3%
Mid-Atlantic                                                                                 15%                 15%                     7%
Midwest                                                                                      29%                 31%                   48%
                                           Source: GAO analysis of Treasury and SNL data.


                                           For determining the extent to which Treasury evaluates SSBCI
                                           performance outcomes, we collected and reviewed the performance
                                           measures that Treasury developed for evaluating SSBCI. We interviewed
                                           Treasury officials on how they were planning to use the performance
                                           outcome measures in evaluating SSBCI. We also interviewed officials
                                           from the same nine states we described earlier—Colorado, Florida,
                                           Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, and
                                           Texas—to collect information on their evaluation and the performance
                                           information they reviewed relating to SSBCI. To analyze the
                                           communication of SSBCI performance outcomes, we reviewed the
                                           relevant provisions of the Small Business Jobs Act of 2010 and
                                           Treasury’s outreach information that they had drafted for the states, such
                                           as conference materials.

                                           We conducted this performance audit from March 2012 to December
                                           2012 in accordance with generally accepted government auditing
                                           standards. Those standards require that we plan and perform the audit to
                                           obtain sufficient, appropriate evidence to provide a reasonable basis for
                                           our findings and conclusions based on our audit objectives. We believe
                                           that the evidence obtained provides a reasonable basis for our findings
                                           and conclusions based on our audit objectives.




                                           Page 48                                                  GAO-13-76 Small Business Lending Programs
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of the Treasury



of the Treasury




             Page 49                                     GAO-13-76 Small Business Lending Programs
Appendix II: Comments from the Department
of the Treasury




Page 50                                     GAO-13-76 Small Business Lending Programs
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Daniel Garcia-Diaz, (202)-512-8678, garciadiazd@gao.gov
GAO Contact
                  In addition to the individual named above, Kay Kuhlman (Assistant
Staff             Director), Pamela Davidson, Nancy Eibeck, Chris Forys, Michael
Acknowledgments   Hoffman, Jonathan Kucskar, Marc Molino, Jennifer Schwartz, and Jena
                  Sinkfield made key contributions to this report.




(250665)
                  Page 51                               GAO-13-76 Small Business Lending Programs
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