C-Suite Wednesday – OIG Warns of Potential Risks to 7(a) Program

March 22, 2023

Delaney Sexton
Contributing Editor

C-Suite Wednesday – OIG Warns of Potential Risks to 7(a) Program

The Inspector General prepared a white paper to report on the 7(a) loan program’s performance during the pandemic and the possible risks that could affect the management of the program.

According to the report, the average 7(a) loan amount increased by 28% in fiscal year 2021 from the average loan amount in 2020. The total 7(a) loan portfolio saw a substantial increase of 62% from fiscal year 2020 to 2021. Also in fiscal year 2021, default and charge-off rates were 1.02% and 0.15% respectively. This is a significant drop compared to the default rates (9.04%) and charge-off rates (4.75%) in fiscal year 2018.

While the 7(a) program experienced growth, small businesses had access to relief payments, deferred payments, and other financial support through pandemic-related SBA programs. This likely contributed to the lower rates of defaults and charge-offs.

Since the base prime rate has seen recent hikes, variable interest rates for the 7(a) program have also increased. The rise in interest rates along with other economic conditions could increase risk and SBA’s liability.

Further, the Oversight staff has decreased by 38%. This reduction in resources could impact the SBA’s fiscal year 2023 goals for oversight reviews which ensure lender compliance with 7(a) rules and regulations. To reduce potential financial losses and maintain the program’s integrity, the report states that “SBA should consider potential risks related to higher loan amounts, rising interest rates, staffing shortages, delayed defaults, and charge-offs in its 7(a) program risk strategy.”

“Management stated that as of December 31, 2022, the 7(a) loan program performance metrics were stable and depicted low risk and strong portfolio performance. They acknowledged that the lasting impact of the relief payments, the effects of the higher loan amounts, and rising interest rates were unknown,” reads the report.

Source:
OIG – White Paper