SBA OIG Report 26-14: Small Business Lending Companies’ Performance in the 7(a) Loan Program and SBA’s Oversight (Sept. 17, 2026)
Summary
Evaluation Report 26-14 from the U.S. Small Business Administration Office of Inspector General, dated September 17, 2026, on Small Business Lending Companies' (SBLC) performance in the 7(a) loan program and SBA's oversight. It states that from fiscal years (FY) 2016 to 2023, SBLCs approved and disbursed 11,068 7(a) loans, totaling $9.5 billion. As of March 31, 2025, the SBLC default rate was 14.97 percent compared to 9.79 percent for other lender types, and the early default rate was 5.38 percent compared to 2.62 percent. The report says the Office of Credit Risk Management (OCRM) has not conducted safety and soundness examinations of SBLCs since April 4, 2023. It makes three recommendations; SBA management agreed with Recommendations 1 and 3 and partially agreed with Recommendation 2.
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“SBA OIG Report 26-14: Small Business Lending Companies’ Performance in the 7(a) Loan Program and SBA’s Oversight (Sept. 17, 2026).”
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U.S. SMALL BUSINESS ADMINISTRATION OFFICE OF INSPECTOR GENERAL
Small Business Lending Companies’
Performance in the 7(a) Loan Program
and SBA’s Oversight
Evaluation Report
Report 26-14
September 17, 2026
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U.S. Small Business Administration
Office of Inspector General
EXECUTIVE SUMMARY
Small Business Lending Companies’ Performance in the 7(a)
Loan Program and SBA’s Oversight (Report 26-14)
What OIG Reviewed While OCRM monitored SBLCs’ 7(a) loan
A Small Business Lending Company (SBLC) is a portfolio performance, it did not sufficiently
non‐depository lending institution the Small assess the root cause of the SBLCs’ loan
portfolio underperformance, related to default
Business Administration (SBA) licenses and
rates, to mitigate the risk of loans made by
authorizes to make 7 (a) loans. From fiscal years
SBLCs continuing to underperform.
(FY) 2016 to 2023, SBLCs approved and
disbursed 11,068 7(a) loans, totaling $9.5 billion. In addition, although OCRM reviewed SBLCs’
As of April 5, 2025, there were 16 SBLC licenses. compliance with program requirements, our
SBA’s Office of Credit Risk Management (OCRM) evaluation found that the two SBLCs accounting
monitors and supervises SBLCs and oversees for more than 80 percent of SBLCs’ defaults and
their performance in the 7(a) loan program by early defaults continued to have repeated
performing lender portal data analysis, risk- categories of deficiencies across multiple years.
based reviews, and safety and soundness exams. OCRM’s monitoring procedures were not
sufficient to ensure SBLCs implemented
Our objective was to assess SBLCs’ performance appropriate corrective actions to mitigate the
in the 7(a) loan program and SBA’s oversight of risk of similar future loan deficiencies and
SBLCs to ensure program integrity and mitigate financial loss.
financial loss.
Lastly, we noted that OCRM has not conducted
What OIG Found safety and soundness examinations of SBLCs
Opportunities exist for SBA to improve SBLCs’ since April 4, 2023, due to contractual issues.
7(a) loan portfolio performance and its oversight Insufficient oversight of SBLCs increases the risk
of SBLCs. Our analysis of 7(a) loans approved of financial loss and could negatively impact
and disbursed from FYs 2016 to 2023 identified program integrity.
that loans made by SBLCs significantly
What OIG Recommended
underperformed, related to default rates,
compared to loans made by other lender types. We made three recommendations to improve
Additionally, early defaults increased SBLCs’ 7(a) loan portfolio performance and
substantially for loans made by SBLCs during this SBA’s oversight of SBLCs.
same period. Agency Response
As of March 31, 2025, SBLCs’ 7(a) loan portfolio SBA management agreed with
default rate was 14.97 percent compared to Recommendations 1 and 3 and partially agreed
9.79 percent for other lender types (53 percent with Recommendation 2. Management’s
higher). Similarly, the early default rate for 7(a) planned actions satisfy the intent of
loans made by SBLCs was 5.38 percent, more Recommendations 1, 2, and 3.
than double the 2.62 percent early default rate
for loans made by other lender types.
Contents
Introduction .................................................................................................................................................. 1
Background ............................................................................................................................................. 1
Objective ................................................................................................................................................. 2
Results ........................................................................................................................................................... 2
Finding 1: SBLCs’ 7(a) Loan Portfolio Underperformance ....................................................................... 2
SBLCs’ 7(a) Loan Portfolio Default Rates Compared to Other Lender Types .................................... 3
SBLCs’ 7(a) Loan Portfolio Performance in the 7(a) Loan Program .................................................. 5
Recommendation ................................................................................................................................... 7
Finding 2: SBA’s Oversight of SBLCs Needs Improvement ...................................................................... 7
Recommendation ................................................................................................................................. 10
Other Matter: Safety and Soundness Examinations ............................................................................. 11
Recommendation ................................................................................................................................. 12
Evaluation of Agency Response ................................................................................................................... 12
Summary of Actions Necessary to Close Recommendations ................................................................ 13
Tables
Table 1: SBLCs’ 7(a) Loan Approvals and Performance from FYs 2016 to 2023 ............................................ 5
Table 2: Repeated Categories of Deficiencies for the Two SBLCs .................................................................. 8
Figures
Figure 1: 7(a) Loan Default Rates for SBLCs and Other Lender Types from FYs 2016 to 2023 ...................... 3
Figure 2: 7(a) Loan Early Default Rates for SBLCs and Other Lender Types from FYs 2016 to 2023 ............. 4
Appendices
Appendix 1: Scope and Methodology......................................................................................................... 1-1
Appendix 2: Agency Response.................................................................................................................... 2-1
i
Introduction
This report presents the results of our evaluation of Small Business Lending Companies’ (SBLC)
performance in the 7(a) loan program and the U.S. Small Business Administration’s (SBA)
oversight of SBLCs.
Background
An SBLC is a non‐depository lending institution the SBA licenses and authorizes to make loans
pursuant to Section 7(a) of the Small Business Act. An SBLC license allows the lending company
to use government guarantees when underwriting small business loans to reduce the level of risk
to the lender and cost to the borrower. SBLCs are positioned to make a higher volume of loans
to small businesses because of the government guarantee and are:
• Supervised and examined solely by SBA at the federal level;
• Subject to additional SBA loan program requirements including, but not limited to,
regulations specific to SBLCs regarding formation, capitalization, and enforcement
actions; and
• Subject to all other 7(a) loan program requirements including, but not limited to, those
specific to origination, servicing, and liquidation.
On January 4, 1982, SBA implemented a moratorium on licensing new SBLCs because it did not
have adequate resources to effectively service and supervise additional SBLCs. The number of
SBLC licenses remained unchanged at 14 until SBA lifted the moratorium on April 12, 2023. As of
April 5, 2025, there were 16 SBLC licenses.
The Office of Credit Risk Management (OCRM) is responsible for monitoring, supervising, and
overseeing SBA’s lending partners, including SBLCs. OCRM oversees SBLCs’ performance in the
7(a) loan program by conducting lender portal data analysis and risk-based reviews, such as
targeted origination or early default reviews, on individual SBLCs at least once every 24 months.
Additionally, once every 24 months, OCRM typically conducts safety and soundness
examinations of individual SBLCs; however, it has not done so since 2023.
1
Objective
Our objective was to assess SBLCs’ performance in the 7(a) loan program and SBA’s oversight of
SBLCs to ensure program integrity and mitigate financial loss.
Results
Opportunities exist for SBA to improve SBLCs’ 7(a) loan portfolio performance and its oversight
of these lenders. Our analysis of 7(a) loans identified that loans made by SBLCs significantly
underperformed, related to default rates, compared to loans made by other lender types. In
addition, SBLCs’ 7(a) loan portfolio performance declined for loans approved and disbursed from
fiscal years (FY) 2016 to 2023, as indicated by the significant increase in early defaults. While
OCRM monitored SBLCs’ 7(a) loan portfolio performance, it did not sufficiently assess the root
cause of the SBLCs’ loan portfolio underperformance, related to default rates, to mitigate the
risk of loans made by SBLCs continuing to underperform and the risk of financial loss.
We also found that although OCRM reviewed SBLCs’ compliance with program requirements,
SBLCs continued to have repeated categories of deficiencies across multiple years. Additionally,
OCRM has not conducted safety and soundness examinations of SBLCs since April 4, 2023.
OCRM’s monitoring procedures were not sufficient to ensure SBLCs implemented appropriate
corrective actions for identified loan deficiencies that would mitigate the risk of similar future
occurrences and financial loss. Further, the absence of safety and soundness examinations
increases the risk that SBLCs’ noncompliance with loan program requirements will not be
identified, which could impact program integrity.
Finding 1: SBLCs’ 7(a) Loan Portfolio Underperformance
SBLCs’ loan portfolio significantly underperformed in the 7(a) loan program, related to default
rates, compared to the loan portfolio performance of other lender types. 1 In addition, SBLCs’
loan portfolio performance declined for loans approved and disbursed from FYs 2016 to 2023, as
indicated by the significant increase in early defaults.
1
We compared SBLCs’ 7(a) loan default rates to other lender types such as banks, credit unions, community
advantage lenders, and state-regulated financial companies.
2
SBLCs’ 7(a) Loan Portfolio Default Rates Compared to Other Lender Types
Our analysis of 7(a) loans approved and disbursed from FYs 2016 to 2023 2 identified that loans
made by SBLCs defaulted at a significantly higher rate than loans made by other lender types,
with the default rate for SBLCs peaking at 19.69 percent compared to 12.78 percent for other
lender types. As of March 31, 2025, SBLCs’ 7(a) loan portfolio default rate was 14.97 percent,
which was 53 percent higher than the 9.79 percent default rate for other lender types. 3 In
addition, SBLCs’ 7(a) loan portfolio early default rate was 5.38 percent, more than double the
2.62 percent early default rate for other lender types. 4 The higher default and early default rates
for loans made by SBLCs compared to loans made by other lender types spanned across multiple
fiscal years (see Figures 1 and 2).
Figure 1: 7(a) Loan Default Rates for SBLCs and Other Lender Types, FYs 2016-2023
Source: SBA Office of Inspector General (OIG) analysis of data as of March 31, 2025.
2
We analyzed 7(a) loans approved and disbursed beginning on October 1, 2015, to include loans from the period
prior to the COVID-19 pandemic and their associated default rates.
3
A default occurs when the borrower fails to make payment when due or has experienced other events of default,
such as bankruptcy, that results in the lender classifying the loan in liquidation status and/or requesting guaranty
purchase. We based the default rate on the number of 7(a) loans approved and disbursed from October 1, 2015,
through September 30, 2023, that defaulted as of March 31, 2025.
4
An early default occurs within 18 months of the loan’s disbursement. We based the early default rate on the
number of 7(a) loans approved and disbursed from October 1, 2015, through September 30, 2023, that defaulted
within 18 months of the loan disbursement.
3
Figure 2: 7(a) Loan Early Default Rates for SBLCs and Other Lender Types, FYs 2016-
2023
Source: SBA OIG analysis of data as of March 31, 2025.
The default and early default rates for both SBLCs and other lender types were lower for 7(a)
loans approved in FYs 2020 and 2021 compared to those approved in FYs 2016 through 2019.
This was due, in part, to the Coronavirus Aid, Relief, and Economic Security (CARES) Act providing
6 months of payments on 7(a) loans in FYs 2020 and 2021. Further, although the increases in
default and early default rates for 7(a) loans approved in FYs 2022 and 2023 were potentially due
to higher interest rates in effect on and after December 19, 2024, the SBLCs’ default and early
default rates were more than double the rates for other types of lenders.
4
SBLCs’ 7(a) Loan Portfolio Performance in the 7(a) Loan Program
From FYs 2016 to 2023, SBLCs approved and disbursed 11,068 7(a) loans, totaling $9.5 billion. Of
these, 1,657 had defaulted as of March 31, 2025, with $1.3 billion transferred to liquidation. 5
Both the size of the SBLCs’ 7(a) loan portfolio, as well as its loan performance, changed
significantly for loans approved and disbursed during this same period. Specifically, the number
of loans, total loan amount, number of defaulted loans, and number of early defaulted loans all
generally increased (see Table 1). In addition, although the number of loans increased by 171
percent, the number of early defaulted loans increased by 800 percent.
Table 1: SBLCs’ 7(a) Loan Approvals from FYs 2016 to 2023 and Defaults
Approval
Fiscal Number of Number of Number of
Year Loans Loan Amount Defaults Early Defaults
2016 719 $561,581,893 132 20
2017 889 $854,790,379 175 50
2018 1,159 $1,129,823,705 224 72
2019 1,150 $1,064,210,406 192 36
2020 898 $958,489,150 106 15
2021 1,995 $2,073,688,547 205 48
2022 2,313 $1,584,129,521 369 174
2023 1,945 $1,307,818,000 254 180
Total 11,068 $9,534,531,601 1,657 595
Source: SBA OIG analysis of data as of March 31, 2025.
Our analysis of the SBLCs’ 7(a) loan portfolio identified that two SBLCs originated and disbursed
69 percent of the loans originated and disbursed by SBLCs, totaling $5.7 billion, from FYs 2016 to
2023. The defaulted and early defaulted 7(a) loans for these two SBLCs represented 84 percent
of the total number of defaulted loans and 88 percent of the total number of early defaulted
loans attributed to SBLCs.
5
Lenders move a loan into liquidation status when there has been a default event and the lender has determined
that the borrower cannot or will not keep the loan current through regular payments.
5
This occurred because OCRM did not sufficiently assess the root cause of SBLCs’ 7(a) loan
portfolio underperformance, related to default rates, to mitigate the associated risks. According
to OCRM officials, SBLCs’ loan portfolio underperformance in the 7(a) program occurred because
SBLCs are transaction-based lenders and do not have other relationships with the borrowers.
OCRM officials also stated that SBLCs have a different client base than other SBA lenders and
serve as the lender of last resort.
OCRM officials acknowledged that they have concerns related to the risk profiles of individual
SBLCs; however, they do not have concerns with the loan portfolio performance of the general
SBLC population. According to OCRM officials, they took multiple supervisory actions against the
SBLC with the highest default rate that were directly rooted in performance deficiencies.
However, the loan default and early default rates show those actions were not effective in
improving loan performance.
Even though SBLCs’ loan portfolio underperformance, related to default rates, is likely partially
inherent to their being transaction-based lenders with no other relationship with the borrower,
they are subject to the same 7(a) program requirements as other lenders, such as for eligible
uses of proceeds, loan terms and conditions, and credit standards. SBLCs must also comply with
requirements for SBA lenders and supervised lenders. Therefore, SBLCs operate under the same
SBA lending standards as other lenders to mitigate risks associated with the 7(a) loan portfolio.
Although OCRM took supervisory actions and continued to monitor SBLCs’ 7(a) loan portfolio
performance using its lender performance report, lender portal, and risk-based reviews, we
believe additional assessments are needed to determine why SBLCs’ 7(a) loan portfolio had
significantly higher default rates, compared to other lender types. Further, their default rates on
7(a) loans approved and disbursed in FYs 2024 and 2025 were significantly higher compared to
loans made by other lender types. Specifically, as of September 30, 2025, SBLCs’ default rate for
these loans was 4.56 percent, which is more than double the 1.90 percent default rate for other
lender types. The default rates will likely continue to increase as these recently approved and
disbursed loans continue to age. Increased purchases of defaulted loans may result in financial
loss to the 7(a) loan program.
6
Recommendation
To address SBLCs’ 7(a) loan portfolio underperformance, we recommend the Administrator
direct the Associate Administrator for the Office of Capital Access to:
Recommendation 1: Conduct an analysis to effectively assess the root cause of the SBLCs’ 7(a)
loan portfolio underperformance, related to default rates, and implement processes and
procedures to mitigate the identified risks.
Finding 2: SBA’s Oversight of SBLCs Needs Improvement
We found that although OCRM monitored SBLCs’ performance and compliance with program
requirements, identified numerous repeated categories of deficiencies, and issued
recommended corrective actions, its oversight was not effective in improving SBLCs' compliance
with 7(a) loan program requirements. OCRM performs a variety of risk-based reviews on SBLCs,
such as targeted origination, targeted early default reviews, and other reviews based on areas of
concern. These reviews generally include a file review component that assesses compliance of
selected loans with SBA loan program requirements.
We evaluated 18 risk-based reviews—including 4 targeted origination reviews, 11 targeted early
default reviews, and 3 other types of reviews—and 1 examination report 6 conducted or issued
between October 1, 2021, and March 31, 2025, for 2 SBLCs. These SBLCs originated and
disbursed 69 percent of loans from FYs 2016 to 2023 and represented over 80 percent of the
total number of defaulted and early defaulted loans as of March 31, 2025. 7 Our analysis
identified repeated categories of deficiencies that occurred across multiple fiscal years, despite
recommended corrective actions and informal enforcement actions implemented by SBA. See
Table 2 for some of the most common repeated categories of deficiencies for the two SBLCs.
6
Based on our review, this was the only examination report that OCRM issued related to the two SBLCs during our
scope period.
7
One of the two SBLCs did not originate 7(a) loans under its SBLC license after April 2023, due to the acquisition of a
bank by its parent company that is now operating as a traditional 7(a) lender.
7
Table 2: Repeated Categories of Deficiencies for the Two SBLCs
Number of
Category of Deficiency* Deficiencies** Example of Deficiencies
Other core requirements 31 SBLCs did not request, receive, and
reconcile IRS transcripts and did not obtain
required insurance documentation.
Loan closing and disbursement 26 SBLCs did not obtain required lien
positions.
7(a) program fees 10 SBLCs charged prohibited fees.
Secondary market sale 14 SBLCs did not close loans in accordance
with SBA’s loan program requirements.
Eligibility 20 SBLCs did not ensure borrowers met SBA
loan program requirements for eligible
passive businesses.
Use of proceeds 15 SBLCs did not ensure borrowers used loan
proceeds in accordance with SBA’s loan
program requirements for debt
refinancing.
Technical exceptions 21 SBLCs’ documentation contained
incomplete and inaccurate forms, including
SBA Form 1919, Borrower Information
Form; Form 1920, Lender’s Application for
Loan Guaranty; Form 1050, Settlement
Sheet; and Form 159, Fee Disclosure and
Compensation Agreement.
*We obtained the categories of deficiency from the SBA reports. Where not specified, we categorized the
deficiency based on where its criteria was cited in the standard operating procedures or Code of Federal
Regulations.
**We counted the number of times a deficiency appeared in the risk-based reviews and the examination report
and categorized each one. One deficiency may impact one or more loans.
Source: SBA OIG analysis of risk-based reviews and examination report.
Our evaluation of the examination report also identified repeated categories of deficiencies
identified in a prior examination that were not resolved, such as issues with the SBLC’s internal
control policy and errors in properly executing SBA Form 159.
According to federal law, OCRM is responsible for supervising any lender making loans under
Section 7(a) and any small business lending company, as well as overseeing SBLCs by conducting
8
periodic reviews of their compliance and performance. 8 Office of Management and Budget
(OMB) guidance states that agencies should establish specific procedures to take appropriate
action any time there is significant and/or continuing nonconformance with agency standards. 9
Further, the U.S. Government Accountability Office’s (GAO) Standards for Internal Controls in the
Federal Government recommends that management consider whether current controls address
the identified issues and modify controls if necessary. 10
SBLCs continued to have repeated categories of deficiencies across multiple fiscal years because
OCRM’s oversight procedures were not sufficient to ensure that SBLCs implemented appropriate
corrective actions for loan deficiencies identified during risk-based reviews or examinations.
Implementing additional procedures would mitigate the risk of similar future occurrences and
financial loss. Our evaluation of targeted origination reviews and an examination report
identified that OCRM included specific recommended corrective actions to address loan
deficiencies and obtained SBLCs’ responses to those corrective actions. OCRM officials stated
they flagged these loans by adding a note in the Centralized Loan Chron System for additional
review if a guaranty purchase is requested. However, OCRM did not ensure the SBLCs
implemented the corrective actions recommended by validating the responses obtained in the
targeted origination reviews or the examination report.
According to OCRM officials, for targeted origination reviews, they relied on SBLCs’ responses to
ensure lenders’ understanding of the requirements and willingness to improve compliance while
continuing to assess compliance with their recommendations by testing the same protocols in
subsequent reviews. For the examination report, OCRM obtained the SBLC’s responses after the
report was issued but did not evaluate them. OCRM officials stated they do not routinely assess
documentation provided after they complete the file review.
Further, our evaluation of targeted early default reviews identified that corrective actions and
SBLCs’ responses are not part of the documentation for these reviews. According to OCRM
officials, they did not require SBLCs to respond because the primary intent of the targeted early
default review is to identify potential deficiencies that may impair the guaranty. OCRM officials
indicated that loans with deficiencies were flagged in their system for additional review. For
identified loan deficiencies, OCRM suggested SBLCs review the deficiencies; identify other loans
that may have the same deficiencies and determine what action should be taken for those loans;
8
15 U.S.C. §657t.
9
OMB Circular A-129, Policies for Federal Credit Program and Non-Tax Receivables, September 2024.
10
GAO-14-704G, Standards for Internal Control in the Federal Government, September 2014.
9
evaluate the need to improve any policies, procedures, and/or internal controls; and take
appropriate action to ensure compliance going forward.
OCRM officials also stated that for targeted early default reviews they rely on the identification
of these same deficiencies in other types of risk-based reviews that require SBLCs to respond,
such as targeted origination reviews. However, as stated earlier, OCRM did not ensure
recommended corrective actions were implemented in targeted origination reviews, therefore,
it did not mitigate the risk of similar future loan deficiencies.
According to federal regulations, SBA lenders and intermediaries must respond to report
findings, recommendations, and corrective actions, if any, in writing to SBA and, if requested,
submit proposed corrective actions. 11 SBA will provide written notice of whether the response
and, if applicable, any corrective action, is approved, or whether SBA will seek additional
information or require other action. 12
OCRM’s oversight procedures for SBLCs were not sufficient to ensure that SBLCs implemented
appropriate corrective actions to address loan deficiencies. As a result, there is an increased risk
that underperforming SBLCs with repeated categories of deficiencies will continue to participate
in SBA’s 7(a) loan program. This could jeopardize the integrity of the program, increase the risk
of financial loss, and affect SBA’s ability to effectively meet its mission of helping Americans start,
grow, and build resilient businesses.
Recommendation
To address improvements needed in SBA’s oversight of SBLCs, we recommend the Administrator
direct the Associate Administrator for the Office of Capital Access to:
Recommendation 2: Modify OCRM’s oversight procedures to ensure SBLCs implement
appropriate corrective actions to address loan deficiencies identified during risk-based reviews
or examinations to promote program integrity and mitigate the risk of similar future occurrences
and financial loss.
11
13 C.F.R. §120.1055(b).
12
13 C.F.R. §120.1055(c).
10
Other Matter: Safety and Soundness Examinations
During a safety and soundness examination, OCRM assesses the SBLC’s financial condition,
including the lender’s capital, earnings, and liquidity; corporate governance, such as the
performance of the board; effectiveness of policies, standards, and procedures; and the
adequacy of internal controls. OCRM also reviews loan portfolio performance, asset
management, regulatory compliance, risk management, and special items (PARRiS) components,
which identify quantitative and qualitative risk factors of a lender’s behavior, such as compliance
with SBA loan program requirements.
In comparison, during the risk-based reviews, OCRM generally focused on one or more PARRiS
component or other area of concern identified as requiring a targeted scope. In addition,
although OCRM examined loan files in some types of risk-based reviews, the number of files
reviewed was significantly fewer than those reviewed during safety and soundness examinations.
OCRM officials acknowledged that safety and soundness examinations provide a higher level of
assurance of a lender’s soundness and compliance with program requirements than risk-based
reviews. However, we found that OCRM did not conduct safety and soundness examinations of
SBLCs from April 4, 2023, to March 31, 2025. According to 13 C.F.R. §120.1050, SBA may conduct
safety and soundness examinations of SBA-supervised lenders. OCRM officials stated that they
did not have a contractor with adequate training and expertise to conduct the safety and
soundness examinations and are awaiting approval to solicit a contract to assist with future
examinations.
As a result, SBLCs have not been subject to the increased oversight associated with safety and
soundness examinations since April 2023. This occurred at the same time SBA lifted the
moratorium on licensing new SBLCs and announced it was expanding the number of eligible
SBLC licenses. We acknowledge OCRM is not required to conduct safety and soundness
examinations; however, we believe not conducting these examinations increases the risk that
SBLCs’ noncompliance with loan program requirements will not be identified, which could
jeopardize the integrity of the program and increase the risk of financial loss.
11
Recommendation
To address potential increased risk of SBLC noncompliance with loan requirements, we
recommend the Administrator direct the Associate Administrator for the Office of Capital Access
to:
Recommendation 3: Assess the risks associated with not conducting safety and soundness
examinations for SBLCs and, based on the results, establish and implement a plan to ensure
identified risks are mitigated.
Evaluation of Agency Response
SBA management provided formal written comments that are included in their entirety in
Appendix 2. Management stated that while they largely disagree with the draft report, they
acknowledge the opportunities to strengthen oversight activities, as reflected in their response.
Management agreed with Recommendations 1 and 3 and partially agreed with Recommendation
2. Management’s planned actions for Recommendations 1, 2, and 3 satisfy the intent; therefore,
the recommendations are resolved and can be closed when management provides evidence that
they have implemented planned actions.
In their overall response, management stated that their data analysis shows most SBLCs
consistently had lower default rates than the overall 7(a) loan portfolio, and that a single SBLC
was the primary driver of elevated default and early default rates. Management noted that
excluding this SBLC from the analysis, the remaining SBLCs outperformed the cumulative 7(a)
portfolio between FYs 2016 and 2019. Management further noted that the SBLC was placed
under increased supervision in December 2019 and entered into a voluntary agreement in
March 2020 prior to it ceasing 7(a) loan operations in April 2023. Management asserted that the
inclusion or exclusion of this SBLC materially affects the results and related conclusions and
provided several tables to support this position.
We acknowledge management’s assessment that one SBLC significantly contributed to SBLCs’
underperformance between FYs 2016 and 2019. However, our analysis shows this SBLC was not
the sole driver, or root cause, of SBLCs’ underperformance for loans approved and disbursed
from FYs 2016 through 2023. Our report identified that two SBLCs accounted for more than 80
percent of the total number of defaulted and early defaulted loans attributed to SBLCs.
12
Moreover, the tables management provided show that even after excluding the one SBLC, the
SBLCs’ cumulative default and early default rates remained significantly higher than the overall
7(a) portfolio’s cumulative rates in FYs 2022 and 2023. We also believe it is inappropriate to
exclude the largest SBLC lender from an analysis of SBLCs’ performance, as doing so would not
provide an accurate picture of the SBLCs’ 7(a) loan universe.
Further, the default rate for SBLCs remained elevated compared to other lender types even after
the SBLC with the highest number of defaults ceased originating loans in April 2023. As stated in
our report, our analysis of loans approved and disbursed in FYs 2024 and 2025, as of September
30, 2025, showed that SBLCs’ default rate was 4.56 percent—more than double the 1.90 percent
default rate for other lender types. This demonstrates that SBLCs’ underperformance has
persisted independent of the one SBLC’s participation in the program. We also noted that the
SBLC did not originate 7(a) loans under its SBLC license after April 2023; its parent company
acquired a bank, and that bank is now operating as a traditional 7(a) lender, which may continue
to pose a risk to the program.
Summary of Actions Necessary to Close Recommendations
The following section summarizes the status of our recommendations and the actions necessary
to close them.
Recommendation 1
To address SBLCs’ 7(a) loan portfolio underperformance, we recommend the Administrator
direct the Associate Administrator for the Office of Capital Access to conduct an analysis to
effectively assess the root cause of the SBLCs’ 7(a) loan portfolio underperformance, related to
default rates, and implement processes and procedures to mitigate the identified risks.
Status: Resolved
SBA management agreed with this recommendation, stating that going forward, OCRM will
conduct a root-cause analysis of SBLC 7(a) portfolio performance that controls for lender
concentration and disbursement volume and will implement enhanced monitoring procedures
responsive to early signs of performance deterioration in individual SBLCs. Management stated
they plan to implement corrective action by March 31, 2027.
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This recommendation can be closed when management provides evidence of the analysis
conducted to effectively assess the root cause of the SBLCs’ 7(a) loan portfolio
underperformance related to default rates, and the processes and procedures implemented to
mitigate the identified risks.
Recommendation 2
To address improvements needed in SBA’s oversight of SBLCs, we recommend the Administrator
direct the Associate Administrator for the Office of Capital Access to modify OCRM’s oversight
procedures to ensure SBLCs implement appropriate corrective actions to address loan
deficiencies identified during risk-based reviews or examinations to promote program integrity
and mitigate the risk of similar future occurrences and financial loss.
Status: Resolved
SBA management partially agreed with this recommendation, stating they do not accept the
premise that their oversight was broadly ineffective but will modify procedures to validate that
SBLCs implement recommended corrective actions from safety and soundness examinations and
risk-based reviews, including documented follow-up and escalation where remediation does not
occur. Management also requested that OIG reverse repeat deficiency counts attributable to the
SBLC for reports issued after it ceased 7(a) loan originations and re-group remaining deficiencies
by identical Standard Operating Procedures (SOP) or Code of Federal Regulations (CFR) criteria.
Management stated they plan to implement corrective action by June 30, 2027.
We clarify that our report does not conclude that SBA’s oversight of the general SBLC population
was broadly ineffective. Our evaluation covered the risk-based reviews and examination report
for the two SBLCs responsible for the majority of SBLCs’ loan disbursements (69 percent),
defaulted loans (84 percent), and early defaulted loans (88 percent). While we found that SBA
reviewed SBLCs’ compliance with program requirements, we identified that these lenders
continued to exhibit repeated categories of deficiencies across multiple years.
Additionally, regarding management’s request for OIG to reverse the repeat deficiency counts
for the SBLC that ceased 7(a) originations, we believe our assessment included in the report is
accurate. Specifically, although SBA issued targeted early default risk-based reviews of this SBLC
after it stopped originating new loans, the agency did not mitigate the risk of similar future loan
deficiencies because it did not address the deficiencies they identified through corrective
actions. Our evaluation found that targeted early default reviews do not specify corrective
actions or require SBLC responses; instead, SBA relies on other types of risk-based reviews—such
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as targeted origination reviews, which require an SBLC response—to identify and address the
same deficiencies. However, as SBA did not conduct targeted origination reviews after the SBLC
stopped originating loans, there was no mechanism to identify similar deficiencies or
recommend corrective actions. As a result, the underlying deficiencies may not have been
resolved.
Further, regarding management’s request for OIG to re-group remaining deficiencies by identical
SOP or CFR criteria, we believe our assessment included in the report is accurate. Specifically,
while we acknowledge that deficiencies identified in SBA’s risk-based reviews may not be
identical, we classified deficiencies into categories based on the categories listed in SBA’s reports
and, where a category was not specified, based on the SOP or CFR criteria cited. Further, a single
category of deficiency may affect more than one loan, potentially indicating a more significant
issue involving the lender’s compliance with program requirements.
This recommendation can be closed when management provides evidence that they have
modified their oversight procedures to ensure SBLCs implemented appropriate corrective
actions to address loan deficiencies identified during risk-based reviews or examinations to
promote program integrity and mitigate the risk of similar future occurrences and financial loss.
Recommendation 3
To address potential increased risk of SBLC noncompliance with loan requirements, we
recommend the Administrator direct the Associate Administrator for the Office of Capital Access
to assess the risks associated with not conducting safety and soundness examinations for SBLCs
and, based on the results, establish and implement a plan to ensure identified risks are
mitigated.
Status: Resolved
SBA management agreed with this recommendation, stating they will complete a documented
risk assessment and a mitigation plan with milestones. Management stated they plan to
implement corrective action by June 30, 2027, with procurement contingent on required
approvals.
This recommendation can be closed when management provides evidence that they assessed
the risks associated with not conducting safety and soundness examinations for SBLCs and,
based on the results, established and implemented a plan to mitigate identified risks.
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Appendix 1: Scope and Methodology
This report presents the results of our evaluation to assess Small Business Lending Companies’
(SBLCs) Performance in the 7(a) Loan Program and the U.S. Small Business Administration’s (SBA)
Oversight of SBLCs to ensure program integrity and mitigate financial loss. Our scope of work
included 7(a) loans approved and disbursed from October 1, 2015, 13 through September 30,
2023. We assessed the defaults for loans made by SBLCs as of March 31, 2025, 14 and SBA’s
oversight of SBLCs from October 1, 2021, through March 31, 2025.
To accomplish our objective, we analyzed data of approved and disbursed 7(a) loans from
October 1, 2015, through September 30, 2023, and as of March 31, 2025. Specifically, we
obtained the number of 7(a) loans approved and disbursed, the loan amounts, and loan defaults
by SBLC and other lender types to assess SBLC loan default rates compared to that of other types
of 7(a) lenders. We also obtained the number of 7(a) loans approved and disbursed, the loan
amounts, and loan defaults by individual SBLCs to assess individual loan portfolio performance
and identify those with the highest volume of defaulted and early defaulted loans.
We further analyzed data of approved and disbursed 7(a) loans from October 1, 2023, through
September 30, 2025, and as of September 30, 2025, to obtain the number of loan defaults by
SBLC and other lender types and assess the loan default rates of SBLCs and other lender types
for this period.
We reviewed relevant federal laws, regulations, policies, procedures, and guidance pertaining to
SBLC monitoring, oversight, supervision, and enforcement. We also interviewed Office of Credit
Risk Management (OCRM) officials to further understand related processes and procedures and
to assess SBA’s oversight of SBLCs. In addition, we reviewed OCRM’s examination and risk-based
review reports for the two SBLCs with the highest number of defaulted and early defaulted 7(a)
loans to assess the deficiencies, recommended actions, and effects identified in those reports.
We conducted this evaluation in accordance with the Council of the Inspectors General on
Integrity and Efficiency’s Quality Standards for Inspection and Evaluation. These standards
13
Our scope includes an analysis of 7(a) loans approved and disbursed beginning in 2015 to show loan defaults prior
to the COVID-19 pandemic.
14
We assessed 7(a) loan defaults as of March 31, 2025, which is 18 months after September 30, 2023, to determine
whether early defaults occurred.
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require that we adequately plan and perform this evaluation to obtain sufficient and appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our objective.
We believe the evidence obtained provides a reasonable basis for our findings and conclusions
based on our objective.
Use of Computer-Processed Data
We relied on data from SBA’s electronic loan systems, including E-Tran, Mainframe, Partner
Information Management System, and Guaranty Purchase System to conduct our evaluation. We
performed limited testing on data extracts by validating fields in our data extracts, such as
disbursement, default, and transfer to liquidation dates, and compared it to the information in
SBA’s electronic loan systems to ensure the data was complete, reliable, and met the scope
parameters of this evaluation. Further, we reviewed the data reliability assessment from a prior
SBA OIG engagement that used E-Tran data. We did not validate the accuracy of the data
extracts to source documents because doing so would involve reviewing lender loan files and
would be outside the scope of our review. We believe that the data used was sufficiently reliable
to support our findings in this report.
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Prior Audit Coverage
The following lists the Office of Inspector General’s previous audit coverage related to the
objective of this report:
Report Number Report Title Report Date
25-08 SBA’s Awarding of Small Business Lending February 13, 2025
Company Licenses
23-05 White Paper: 7(a) Loan Program During SBA’s March 21, 2023
Response to the COVID-19 Pandemic
20-03 Audit of SBA’s Oversight of High-Risk Lenders November 12, 2019
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Appendix 2: Agency Response
Small Business Administration
Response to the Evaluation Report
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