SBA Disaster Loan Program:

Accounting Anomalies Resolved but Additional Steps Would Improve Long-Term Reliability of Cost Estimates

GAO-05-409: Published: Apr 14, 2005. Publicly Released: May 16, 2005.

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In response to a January 2003 GAO report that identified significant anomalies in the Small Business Administration's (SBA) disaster loan accounts and raised serious concerns about its ability to account for loan sales and estimate program costs, SBA conducted an extensive analysis to identify causes of the anomalies and implemented a number of corrective actions. In light of SBA's actions, GAO undertook a follow-up review to (1) describe the nature of the deficiencies SBA identified, (2) determine whether its corrective actions resolved the deficiencies, and (3) assess whether its procedures provide a reasonable basis for future credit estimates.

SBA took prompt action with a comprehensive review of its financial records and systems to identify the deficiencies related to accounting for its disaster loans and loan sale program. SBA's review found (1) the cash flow model used to estimate the cost of the disaster loan program was unreliable and underestimated the cost, (2) the model used to determine whether sales were beneficial had errors and incorrectly indicated that loans were sold at gains, (3) incorrect loan values used to calculate the results of loan sales led to inaccurate reporting in SBA's financial statements, and (4) incomplete tools provided by OMB to calculate interest payments on borrowings from Treasury resulted in excess payments to Treasury and an insufficient balance in SBA's financing account and subsidy allowance. To resolve these deficiencies, SBA implemented a number of corrective actions during fiscal years 2003 and 2004. To address the first three, SBA developed a new cash flow model to estimate the costs and loan values for the disaster loan program. This improved the agency's ability to prepare more reliable cost estimates and determine the gain or loss on prior loan sales. To address the fourth deficiency, SBA analyzed its interest payments to Treasury and found that it had overpaid by about $134 million. SBA included this amount in its reestimates for the disaster loan program to correct prior interest payments and also implemented a different approach to update or "reestimate" its cost estimates, which will adjust its transactions with Treasury going forward. However, until OMB updates its tools for computing these interest payments, other credit agencies may also be over- or underpaying interest to Treasury. Further, SBA improved its policies and procedures to help ensure that future loan program cost estimates will be reasonable. For example, SBA implemented new standard operating procedures for calculating reestimates and prepared documentation to support the rationale and basis for key aspects of the cash flow model. However, because of the complexities associated with estimating loan program costs, additional actions by SBA would help improve the long-term reliability of cost estimates. These include (1) further documentation of the model and disaster data to readily provide for knowledge transfer between staff and contractors to help ensure proper maintenance, updating, and running of the model; (2) periodic assessments of the model's ability to predict loan performance; and (3) additional procedures to ensure the disaster data used in the model are tested to verify and document that they are reliable. In addition, there may be opportunities to improve the model with additional variables, such as financial strength of borrowers, as well as revisions to simplify the estimation process that warrant further consideration by SBA.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, during fiscal year 2007 OMB revised the Credit Subsidy Calculator (CSC) that OMB provides to agencies for use when calculating subsidy cost re-estimates and financing account interest. The new version of the calculator, referred to as CSC2 is a "one-stop" tool for making required calculations for Federal credit programs. It built upon the existing functions of the previous CSC and incorporated the reestimate and financing account interest functions of other tools. The revised CSC2 corrects agencies' financing account interest calculations consistent with our recommendation. The CSC2 was intended to help agencies more easily integrate all of the processes involved in subsidy and interest calculations over the life of the loans, and resolve discrepancies between budget and accounting data.

    Recommendation: To help ensure that agencies make correct interest calculations for financing accounts, the OMB Director should update the tools provided to agencies for adjusting financing account interest transactions once a final interest rate is determined for a cohort.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Implemented

    Comments: SBA developed Policies and Procedures to update and enhance the cash flow model. This document included procedures to test and document the reliability of data used in cash flow models. For example, SBA revised the model to use data from only the ELIPS system instead of multiple systems. The data in ELIPS is updated daily and reconciled daily with the general ledger. In addition, data pulled from ELIPS to use in the cash flow model is validated against data in other systems and differences greater than one percent and researched and the cause is documented. Further, because subsidy estimates are prepared with 9 months of actual data and projected data for the final 3 months of the current year, SBA developed procedures to test the projected data with actual performance to determine if adjustments are needed.

    Recommendation: The SBA Administrator should establish additional procedures to test and document the reliability of the data used in the new cash flow model for the disaster loan program.

    Agency Affected: Small Business Administration

  3. Status: Closed - Implemented

    Comments: SBA implemented several steps to simplify the estimation process. The estimation process was revised to use data from one source data system, instead of multiple systems. The cash flow model was revised to reduce the number of manual steps in the reestimate process. In addition, SBA developed Policies and Procedures to document the process to update, enhance, review, validate, and run the cash flow model. Further, a SAS operating interface is being developed, which will allow for reestimates to be completed with the push of one button.

    Recommendation: The SBA Administrator should consider possible revisions to the model and/or alternative methodologies that would simplify the estimation process.

    Agency Affected: Small Business Administration

  4. Status: Closed - Implemented

    Comments: In response to our recommendation, SBA developed polices and procedures over the agency's credit subsidy process during fiscal year 2006. These policies and procedures include steps to test the disaster loan program credit subsidy model's ability to predict future loan performance by comparing actual and estimated cash flows. These procedures were developed based on an analysis that was first performed during fiscal year 2006.

    Recommendation: The SBA Administrator should establish policies and procedures to routinely test the new disaster cash flow model's ability to predict loan performance by comparing the model's predictions to actual loan performance and to identify and address the causes of any significant variances.

    Agency Affected: Small Business Administration

  5. Status: Closed - Implemented

    Comments: In response to our recommendation, during 2006 SBA's Disaster Loan Program Office collected information related to the credit scores of disaster loan borrowers. SBA conducted an analysis of individual borrowers' credit scores. SBA found that, as of the date of the analysis, credit scores had an insignificant impact on whether or not a loan ultimately defaulted. SBA also developed policies and procedures that summarize how the agency would continue to routinely test possible data that could be used in the model, including credit scores.

    Recommendation: The SBA Administrator should study the value of incorporating additional variables in the new disaster cash flow model, such as detailed information on the financial strength of borrowers.

    Agency Affected: Small Business Administration

  6. Status: Closed - Implemented

    Comments: SBA's Office of the Chief Financial Officer developed Policies and Procedures for the Office of Financial Analysis (OFA). OFA is responsible for the preparation of SBA's credit program subsidy estimates. The policies developed relate to performing and documenting tasks associated with the preparation of budget formulation estimates and re-estimates for SBA's credit programs. These policies include procedures for a cash flow model update/enhancement cycle. Specifically, there are procedures that describe planning for model updates, an evaluation process, a review process, and a validation process. These procedures are intended to control modeling changes and to maintain the integrity of the models. OFA also developed separate "desktop procedures" that describe in detail the process to update and run the model.

    Recommendation: The SBA Administrator should develop additional documentation of the new disaster cash flow model to help facilitate proper operation, maintenance, and updating of the model.

    Agency Affected: Small Business Administration

  7. Status: Closed - Implemented

    Comments: In response to our recommendation, during fiscal year 2007 OMB revised the Credit Subsidy Calculator (CSC) that OMB provides to agencies. The new version of the calculator, referred to as CSC2 is a "one-stop" tool for making required calculations for Federal credit programs. It built upon the existing functions of the previous CSC and incorporated the reestimate and financing account interest functions of other tools. The CSC2 was intended to help agencies more easily integrate all of the processes involved in subsidy and interest calculations over the life of the loans, and resolve discrepancies between budget and accounting data. The methodology used in the CSC2 allows agencies to calculate interest on the financing account balances, as well as interest adjustments going back to the initial disbursement date for the cohort.

    Recommendation: To help ensure that agencies make correct interest calculations for financing accounts, the OMB Director should provide instructions to agencies on making retroactive corrections to financing account interest transactions based on final interest rates for a cohort.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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