SBA incurs substantial losses on collateral for loans - Small Business Administration

Nation's Business, March, 1992

The Small Business Administration suffers substantial losses when it liquidates collateral on defaulted loans, the General Accounting Office reports.

In a survey in three SBA regions, the GAO said, the value of collateral at the liquidation of loans was 68 percent less than the estimated market value when the loans were made. The GAO, which monitors government activities on behalf of Congress, noted that the SBA does not independently verify collateral values assigned by loan applicants.

The GAO also said that borrowers might dispose of collateral such as equipment and furnishings during the life of the loan, and income from accounts receivable that had been offered as collateral might be used to defray operating expenses. Depreciation and economic conditions also affect the value of collateral, the GAO noted.

The GAO recommended that the SBA establish procedures for effective valuation and monitoring of collateral and for overseeing liquidations.