Sparked, in part, by the massive, $76 million Business Loan Express (BLX) fraud case, the notion that the U.S. Small Business Administration’s lending programs need improved oversight is gaining traction and attention on Capitol Hill. This month, Senate Committee on Small Business and Entrepreneurship Chairman John Kerry (D-Mass.) and Ranking Member Olympia Snowe (R-Maine) introduced S. 2288, the Small Business Lending Oversight and Program Performance Improvements Act of 2007, which aims to establish tangible performance standards for the SBA’s 7(a) and 504 programs. It is based partly on a July Government Accountability Office (GAO) report—Small Business Administration: Additional Measures Needed to Assess 7(a) Loan Program’s Performance.

The bill would increase the transparency of lenders’ portfolio quality by establishing a set of evaluation standards that would include the rates of liquidation, currency, recovery, and delinquency, as well as other portfolio risk indicators. The SBA would use this information to rank and assign a separate score for each covered lender on each of the standards, and would be required to make those scores available to the lenders. Critics contend that the SBA’s current lender monitoring system does not explain the metrics of lenders’ risk ratings or identify where there are problems so that lenders can attempt to proactively mitigate defaults and losses. The bill also would allow for additional onsite review of covered lenders demonstrating “significant and sustained statistically adverse” changes in their loan portfolios.

S. 2288 also would require the SBA to calculate and publish loan default rates for its 7(a), 504, and specialty loan programs, including the Express Loan program, by using established industry standards. The SBA’s current default rate calculations are not directly comparable to commercial lenders’ default rates.

Additionally, S. 2288 would require the establishment of economic performance evaluation measurements. It would require the SBA to publish a report on borrowers’ economic performance focusing on loan recipients’ number of employees, annual sales receipts, and an estimate of the amount they paid in total annual Federal income taxes. While the SBA currently estimates job growth, the GAO report recommended that that further measurements were necessary to demonstrate the return on investment of SBA loans.

The bill also requires State and local development companies to have written contracts—approved by a board of directors and reported to the SBA—with each executive or highly-paid employee. Those contracts would stipulate the amount of compensation, benefits, and “any transfer of anything of value to that executive or highly paid employee, including any rental or sale.” Small State and local development companies are exempted from this requirement, however, as are development companies that make a low number of 504 loans or are regulated by a State or local government.

Finally, the bill requires the SBA to follow cost containment and cost control practices in regard to oversight review fees and directs the Comptroller General to conduct a study on the 7(a) program. The report would focus on the scope of necessary lender oversight and an examination of oversight fees.

S. 2288 has been endorsed by the National Association of Government Guaranteed Lenders and the National Association of Development Companies.