Veterans Affairs

Veterans get lip service when it comes to small business loans

Veterans who want to start businesses often turn to the Small Business Administration for loans. The SBA is obligated to give them special consideration. But th...

Tom Temin@tteminWFED

January 17, 2024 2:00 pm

7 min read

Veterans who want to start businesses often turn to the Small Business Administration for loans. The SBA is obligated to give them special consideration. But the Government Accountability Office found that SBA doesn’t really have procedures in place to deal with veterans. For more, the Federal Drive with Tom Temin spoke with Daniel Garcia-Diaz, GAO’s Managing Director for Financial Markets.

Interview Transcript:

Tom Temin What is the law here? This is a statutory requirement for SBA in terms of how it deals with requests from veterans. What is that? Let’s start.

Daniel Garcia-Diaz There. Yeah. So the statute is very general, but it does require SBA to ensure that lenders are giving special consideration for veterans status. And what does that mean? That means a variety of things. And the regulations that SBA has implemented have focused on ensuring that lenders are responding to applications in a prompt manner. It also says, includes questions where the lender may be kind of considering on the edge of approving or not approving. To give it a closer look, and generally kind of try to work with the borrower to to make a decision in favor of the borrower. But of course, we look at those regulations and any policies and procedures that SBA has in place. And we found that, well, they were as vague as what I just described. And so we were concerned on how the lenders are going to operationalize those requirements.

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Tom Temin And just how does this work? These are private sector lenders that have sanction from the SBA, or they have some kind of a dispensation. Or are these loan programs among the SBA’s many loan channels?

Daniel Garcia-Diaz Yes. So there are multiple programs. In this report, we looked at three different types of small business programs. And SBA relies on lenders and sometimes community development corporations as well to provide loans to the small businesses. And they are the ones these private entities are the ones that are doing the underwriting of these loans, and they have to follow the strict procedures that SBA lays out for them. And in return, SBA can provide a guarantee on part of that loan.

Tom Temin Got it. And this is a program that is long standing. What prompted GAO to look at it at this point in history? Because these go back decades, right?

Daniel Garcia-Diaz They do. And there was congressional interest in ensuring that veterans have access to capital, and particularly capital that’s coming from these federal resources. That’s why we looked into the matter, and we continue to hear these concerns over time, that veterans sometimes may be struggling a little bit more in that compared to non veteran businesses in obtaining capital. And there’s a range of reasons why the veterans can experience some difficulties.

Tom Temin And just briefly, what are those as an aside.

Daniel Garcia-Diaz Sure. And so some of the difficulties that veterans may find is that the lenders are looking for work experience. Right. And so the veterans have to explain a military service is work experience, valuable work experience that could be applicable to starting up or expanding your small business. Other challenges that they’ll find is that a lot of the rules and some of the benefits that accrue to veterans aren’t transparent. They don’t always don’t know about it, so they may not even ask for it. And of course, veterans are going to experience many of the same challenges that other businesses face. For instance, high interest rates and things like that. But those are some of the issues that veterans run into. Some of the studies we’ve looked at also kind of point to veterans experiencing slightly higher rates of rejection of loan applications. But what we also find is that veterans tend to eventually get the credit that they need, but it suggests that they often have to shop for willing lenders.

Tom Temin We’re speaking with Daniel Garcia-Diaz, managing director for financial markets and community investment at the Government Accountability Office. And so you’re recommending that SBA sort of quantify or tighten up the language surrounding special consideration. That seems like a tough thing to do without ordering people to automatically approve every veteran application. What could SBA do, do you think.

Daniel Garcia-Diaz Part of it is providing examples and details of how might they say close case look like, and what are some options for making successfully accepting the application? But of course, you have to balance that with sound underwriting practices. As you say, you don’t want to just approve anyone who’s a veteran. You want to have a sound loan, but providing more details on the types of cases, defining concepts of, you know, if you’re going to review applications promptly, what exactly does that mean? And it is difficult, but working with lenders and the experiences that they have, they can come up with more details to ensure that all the lenders that are participating in these SBA programs have kind of a common starting point to evaluate these applications and take action. Right now, it’s not so clear. And in fact, in some of our conversations with lenders, lenders will often tell us, hey, we review veteran owned business applications just like we do everyone else. Well, that would suggest that you’re not aware of the special considerations. So providing a lot more details in their policies and procedures for the lenders I think would help significantly.

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Tom Temin Now, one of your recommendations is and I’ll just read it. The administrator of SBA should ensure that the Associate Administrator of the Office of Veterans Business Development develop and implement policies and procedures for ensuring full compliance with quarterly year end reporting requirements. So it sounds like there’s some procedural things and the ability to get knowledge of the extent of loan programs for veterans might be lacking in the first place.

Daniel Garcia-Diaz Correct. And that recommendation focuses on SBA supported outreach centers that are all over the US. Right now there’s about 28 of them, and they provide training and information to veterans on how to start up a business, how to grow your business, and these centers. And they can be nonprofits that can be universities. They apply for a grant. They receive a grant from SBA to administer the outreach. They’re supposed to set goals for themselves and report on whether they’re achieving it to SBA. And what we found in 17 out of 21 cases that we looked at, that they weren’t reporting their objectives, their targets, and whether they’re meeting them. And so SBA really has to tighten their monitoring of these centers to ensure that they are delivering the counseling, the technical assistance, the training that they’re being asked to do.

Tom Temin And if the SBA does develop more precise language and use cases and so forth for the lending institutions to make solid the idea of preference for veterans or special consideration, I should say, then what is the obligation of lending institutions to accept those and adopt them?

Daniel Garcia-Diaz Well, the lenders will when they administer these programs, they are looking to SBA’s policies and procedures because it’s important for them to meet the rules of the program so that SBA will honor the guarantee if there should be a default. And so they are motivated to follow whatever instructions they get from SBA. And to the extent that SBA can provide a lot more clarity on what they mean by special considerations, that’s going to help the lenders follow through on it. But of course, you have to supplement that with monitoring and oversight just in general over the lenders, you know, which is also part of a bigger and broader issue at SBA.

Tom Temin Right. Does SBA have the institutional capacity to do this level of scrutiny on a pretty big program, given everything else that’s on the SBA’s plate?

Daniel Garcia-Diaz Correct. And as we showed in the report, veteran owned businesses receiving SBA assistance can account for anywhere between 2.1 and 5% of the loans made under these programs. That’s an important population to keep an eye on. And of course, Congress flagged it for SBA, but it is one population among many that SBA has to be keeping tabs on.

Tom Temin And what was SBA’s reaction to this latest report?

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Daniel Garcia-Diaz They generally agreed with all the recommendations, but interestingly, they also cited regarding the special considerations language, that they really didn’t think it was necessary that they provide a lot of flexibilities, you know, for lenders to implement those special consideration. But as we pointed out, and as we heard from the lenders, there’s not a lot of clarity around this and how to operationalize it when you’re underwriting a loan.