CRS Analyzes Small Business Capital Issues

Congressional interest in small business access to capital has increased in recent years because of concerns that small businesses might be prevented from accessing sufficient capital to enable them to create and retain jobs and assist in the economic recovery. Some, including President Obama, have argued that the federal government should provide additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses and create jobs.

During the 111^th Congress, P.L. 111-240, the Small Business Jobs Act of 2010, provided the Small Business Administration (SBA) additional funding and enhanced several SBA lending programs in an effort to assist small businesses access capital. The act also authorized the Secretary of the Treasury to establish a $1.5 billion State Small Business Credit Initiative (SSBCI).

The SSBCI provides funding, allocated by formula and distributed in one-third increments, to states, territories, and eligible municipalities to expand existing or to create new state small business investment programs, including state capital access programs, collateral support programs, loan participation programs, loan guarantee programs, and venture capital programs. In most instances, the initial round of funding (called a tranche) took place in FY2011. Most SSBCI participants received their second tranche during FY2013, and Treasury anticipates that most states will receive their third, and final, tranche during FY2014 or early in FY2015.

SSBCI participants are expected to leverage their SSBCI funds to generate new small business lending that is at least 10 times the amount of their SSBCI funds. Forty-seven states; American Samoa; the District of Columbia; Guam; the Northern Mariana Islands; Puerto Rico; the U.S. Virgin Islands; Anchorage, Alaska; two consortiums of municipalities in North Dakota; and a consortium of municipalities in Wyoming currently participate in the program.

The Obama Administration has recommended that another $1.5 billion round of funding take place, with applications accepted in FY2015 and state allotments provided in one-half increments starting in FY2015 and continuing through FY2018. The Administration has proposed that $1 billion be competitively awarded to states and $500 million awarded "by a need-based formula based on economic factors such as job losses and pace of economic recovery." Legislation with provisions similar to the Administration's proposal has been introduced in both the House and the Senate (H.R. 4556 and S. 2285).

This report examines the SSBCI and its implementation, including Treasury's response to initial program audits conducted by the U.S. Government Accountability Office and Treasury's Office of Inspector General. These initial audits suggest that SSBCI participants are generally complying with the statute's requirements, but that some compliance problems exist; Treasury's oversight of the program could be improved; and performance measures are needed to assess the program's efficacy.

                               Contents

Congressional interest in small business access to capital has increased in recent years because of concerns that small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recovery. Some, including President Obama, have argued that the federal government should provide additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. They argue that in recent years many financial institutions have tightened their small business lending standards in reaction to higher loan default rates and higher percentages of loans in arrears resulting largely from relatively weak economic conditions throughout the nation. They also assert that the federal government should intervene because it is relatively difficult for many small businesses, including some with excellent credit histories, to access the capital they need to expand their operations.¹

Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses and create jobs.²

During the 111^th Congress, P.L. 111-240, the Small Business Jobs Act of 2010, provided the Small Business Administration (SBA) additional funding, authorized several SBA pilot programs, and enhanced several of the SBA's lending programs in an effort to assist small businesses access capital.³ The act also authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) ($4.0 billion was issued) to encourage community banks with less than $10 billion in assets to increase their lending to small businesses and a $1.5 billion State Small Business Credit Initiative (SSBCI).⁴

The SSBCI provides funding, allocated through a statutorily created formula and distributed in one-third increments (called tranches), to states, the District of Columbia, eligible territories, and eligible municipalities (hereafter states) to expand existing or to create new state small business investment programs, including capital access programs, collateral support programs, loan participation programs, loan guarantee programs, and venture capital programs. In most instances, states received their initial tranche in FY2011, with over $366 million in SSBCI funds transferred to states.⁵ At that time, Treasury anticipated providing another $859 million in SSBCI funds to states in FY2012.⁶ However, because it took states somewhat longer than anticipated to expend, transfer, or obligate their first tranche of SSBCI funds, Treasury transferred less SSBCI funds to states in FY2012 than in FY2011 ($187 million, for a total of $553 million).⁷ In FY2013, Treasury transferred $364 million in SSBCI funds to states (totaling $917 million).⁸

As of March 31, 2014, Treasury had disbursed just over $1 billion, or about 72%, of the $1.45 billion available to states ($1.5 billion minus Treasury's administrative costs).⁹ As of March 31, 2014, all 57 participants had received their first tranche, 46 had received their second tranche, and 17 had received their third tranche.¹⁰ Treasury anticipates that most states will have received their third, and final, tranche by the end of FY2014 or early in FY2015, depending on how quickly they expend, transfer, or obligate their SSBCI funds.

States are expected to leverage their SSBCI funds to generate new small business lending that is at least 10 times the amount of their SSBCI funds (a leverage ratio of 10:1). Forty-seven states; American Samoa; the District of Columbia; Guam; the Northern Mariana Islands; Puerto Rico; the U.S. Virgin Islands; Anchorage, Alaska; two consortiums of municipalities in North Dakota; and a consortium of municipalities in Wyoming currently participate in the program.

During congressional consideration, advocates argued that the SBLF and SSBCI will promote economic growth and job creation by enhancing small business access to capital. Opponents argued that the SBLF and SSBCI did not address the need to stimulate demand for credit by small businesses, which, in their view, is the core issue affecting the role of small business in job creation during the economic recovery. They argued that "the solutions to America's economic problems do not lie in more taxpayer-funded bailouts," and advocated small business tax reductions as a more effective means to stimulate job creation and economic growth.¹¹ For additional discussion of these different approaches to stimulate job creation and economic growth see CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay Dilger and CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger.

It is still too early to determine the full extent of the SSBCI's effect on small business lending. As of March 31, 2014, states had spent or obligated just over half of the program's funds (about $820.2 million, or 56%).¹² Also, determining the program's influence on small business lending is likely to be more suggestive than definitive because differentiating the SSBCI's effect on small business lending from other factors, such as changes in the lender's local economy, is methodologically challenging, especially given the relatively small amount of financing involved relative to the national market for small business loans. The SSBCI's $1.5 billion in financing represents less than 0.3% of outstanding non-agricultural small business loans.¹³

The Obama Administration has argued that "SSBCI funds have already supported thousands of loans and investments that might not otherwise have been made to small businesses in a wide range of sectors" and "have helped create or save more than 53,000 American jobs."¹⁴ The Administration has announced that "due to the success of the first round of SSBCI, the President's [FY2015] budget proposes a second round of $1.5 billion for a program to run from 2015 through 2021."¹⁵ Under the Administration's proposal, applications for the second round of funding would be accepted in FY2015, with state allotments provided in one-half increments starting in FY2015 and continuing through FY2018.¹⁶ The Administration has proposed that $1 billion be competitively awarded to states "best able to target underserved groups, leverage federal funding, and evaluate results" and $500 million awarded "by a need-based formula based on economic factors such as job losses and pace of economic recovery."¹⁷

H.R. 4556, the Small Business Access to Capital Act of 2014, and its companion bill in the Senate (S. 2285), both introduced on May 1, 2014, and referred to their respective chamber's Committees on Small Business, include provisions similar to the Administration's proposal.

This report examines the SSBCI and its implementation, including Treasury's response to initial program audits conducted by the U.S. Government Accountability Office (GAO) and Treasury's Office of Inspector General (OIG). These audits suggest that states are generally complying with the statute's requirements, but that some compliance problems exist; Treasury's oversight of the program could be improved; and performance measures are needed to assess the program's efficacy.

Legislative Origins

On January 27, 2010, President Obama announced in his State of the Union Address that because "financing remains difficult for small business owners across the country, even those that are making a profit," he would send Congress several legislative proposals designed to enhance small business access to capital, including a proposal to establish a $30 billion SBLF.¹⁸ On May 7, 2010, the Obama Administration sent Congress draft legislation to establish the SBLF and the SSBCI.¹⁹

On May 13, 2010, Representative Gary Peters introduced H.R. 5302, the State Small Business Credit Initiative Act of 2010. The bill would have authorized a $2 billion SSBCI modeled on the President's SSBCI proposal. That same day, Representative Barney Frank, chair of the House Committee on Financial Services, introduced H.R. 5297, initially titled the Small Business Lending Fund Act of 2010. Based on the President's SBLF proposal, the bill was designed to encourage lending to small businesses by creating a $30 billion SBLF to make capital investments in eligible community banks with total assets of less than $10 billion.²⁰ On May 18, 2010, the Committee on Financial Services held a hearing on H.R. 5297 and, the following day, approved the bill, 42-23, as amended.²¹ Perhaps the most significant amendment approved was an amended version of the $2 billion State Small Business Credit Initiative Act of 2010. It was approved by a vote of 39-23.²²

SBLF and SSBCI advocates argued that the programs were necessary because "many companies, particularly small businesses, claim that it is becoming harder to get new loans to keep their business operating and that banks are tightening requirements or cutting off existing lines of credit even when the businesses are up to date on their loan repayments."²³ In their view, the SBLF and SSBCI would promote economic growth and job creation by enhancing small business access to capital.

The House Committee on Financial Services' Republicans indicated in the report accompanying H.R. 5297 that they "were unanimous in our opposition to this misguided legislation."²⁴ They argued that the SBLF and SSBCI did not address what they considered to be the core issue affecting small business job creation during the economic recovery -- the need to stimulate demand for credit by small businesses.²⁵ They argued that the bill would fail to help small businesses or create jobs, would succeed only in adding billions of dollars to the nation debt, and concluded that "the solutions to America's economic problems do not lie in more taxpayer-funded bailouts."²⁶ Instead of supporting federal spending programs to enhance small business access to capital, they advocated an extension of a series of small business tax credits as a more effective means to stimulate small business job creation and economic growth.²⁷

On June 14, 2010, the House Committee on Rules issued a rule for H.R. 5297 (H.Res. 1436), which provided that "in the engrossment of H.R. 5297, the Clerk shall add the text of H.R. 5486, as passed by the House, at the end of H.R. 5297 and that H.R. 5486 shall be laid on the table."²⁸ H.R. 5486, To Amend the Internal Revenue Code of 1986 to Provide Tax Incentives for Small Business Job Creation, and for Other Purposes, included several tax incentives for small businesses and several revenue raising provisions designed to offset the costs of the tax incentives. Also, at that time, the House Committee on Rules posted on its website legislative language for a proposed amendment in the nature of a substitute to H.R. 5297, as reported, which included a proposed $1 billion Small Business Early-Stage Investment Program.

On June 17, 2010, the House passed H.R. 5297, by a vote of 241-182. The engrossed bill, retitled the Small Business Jobs and Credit Act of 2010, also included the language in H.R. 5486 and the Small Business Early-Stage Investment Program, as well as the $30 billion SBLF and $2 billion SSBCI.

The arguments presented in the House report accompanying the bill, both for and against the bill's passage, were also presented during House floor debate. For example, advocates argued that the SSBCI would "increase small business lending which will retain and create jobs."²⁹ Opponents argued that the bill "is repeating the same failed initiatives that have helped our national debt grow to $13 billion in the past two years" and did not address what they viewed as the top problem facing small businesses -- "the lack of sales and demand."³⁰

The House-passed version of H.R. 5297 was placed on the Senate Legislative Calendar on June 18, 2010. Following a series of votes on motions to invoke cloture on several amendments in the nature of a substitute to H.R. 5297, and the August recess, the Senate passed an amended version of the bill (S.Amdt. 4594, an amendment in the nature of a substitute for H.R. 5297) on September 16, 2010, by a vote of 61-38.³¹ The Senate-passed version of the bill, which included the SSBCI but funded at $1.5 billion instead of $2 billion, was passed by the House on September 23, 2010, by a vote of 237-187. The enrolled bill, retitled the Small Business Jobs Act of 2010, was signed into law (P.L. 111-240) by President Obama on September 27, 2010.³²

The arguments presented during Senate floor debate, both for and against the bill's passage, were similar to those presented during House floor debate. One difference was a greater emphasis by the bill's advocates in the Senate on the SSBCI's support of state loan collateral programs. Several Senators argued that the SSBCI's support of state loan collateral programs was needed because, as one Senator pointed out "just as the recession has battered the value of our homes, it has also battered the value of business property such as real estate, factories, and equipment. That has damaged the ability of small businesses to get bank financing because it has lowered the value of property they can offer as collateral."³³

SSBCI Programs

The SSBCI provides funding to expand existing or to create new state small business investment programs, including capital access programs, loan participation programs, loan guarantee programs, collateral support programs, venture capital programs, and any other small business credit or equity support program that meets the SSBCI's program requirements.

State Capital Access Programs

State capital access (CAP) programs are loan portfolio insurance programs that enable "small businesses to obtain credit to help them grow and expand their business."³⁴ Under a CAP, when a participating lender originates a loan, the lender and borrower combine to contribute a percentage of the loan or line of credit into a reserve fund which is held by the lender. Under the SSBCI, the contribution must be from 2% to 7% of the amount borrowed. Typically, the contributions range from 3% to 4%. The state then matches the combined contribution, and sends that amount to the lender who deposits the funds into the lender-held reserve fund. State CAPs encourage lending to small businesses because the reserve fund reduces the lender's risk of losses by being available to cover any losses on any of the loans in the lender's CAP portfolio. Interest rates, maturity, collateral, and other loan terms are negotiated between the lender and the borrower.³⁵

Under the SSBCI, approved state CAPs are eligible for federal funding equal to the amount of the insurance premiums paid by the borrower and the lender into the lender-held reserve fund, as calculated on a loan-by-loan basis. The state may use SSBCI funding to make its contribution to the lender-held reserve fund. States may also supplement the federal contribution with state or private funds if it chooses to do so.³⁶

Subject to some restrictions, SSBCI state CAP loans may be used for most business purposes, "including, but not limited to: start-up costs, working capital, business procurement, franchise fees, equipment, inventory, and the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes."³⁷ In addition, the borrower must have 500 employees or less at the time that the loan is enrolled in the program and the loan amount may not exceed $5 million.³⁸

State Loan Participation Programs

State loan participation programs enable "small businesses to obtain medium to long-term financing, usually in the form of term loans."³⁹ States may structure loan participation programs in two ways: (1) by purchasing a portion of a loan originated by a lender (also known as a purchase transaction or purchase participation), or (2) by participating in the loan as a co-lender (also known as a companion loan) where a lender originates a senior loan and the state originates a second loan, which is usually subordinate to the lender's senior loan should a default occur, to the same borrower. State loan participation programs encourage lending to small businesses because the lender is able to diversify its risk of loss by sharing its exposure to loan losses with the state. Interest rates, maturity, collateral, and other loan terms for purchase transactions and purchase participations are negotiated between the lender and the borrower, although the state may seek to approve the loan terms prior to closing. For companion loans, the state and lender negotiate interest rates, maturity, collateral and other loan terms.⁴⁰

Subject to some restrictions, loans in SSBCI state loan participation programs may be used for most business purposes (start-up costs, working capital, business procurement, franchise fees, etc.). In addition, SSBCI state loan participation programs must target an average borrower size of 500 employees or less, and may not extend credit to borrowers with more than 750 employees.

They must also target an average loan amount of $5 million or less, and may not extend credit for any single loan exceeding $20 million.⁴¹

State Loan Guarantee Programs

State loan guarantee programs enable "small businesses to obtain term loans or lines of credit" by providing the lender "with the necessary security, in the form of a partial guarantee, for the lender to approve a loan or line of credit."⁴² The guarantee percentage is determined by the states and lenders, but, under the SSBCI, may not exceed 80% of loan losses. Also, origination and annual utilization fees are determined by each state to defray the program's cost. Under the SSBCI, fees may range from 0% to 3% of the loan amount. States typically establish limits on the amount of loans any one lender can originate in the program, and have a cash reserve to cover anticipated losses on the guarantees. Interest rates, maturity, collateral, and other loan terms are typically negotiated between the lender and the borrower, although in some cases, loan terms are subject to state approval and, in many cases, the state and lender will discuss and negotiate loan terms and guarantee options prior to reaching agreement to approve the loan and issue a guarantee.⁴³

Subject to some restrictions, loans in SSBCI state loan guarantee programs may be used for most business purposes. In addition, SSBCI state loan guarantee programs must target an average borrower size of 500 employees or less, and may not guarantee credit to borrowers with more than 750 employees. They must also target an average loan amount of $5 million or less, and may not guarantee credit for any single loan exceeding $20 million.⁴⁴

State Collateral Support Programs

State collateral support programs are "designed to enable financing that might otherwise be unavailable due to a collateral shortfall."⁴⁵ They provide pledged collateral accounts to lenders to enhance the collateral coverage of individual loans. Lenders are required to have at least 20% of their own capital at risk in each loan. Interest rates, maturity, collateral, and other loan terms are negotiated between the lender and the borrower. The state and lender negotiate the amount of cash collateral to be pledged by the state. In practice, state collateral support is rarely provided for more than 50% of the loan value.⁴⁶

Subject to some restrictions, SSBCI state collateral support program loans may be used for most business purposes. In addition, SSBCI state collateral support programs must target an average borrower size of 500 employees or less, and may not support credit to borrowers with more than 750 employees. They must also target an average loan amount of $5 million or less, and may not support credit for any single loan exceeding $20 million.⁴⁷

State Venture Capital Programs

State venture capital programs provide "investment capital to create and grow start-up and early-stage businesses."⁴⁸ They come in two forms: a state-run fund, which may include private investors, that invests directly in businesses; and a fund of funds that invests in other venture capital funds that, in turn, invest in individual businesses.⁴⁹ In both cases, the day-to-day management of the fund is typically outsourced to a professional firm. Investments are typically equity (stock) and hybrid investments, such as preferred equity and subordinated debt. Terms are negotiated between the business owner and the venture capital fund. The standard life of most state venture capital funds is 12 years, and individual fund investments are typically for 3 to 7 years.⁵⁰

Subject to some restrictions, SSBCI state venture capital program investments may be used for most business purposes. In addition, SSBCI state venture capital programs must target its investments to businesses that have 500 employees or less, and may not invest in businesses with more than 750 employees. They must also target an average investment of $5 million or less, and may not make a single investment exceeding $20 million.⁵¹

SSBCI Funding

P.L. 111-240 appropriated $1.5 billion to the Department of the Treasury for the SSBCI program, including the "reasonable costs of administering the program."⁵² The 50 states, American Samoa, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands, the U.S. Virgin Islands, and, in some instances, municipalities are eligible for funding, with the amount available to each state, territory, and municipality determined by a formula contained in the act (described later in this section).

Application Process

To receive SSBCI funding, states, American Samoa, the District of Columbia, Guam, Puerto Rico, the Northern Mariana Islands, and the U.S. Virgin Islands were required to file a notice of intent to apply for funding with Treasury by November 26, 2010. After filing a notice of intent to apply for funding, they were required to submit to Treasury an application for funding by June 27, 2011.

Municipalities were allowed to apply for funding, but only in the event their state did not participate in the program. Municipalities were eligible to apply for funding up to the total amount of their state's SSBCI allotment, with the final approved amounts apportioned based on their proportionate share of the population of all approved municipal applicants in that state, based on the most recent available decennial census.⁵³ Eligible municipalities were required to submit to Treasury an application for funding by September 27, 2011.

The application for funding requested information concerning such items as

• the amount requested;

• how the funds are to be used (state capital access program, collateral support program, loan participation program, loan guarantee program, venture capital program, or other small business support program);

• confirmation that at a minimum, $1 of public investment will result in at least $1 of new private credit; that there is a reasonable expectation that the funding will result in new small business lending of at least 10 times the amount of the SSBCI federal contribution; that the funding targets small businesses with 500 employees or less, does not support borrowers that have more than 750 employees, targets loans with an average principal of $5 million or less, and does not extend credit support to loans that exceed $20 million;

• documentation describing the operational capacity, skills, and experience of the applicant's management team in operating capital access and other small business capital support programs;

• documentation describing the internal accounting and administrative control systems used to safeguard against waste, loss, unauthorized use, and misappropriation; and

• documentation describing how the participant planned to use the funds "to provide access to capital for small businesses (1) in low- and moderate-income communities, (2) in minority communities, (3) in other underserved communities, and to (4) women- and minority-owned small businesses."⁵⁴

The SSBCI funding formula takes into account the number of jobs and job losses for each state in proportion to the aggregate number of jobs and job losses nationally. Specifically, it is based on the average of (1) the number of individuals employed in each state in December 2007 compared to the number of individuals employed in each state in December 2008; and (2) the number of individuals unemployed in each state in December 2009 compared to the number of individuals unemployed nationally in December 2009. After accounting for Treasury's anticipated administrative costs, each participating state is guaranteed a minimum allotment of 0.9% of available funding ($13,168,350).⁵⁵

Funding is provided in three installments (called tranches), each approximately one-third of the participant's approved allotment. The first tranche is provided "immediately following the receipt of the fully signed Allocation Agreement."⁵⁶ Allotment agreements describe how states are to comply with program requirements and are signed after the state's application is approved.

Prior to the receipt of the second and third tranches, each state must certify that it has expended, transferred, or obligated at least 80% of the previous disbursement to, or for the account of, one or more approved state programs.⁵⁷ Treasury is authorized to recoup misused funds should the state be found in default of the allocation agreement and may terminate any portion of an allotment that Treasury has not disbursed within two years of the date on which the allocation agreement with the state was signed. By statute, all SSBCI allocation agreements expire on March 31, 2017.

State-by-State Allotments

Forty-eight of the 50 states, American Samoa, the District of Columbia, Guam, Puerto Rico, the Northern Marianas Islands, and the U.S. Virgin Islands submitted an application to participate in the program by the June 27, 2011, deadline. Collectively, they requested approximately $1.4 billion in funding.⁵⁸ North Dakota and Wyoming did not apply. Alaska later withdrew its application. Five municipalities (one in Alaska, two in North Dakota, and two in Wyoming) subsequently requested $39.5 million in SSBCI funding.⁵⁹ Funding was allotted to Anchorage, Alaska ($13,168,350); a Laramie, Wyoming, led consortium of 17 municipalities ($13,168,350); a Mandan, North Dakota, led consortium of 37 municipalities and an Indian tribe ($9,710,768); and a Carrington, North Dakota, led consortium of 36 municipalities ($3,457,582).

Table 1 shows the amount of SSBCI funding awarded to each state and territory (hereinafter referred to as states unless otherwise noted), and the types of small business investment programs supported. As shown on Table 1, California received the largest allotment ($167.75 million) and American Samoa, which requested less than the minimum guaranteed allotment, received the smallest allotment ($10.5 million).

Twenty-six states use SSBCI funding to support a capital access program, 37 support a loan participation program, 18 support a loan guarantee program, 17 support a collateral support program, 32 support a venture capital program, and 9 support another type of small business credit or equity program.

                            Table 1. SSBCI Programs

States may use up to 5% of their initial tranche, and up to 3% of their second and third tranches, for administrative expenses related to implementing an approved small business investment program. They are also subject to several reporting requirements. For example, they must submit to Treasury quarterly reports describing the use of allocated funds for each approved program, including the total amount of allocated funds used for direct and indirect administrative costs, the total amount of allocated funds used, the amount of program income generated, and the amount of charge-offs against the federal contributions to the reserve funds set aside for any approved CAP. They are also required to submit annual reports to Treasury, by March 31 of each year, containing, among other things, transaction-level data for each loan or investment made with SSBCI funds for that year.

Audits, Evaluation Reports, and Program Adjustments

P.L. 111-240 requires the Government Accountability Office (GAO) to perform an annual audit of the SSBCI program. In addition, the act requires the Office of Inspector General (OIG) of the Department of Treasury to conduct, supervise, and coordinate audits and investigations into the use of SSBCI funds. GAO released its first annual audit of the program on December 7, 2011, the second annual audit on December 5, 2012, and third annual audit on December 18, 2013. Treasury's OIG released its first evaluation report of Treasury's implementation of the SSBCI on August 5, 2011, and its first audit of a state's use of SSBCI funds (California) on May 24, 2012. As of July 24, 2014, Treasury's OIG had completed audits of 21 participants' use of SSBCI funds (California, Montana, Vermont, Michigan, Texas, Massachusetts, Delaware, New Jersey, Alabama, Missouri, Washington, Kansas, Florida, Louisiana, West Virginia, Illinois, South Carolina, American Samoa, North Carolina, Idaho, and Indiana).⁶¹

GAO's 2011 Audit

GAO noted in its 2011 SSBCI audit that Treasury's early implementation efforts were appropriately focused on establishing the application process and the process for distributing initial installments of funds to recipients as quickly as possible.⁶² Left unstated was that Treasury was establishing policy guidelines and paperwork requirements for the program essentially from scratch. Also, participants reported that nearly one-half of their SSBCI investment programs were new.⁶³ This suggests that at least some states had limited prior experience operating and overseeing many of their small business investment programs.⁶⁴

GAO found that Treasury issued an initial set of policy guidelines and application materials via its website on December 21, 2010, and "was able to review, approve and obtain signed allocation agreements with and distribute first installments of funds to two states in January 2011."⁶⁵ In response to feedback from states, the SBA, and other federal agencies, Treasury decided to revise its policy guidelines and application paperwork "to better articulate what documentation was required for both the application and review processes."⁶⁶ Revised policy guidelines and modifications to the allocation agreements were issued in April 2011. The two previously approved states were asked to sign an amended allocation agreement that incorporated the revisions.

GAO reported that several states indicated that they had delayed submitting their SSBCI applications until Treasury issued its final application guidance and 37 states submitted their applications in June 2011, the final month that applications were allowed. Although some states had postponed the submission of their applications, GAO found that "despite the delay in providing application guidance, applicants generally viewed Treasury officials as helpful throughout the application process -- providing answers to most questions immediately and determining answers as soon as possible when not readily available."⁶⁷

GAO also found that Treasury finalized its disbursement procedures for second and third installments of SSBCI funds at the beginning of November 2011. Treasury officials reported that despite this delay, no state, at that time, had expended 80% of its initial disbursement to support loans or investments to small businesses. However, GAO noted that while Treasury was finalizing the disbursement procedures "states were potentially delayed in receiving their remaining SSBCI funding."⁶⁸ GAO noted that one state that they contacted reported that they were ready for their second installment before Treasury had finalized the disbursement procedures, but were told by Treasury officials that they would have to wait until the disbursement procedures were finalized.⁶⁹

GAO concluded its audit by noting that Treasury had not yet developed performance measures for the SSBCI program. GAO noted that "measuring performance allows organizations to track progress toward their goals and gives managers crucial information on which to base decisions" and "until such measures are developed and implemented Treasury will not be in a position to determine whether the SSBCI program is effective in achieving its goals."⁷⁰

Treasury's Response to GAO's 2011 Audit: Performance Measures

In response to GAO's audit, in January 2012, Treasury adopted three performance goals to measure its administration of the program and four performance indicators to measure SSBCI outcomes.

The following three performance goals reflect Treasury's role in administrating the program, which includes evaluating the eligibility of participating states and approved state programs; providing program oversight, including compliance with the act's provisions, SSBCI policy guidelines, and the terms and conditions of the allocation agreements; and providing on-going technical assistance related to the program's implementation:

• 90% of requests for modifications to allocation agreements are approved or rejected within 90 days of receiving a final submission;

• 90% of requests for subsequent disbursements under existing allocation agreements are approved or rejected within 90 days of receipt of a formal submission; and

• 90% of quarterly reports are received within 5 days of the deadline.⁷¹

The following four performance indicators were established to serve as "benchmarks for any future programs of a similar nature to the SSBCI":⁷²

• the amount of SSBCI funds used over time, as reported on SSBCI quarterly reports;

• the volume and dollar amounts of loans or investments supported by SSBCI funds, as reported on SSBCI annual reports;

• the amount of private sector leverage, as reported on SSBCI annual reports; and

• the estimated number of jobs created or retained, as reported on SSBCI annual reports.

GAO's second annual audit of the SSBCI, issued on December 5, 2012, found that as of June 30, 2012, Treasury had transferred $468 million in SSBCI funds to states (about one-third of total SSBCI funds), and states had disbursed about $150 million of that amount (about 10% of total SSBCI funds). GAO reported that the states they interviewed said that "disbursing funds was much faster for state programs that were in existence before SSBCI because the infrastructure was already in place and lenders were already familiar with the programs" but that "some states implementing new programs told us that it could take time to use the funds because they had to conduct extensive outreach to lenders to make them aware of the programs and encourage them to commit to small business lending."⁷⁴

GAO noted that Treasury is authorized to revoke any portion of a participating state's allocated SSBCI funds that had not been transferred to the state by the end of the two-year anniversary of the state's approval to participate in the SSBCI. GAO noted that Treasury had not developed a written policy on how it will use this authority, that most of the participating states' two-year period will end sometime in 2013, and "it is still unknown if they all will be able to use their funds in the time to obtain the third and final disbursement within this time frame."⁷⁵ GAO noted that although Treasury officials had indicated at an October 2012 conference attended by many SSBCI participants that "Treasury did not currently plan to exercise this authority in the near future," GAO argued that "when states are required to spend federal funds to meet a statutory deadline or specific program requirements, agencies should provide guidance to the states on what they should expect if they are unable to meet the deadline."⁷⁶ In the absence of a formal written policy on this matter, GAO asserted that it was unclear how Treasury would use this authority in a consistent manner.

GAO also acknowledged that, in response to its first annual audit of the SSBCI, Treasury had created performance measures "to help monitor and measure the effectiveness of SSBCI."⁷⁷

However, GAO noted that Treasury "has not yet determined how and when it will make this information public."⁷⁸ GAO argued that "we recognize that it is still early in the program and results vary greatly across the program participants for a variety of reasons," but "Treasury should make information publicly available concerning its performance indicators" because "performance information is an important tool for policymakers, particularly as Congress reviews and considers programs to assist small businesses going forward."⁷⁹

Treasury's Response to GAO's 2012 Audit: Written Policy Guidance and Publishing Performance Measures

In June 2013, Treasury responded to GAO's recommendation for written policy guidance concerning the Treasury's discretionary authority to revoke a participating state's allocated SSBCI funds that had not been transferred to the state by the end of the two-year anniversary of the state's approval to participate in the SSBCI by disseminating, by email, a "Frequently Asked Question" (FAQ) narrative on the topic to all participating states. Treasury also discussed its policy guidance on this subject at the national SSBCI conference held on June 3 and 4, 2013.⁸⁰

Treasury issued the following policy guidance on this subject:

On September 25, 2013, Treasury released the first of what will be an annual summary report of performance information drawn from SSBCI participants' annual reports.⁸⁴ The summary report contained information drawn from SSBCI participants' 2012 annual reports and included data related to each of the Treasury's four performance measures (amount of SSBCI funds used over time, volume and dollar amounts or investments supported by SSBCI funds, amount in dollars, of private-sector leverage, and estimated number of jobs created or retained), as of December 31, 2012.

GAO's 2013 Audit

GAO's third annual audit of the SSBCI, issued on December 18, 2013, found that although the pace of participant SSBCI spending had increased since their second annual audit, participants were still facing several challenges in using their SSBCI funds. For example, as of June 30, 2013, Treasury had disbursed about $811 million in SSBCI funds to participants (about 54% of total SSBCI funds). Eight participants had received their third and final tranche, 19 participants had received their second tranche, and 30 participants were "still working to use their first disbursement of SSBCI funding."⁸⁵ Participants had disbursed about $549 million of their allotment of SSBCI funds (about 38% of total SSBCI funds).⁸⁶ As of June 30, 2013, 18 participants had used more than 50% of their allocation, 14 participants had used more than 25% but less than 50% of their allocation, 19 participants had used more than 10% but less than 25% of their allocation, and 6 participants had used 10% or less of their allocation.⁸⁷

Participants told GAO that the administrative challenges they faced early in the program's implementation that slowed their spending, such as Treasury's delay in finalizing the program's guidelines and the learning associated with implementing a relatively large number of new small business programs, were now largely resolved and "were issues that they would expect to occur with the implementation of any new program."⁸⁸ Participants also told GAO that the unexpected low demand for some SSBCI CAP programs also slowed their SSBCI spending. They explained that it took some time for them to reallocate funds from SSBCI programs experiencing low demand to those experiencing higher demand.⁸⁹

Participants indicated that they were now facing several new challenges in spending their SSBCI allotment, including (1) the reluctance of large banks to participate in the program, (2) the Small Business Jobs Act of 2010's requirement that participants obtain certifications from lenders and borrowers that they have not been convicted of a sex offense against a minor, and (3) concerns expressed by some lenders that they could be subject to additional regulatory scrutiny for using SSBCI programs to underwrite loans.⁹⁰

Treasury officials and representatives of a trade association told GAO that the reluctance of large banks to participate in the SSBCI was due to the variation of SSBCI programs across the nation. They explained that "national banks typically design programs that can be implemented consistently throughout the country and that they are reluctant to tailor different processes to each SSBCI participant's program."⁹¹

Two SSBCI participants told GAO that there were banks that refused to participate in their SSBCI programs because of the sex offender certification requirement.⁹² Several SSBCI participants also told GAO that "some banks have determined that, for legal reasons, they are not able to sign the certification, while other banks do not understand the need for the requirement."⁹³

To help address lenders' concerns about being subject to additional regulatory scrutiny for using SSBCI programs to underwrite loans, Treasury officials briefed officials from the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) concerning the SSBCI program and provided them periodic program updates. The FDIC and OCC also published guidance assuring their regulated entities that solely participating in the SSBCI does not subject them to increased regulatory scrutiny.⁹⁴

GAO concluded their audit by noting that Treasury had developed targets for its three measures relating to administrative performance, but had not developed targets for its four measures related to program performance. It recommended that Treasury establish targets for selected performance measures related to monitoring program performance and seek input from program stakeholders, including other agencies involved in promoting small businesses and Congress, as its designs its SSBCI program evaluation.

Treasury's Response to GAO's 2013 Audit: Targets for Program Performance Measures and Outreach

On December 4, 2013, Treasury officials informed GAO that it agrees with both of GAO's recommendations and has begun the process of establishing targets for program performance measures and for gathering input from program stakeholders in designing SSBCI program evaluations.⁹⁵

Treasury's Inspector General Evaluation Reports

On August 5, 2011, Treasury's OIG issued its first evaluation report examining the SSBCI program.⁹⁶ On the opening page, the OIG praised Treasury officials for "seeking our assistance during the developmental stage of the program."⁹⁷ The OIG noted in the report that Treasury officials had previously made several revisions to the SSBCI's initial policy guidelines, allocation agreement, and application materials following consultation with the OIG, including modifying "the SSBCI application to require that applicants detail their oversight and compliance regimes prior to receiving program approval."⁹⁸

After examining Treasury's policy guidelines and allocation agreement between Treasury and participating states, the OIG made nine recommendations for improvements. For example, the OIG recommended that Treasury improve the understanding of state oversight responsibilities by more clearly defining what is meant by the terms "supervision and oversight and accountability; and set minimum standards for participating state oversight of SSBCI recipients, including defining a participating state's role in overseeing compliance with loan use requirements and restrictions."⁹⁹ The OIG also recommended that Treasury "either modify the allocation agreement or amend the policy guidelines to require participating states to make a representation that it is aware of, monitoring, and enforcing compliance with the policy guidelines and other restrictions applicable to the other participants [lenders and borrowers] in the program."¹⁰⁰

Treasury took several immediate actions to address the OIG's recommendations. For example, in response to the recommendation that Treasury more clearly define the terms "supervision and oversight and accountability" and to establish minimum standards for participating state oversight of SSBCI recipients, Treasury revised its SSBCI "Frequently Asked Questions" document on its website "to combine all applicable oversight requirements in one place" and "elaborate on the specific duty that each provision imposes upon the participating state."¹⁰¹ In addition, Treasury also took into consideration the OIG's recommendations as it developed its SSBCI National Standards for Compliance and Oversight document, which was released on May 15, 2012.¹⁰²

Treasury's Inspector General Use of SSBCI Funds Audit Reports

On May 24, 2012, Treasury's OIG released the first of a planned series of audits of state use of SSBCI funds, starting with California.¹⁰³ As mentioned previously, as of July 24, 2014, Treasury's OIG had completed audits of 21 participants' use of SSBCI funds (California, Montana, Vermont, Michigan, Texas, Massachusetts, Delaware, New Jersey, Alabama, Missouri, Washington, Kansas, Florida, Louisiana, West Virginia, Illinois, South Carolina, American Samoa, North Carolina, Idaho, and Indiana).¹⁰⁴

In each audit, Treasury's OIG reviewed a judgmental sample of small business loans or investments to "determine whether [the loans or investments] complied with program requirements for loan use, capital at risk, and other restrictions."¹⁰⁵ Treasury's OIG then determined if there were "any instances of reckless or intentional misuse."¹⁰⁶ Treasury is required to recoup any funds that the OIG identifies as intentionally or recklessly misused.¹⁰⁷ To date, only Texas, New Jersey, Louisiana and West Virginia were found to be in full compliance with all SSBCI requirements.

California

Treasury's OIG determined that California had used the majority of the $3.6 million in SSBCI loans it examined properly, but identified $133,250 in loan loss reserves funded under California's Small Business Loan Guarantee Program that did not comply with SSBCI program requirements.¹⁰⁸ The OIG indicated that these non-compliant expenditures "constitute a 'reckless' misuse of funds as defined by Treasury guidance, which under the provisions of the Small Business Jobs Act must be recouped."¹⁰⁹ The OIG also identified $160,988 in administrative expenses charged to the SSBCI program that were "not adequately supported by actual expenses incurred or with proper documentation to validate the costs claimed."¹¹⁰ The OIG also reported that "42 or approximately 58%, of the 73 loans we tested lacked all of the required borrower and lender assurances."¹¹¹

Treasury agreed to recoup from California the $133,250 in loan loss reserves identified by the OIG as a reckless misuse of funds; required California to provide additional supporting documentation for its SSBCI administrative expenses; and required California program officials to address missing borrower and lender certifications and assurances. Treasury subsequently noted that any loans still missing required assurances and certifications had been un-enrolled, and all other certification issues had been resolved.¹¹²

Montana

Treasury's OIG found that Montana had misused $2.73 million of the $4.9 million in SSBCI funds it examined because the funds were used for passive real estate investments and the refinancing of prior debt, which "are prohibited under the Small Business Jobs Act or SSBCI Policy Guidelines."¹¹³ The OIG also found that $3,426 in personnel costs incurred for administering SSBCI funds were not allowable or allocable because the costs were not properly supported as required by OMB Circular A-87.¹¹⁴

The OIG "did not find the misuse of funds to be intentional or reckless as Montana sought guidance from Treasury before enrolling the loans."¹¹⁵ The OIG reported that Treasury officials did not provide definitive guidance on the permissibility of passive real estate loans and informed Montana that refinancing prior debt to the same lender was allowable if the prior debt had matured and new underwriting has occurred. The OIG noted that Treasury attempted to clarify the Small Business Job Act's prohibition on the refinancing of prior debt by defining "refinancing," which is not defined in the act. The OIG challenged Treasury's conclusion "that the statutory prohibition on refinancing the same lenders' loans pertained only to existing debt that had not yet matured and that refinancing debt after it matures constitutes 'refunding,' a permitted use."¹¹⁶ The OIG noted that there were no references in the Small Business Jobs Act or in Treasury's SSBCI Policy Guidelines concerning "re-funding."¹¹⁷

Treasury agreed to notify participating states that loans for passive real estate are considered a misuse of funds and encourage them to review their loan enrollments to ensure compliance with guidance that was in place at the time the loans were made.¹¹⁸ Treasury also agreed to "provide a clear and rigorous analysis documenting how Treasury concluded that some refinancing of existing debt from the same lender, or 're-funding,' is consistent with the statutory language, or amend the program procedural guidance to remove that possibility."¹¹⁹ Treasury also found that Montana was unable to provide the necessary documentation for the $3,426 in personnel costs cited by the OIG in its review of the state's SSBCI administrative expenses and that those costs would be disallowed.¹²⁰

Vermont

Treasury's OIG examined 26 loans issued under Vermont's four SSBCI programs and found that Vermont's interest rate subsidy program ($931,000 in SSBCI funding) did not comply with the requirements established by its Allocation Agreement with Treasury.¹²¹ Because the state estimated its interest rate subsidies, the OIG found that Vermont's quarterly reports to Treasury "do not reflect the State's actual use of funds for the program" and, therefore, "the State cannot provide Treasury with accurate information for measuring the leverage achieved with SSBCI funds."¹²² The OIG recommended that Treasury require Vermont to provide a sub-accounting of all the funds transferred in connection with the interest rate subsidy program as well as program income generated from the use of such funds. In addition, the OIG recommended that Treasury determine whether Vermont "is in general default of its Allocation Agreement due to its non-compliance with accounting and lender/borrower assurance requirements, and whether future funding to the State should be reduced, suspended, or terminated."¹²³ The OIG also found that $216,820 in administrative expenses charged to the SSBCI program did not comply with program guidance.¹²⁴

Treasury agreed to require Vermont to provide a sub-accounting of all the funds transferred in connection with the interest rate subsidy program as well as all program income generated from the use of such funds.¹²⁵ Treasury also agreed to determine whether "there has been a general event of default under Vermont's Allocation Agreement resulting from the State's non-compliance with the grants management common rule or lender/borrower assurance requirements" and, "if such an event has occurred and has not been adequately cured, determine whether it warrants a reduction, suspension, or termination of future funding to the State."¹²⁶ Treasury also agreed to disallow the $216,820 in administrative expenses charged to the SSBCI program by Vermont unless the state provides supporting documentation in accordance with OMB Circular A-87.¹²⁷

Michigan

Treasury's OIG found that Michigan had used the majority of the $38.5 million in SSBCI loans it examined properly, but identified "approximately $2.524 million in misuse of which $2.5 million was used to finance lender purchase transactions that did not involve extensions of additional credit to borrowers; $3,000 supported a partner buy-out, a prohibited use; and $21,000 was used to pay the CAP insurance premium on a loan closed and funded prior to Michigan's acceptance into the SSBCI program and Treasury's allocation of funds to the State."¹²⁸ The OIG found that the $21,000 used to pay the CAP insurance premium was a "reckless" misuse of funds that must be recouped. Although the OIG did not find the $2.5 million used to finance lender purchase transactions that did not involve extensions of additional credit to borrowers as a "reckless" misuse of funds, it did question whether the purchase transactions "are consistent with the intent of the [Small Business Jobs] Act to help small businesses expand, grow, and create jobs."¹²⁹ It recommended that Treasury develop guidance for such transactions. In addition, the OIG found $8,506 in administrative expenses charged to the SSBCI program that were incurred prior to the date Michigan was approved to participate in the program and notified of its SSBCI allocation and recommended that those expenses be disallowed.¹³⁰

Treasury agreed to issue guidance to address the conditions under which loan purchase transactions would be permitted.¹³¹ Treasury also agreed to recoup the $21,000 used to pay the CAP insurance premium on a loan closed and funded prior to Michigan's acceptance into the SSBCI program and Treasury's allocation of funds to the state and to disallow the $8,506 in administrative expenses that were incurred prior to the date Michigan was approved to participate in the program and notified of its SSBCI allocation.¹³²

Texas

Treasury's OIG examined five investments, totaling $6.3 million, financed by the Texas Small Business Venture Capital Program and found the program in full compliance with all SSBCI requirements. The OIG credited the state's "success in ensuring full compliance with SSBCI requirements" to the state's "use of a checklist to evaluate compliance with program requirements prior to the completion of each transaction."¹³³

Massachusetts

Treasury's OIG contracted with an independent certified public accounting firm to audit Massachusetts' use of SSBCI funds. As of June 30, 2012, Massachusetts had obligated or spent approximately $6.6 million of the SSBCI funds disbursed, including $4 million for the Massachusetts Growth Capital Corporation (MGCC) Loan Participation Program, $2.1 million for the Massachusetts Business Development Corporation (MBDC) Loan Participation Program, and $211,000 for the Massachusetts Capital Access Program (MCAP). The Commonwealth also incurred approximately $321,000 in administrative costs.

The accounting firm reviewed the state's administrative costs and a randomly selected sample of 35 state SSBCI transactions (3 loan participation loans and 32 capital access loans) to determine their compliance with SSBCI requirements. The audit found that Massachusetts charged $200,000 in administrative costs to the SSBCI program that did not comply with program guidance and Massachusetts did not include in its quarterly reports to Treasury $51,248 of program income. The audit also found that 34 of the 35 transactions were in compliance with program requirements. The accounting firm noted that a transaction for $237,000 made by the MBDC Loan Participation Program appeared to be prohibited by SSBCI Policy Guidelines because it involved an SBA-guaranteed loan. Massachusetts officials "reported that they believed that the loan in question was compliant with program requirements because Treasury's SSBCI Policy Guidelines prohibit the enrollment of only the unguaranteed portions of federally-guaranteed loans" and "the prohibition on credit enhancement did not pertain to the guaranteed portion of federally-guaranteed loans."¹³⁴ In addition, the audit found that Massachusetts did not obtain complete borrower and lender assurances for 89% of the loans reviewed by the time of loan closing.¹³⁵

The OIG recommended that Treasury "revise its program guidance to make the enrollment of federally-guaranteed loans a clear prohibition, disallow $200,000 in administrative expenses unless the Commonwealth can provide adequate support for such costs, and require the Commonwealth to demonstrate that it has a compliant system for allocating administrative costs."¹³⁶ The OIG also recommended "that Treasury determine whether there has been a general event of default of the Allocation Agreement resulting from Massachusetts' non-compliance with lender/borrower assurance requirements, materially inaccurate certifications, and failure to report program income."¹³⁷

In response to the OIG's recommendations, Treasury indicated that it was in the process of revising its program guidance on the enrollment of federally-guaranteed loans, and will determine whether Massachusetts has adequately cured its non-compliance with program requirements and whether additional action is warranted. Also, Massachusetts clarified that while it reported $200,000 in administrative expenses, it did not charge the SSBCI fund for them, and does not intend to seek reimbursement from SSBCI for these expenses. Massachusetts also reported that many of the transactions examined during the audit "were made in the early stage of the SSBCI program, before suggested reporting forms were promulgated by Treasury."¹³⁸

Delaware

Treasury's OIG found that as of September 30, 2012, Delaware had obligated or spent approximately $4.1 million of its first SSBCI disbursement of $4.3 million -- $80,883 for 36 loans enrolled in the Delaware Access Program and approximately $4 million for 14 loans enrolled in the Delaware Strategic Fund (DSF) Loan Program. The OIG reviewed a random sample of 26 loans (19 from the Delaware Access Program and 7 from the DSF Loan Program) that were enrolled as of September 30, 2012, to determine if they were in compliance with program requirements.¹³⁹

The OIG did not identify any instances of intentional or reckless misuse of funds. However, it did find that while Delaware obtained most borrower and lender assurances at loan closing, these assurances did not contain all required affirmations.¹⁴⁰ Several assurances were also missing signatures or dates. In addition, the OIG found that Treasury became aware of Delaware's noncompliance with the assurance requirements in May 2012, but it was not until October 2012 that Treasury directed Delaware's officials to obtain the missing assurances for each loan. By November 2012, Delaware had retroactively obtained the missing assurances.

The OIG recommended that Treasury "examine the reasons why appropriate and timely actions were not taken to address Delaware's compliance and certification issues, and take appropriate actions to strengthen its compliance monitoring and enforcement of program requirements."¹⁴¹ In response to this recommendation, Treasury reported that it "is in the process of adjusting the quarterly certification process to cover circumstances where a participating state has a known unresolved item of noncompliance."¹⁴² Also, Delaware officials reported that they had implemented "additional precautions, including random audits of SSBCI loans, to ensure compliance with use of proceeds, capital-at-risk, and assurance requirements."¹⁴³

New Jersey

Treasury's OIG contracted with an independent certified public accounting firm to audit New Jersey's use of SSBCI funds.¹⁴⁴ The accounting firm found that as of June 30, 2012, New Jersey had spent about $2.9 million of its first SSBCI disbursement of $11.1 million -- $1.76 million for two loan participations, $675,000 for a credit guarantee, and $500,000 for a direct loan.¹⁴⁵

The accounting firm reviewed all four transactions and determined that New Jersey complied with all program requirements in administering the $2.9 million in SSBCI funds. The OIG concluded that New Jersey's "success in ensuring full compliance was attributable to several best practices that the New Jersey Economic Development Authority [which administers New Jersey's SSBCI program] employed to enhance its program oversight," including the use of a "SSBCI Application Eligibility Criteria Checklist" that "listed each of the required SSBCI assurances and specific SSBCI program requirements which had to be completed and signed prior to each transaction."¹⁴⁶

Alabama

Treasury's OIG contracted with an independent certified public accounting firm to audit Alabama's use of SSBCI funds. The accounting firm reviewed all 14 loans enrolled in Alabama's Loan Guarantee Program, totaling approximately $3.8 million, made between the signing of the SSBCI Allocation Agreement on August 24, 2011, and June 30, 2012. The accounting firm also reviewed the $45,172 in administrative expenses Alabama charged against SSBCI funds during that time period to ensure they were allowable, reasonable, and allocable.

The audit found that Alabama complied with all program requirements in administering the $3.8 million of SSBCI funds used as of June 30, 2012. The OIG attributed "the state's success in ensuring full compliance" to the Alabama Department of Economic and Community Affairs' requirement that a checklist containing SSBCI requirements be completed prior to each loan enrollment to ensure that the loan was in full compliance with SSBCI requirements.¹⁴⁷ The audit also found that Alabama had overstated the amount of SSBCI funds used by approximately $1 million on its March 31, 2012, Quarterly Report, and by approximately $4 million on its June 30, 2012, Quarterly Report. The OIG indicated that the errors occurred because Alabama incorrectly included private lender contributions to loan loss reserves for loans guaranteed with SSBCI funds. However, because the inaccuracies were identified by Treasury and corrected prior to the audit, the OIG made no recommendations concerning the errors.¹⁴⁸

Missouri

Treasury's OIG contracted with an independent certified public accounting firm to audit Missouri's use of SSBCI funds. The accounting firm reviewed all 17 SSBCI transactions between the signing of the SSBCI Allocation Agreement on May 23, 2011, and March 31, 2012. These transactions included 16 investments, totaling $6.6 million, by the Missouri Innovation, Development, and Entrepreneurship Advancement (IDEA) Fund and one loan, totaling $511,135, by the Grow Missouri Loan Fund. The accounting firm also reviewed the $151,568 in administrative expenses Missouri charged against SSBCI funds during that time period to ensure they were allowable, reasonable, and allocable. Because the audit of the IDEA Fund revealed a prohibited party relationship, the audit's scope was expanded to include seven additional IDEA Fund transactions made between April 1, 2012, and September 30, 2012, "to determine whether additional prohibited party relationships existed."¹⁴⁹

The OIG found that Missouri "properly used over 96% of the $7.3 million in SSBCI funds expended, and that all related administrative costs were compliant with program requirements."¹⁵⁰ However, the audit revealed that a $240,000 venture capital investment made by the IDEA Fund "constituted a reckless misuse of funds, as defined by Treasury" because a director of the board that approved the investment "had a prohibited party relationship with the company that received the investment based on the director's controlling interest in the investee."¹⁵¹ The director had recused herself from the vote approving the investment. The OIG noted that the board should have known that prohibited party relationships are not allowed because the SSBCI Policy Guidelines "require every borrower and investee receiving funds to certify that such a relationship did not exist."¹⁵² The OIG recommended that Treasury recoup the $240,000 investment. Missouri disagreed with the OIG's finding that it "recklessly misused funds" arguing that the board was in compliance with its own conflict of interest policy and that the relationship with the "potentially interested Director" was "disclosed repeatedly in the application materials which were provided to the Board" and that the investment "was made on the merits through a rigorous and independent process."¹⁵³ Nonetheless, Missouri took measures "to remedy the situation and prevent similar issues in the future."¹⁵⁴ For example, the board administering the IDEA Fund "replenished the SSBCI program account in the amount of the misused funds and unenrolled the transaction," amended its conflict of interest policy to comply with the SSBCI guidelines on conflicts of interest, and created a checklist to ensure that each transaction supported by SSBCI funds is in compliance with the SSBCI guidelines on conflicts of interest.¹⁵⁵

Treasury agreed to recoup the $240,000 from Missouri. Treasury also agreed to "determine whether Missouri has adequately cured its non-compliance with the related party prohibition, requirements for assurances, and certification filings" and if further action is warranted.¹⁵⁶

Washington

Treasury's OIG contracted with an independent certified public accounting firm to audit Washington's use of SSBCI funds. The accounting firm reviewed all of the state's $5.3 million in SSBCI loans issued by Washington's Enterprise Cascadia Loan Participation Program and all of the $1.7 million in investments issued by the state's W Fund Venture Capital Program between the signing of the SSBCI Allocation Agreement on October 31, 2011, and June 30, 2012. The accounting firm also reviewed the $92,291 in administrative expenses Washington charged against SSBCI funds during that time period to ensure they were allowable, reasonable, and allocable.¹⁵⁷

The audit determined that all $7.1 million in loans and venture capital investments "complied with SSBCI program requirements and restrictions, and that borrower and lender assurances were complete and timely."¹⁵⁸ However, the audit found that the $92,291 in administrative expenses reported to Treasury "was overstated by $5,779 as a result of an accounting change [comprised of payroll costs for administration of the SSBCI program that were incurred during the reporting period, but subsequently transferred to an alternative funding source] that was not reflected in the state's SSBCI Quarterly Report."¹⁵⁹ When the auditors brought the overstatement to their attention, Washington officials notified Treasury of the need to adjust their SSBCI Quarterly Report to reflect the cost transfer. Treasury "advised Washington that it would authorize the adjustment upon completion of the OIG's audit."¹⁶⁰

Kansas

Treasury's OIG contracted with an independent certified public accounting firm to audit Kansas's use of SSBCI funds. The accounting firm reviewed all of the state's $1.53 million in SSBCI loans issued by the Kansas Capital Multiplier Loan Fund and all of the $696,950 in investments issued by the Kansas Capital Multiplier Venture Fund between the signing of the SSBCI Allocation Agreement on June 28, 2011, and March 31, 2012. The accounting firm also reviewed the $14,585 in administrative expenses Kansas charged against SSBCI funds during that time period to ensure they were allowable, reasonable, and allocable.

The audit found that Kansas "appropriately used most of the SSBCI funds it had expended," but questioned three $250,000 loans that were issued to affiliated entities as part of a $31 million aggregate financial arrangement.¹⁶¹ The OIG noted that there is a $20 million cap on SSBCI loans made under other credit support programs (OCSPs) and that Treasury's guidance "does not address how the cap should be applied when funds are used to make companion loans comprising a larger financial package or where multiple loans are made to affiliated entities."¹⁶² The OIG recommended that Treasury clarify the requirement that SSBCI funds not be used to support loans that exceed a principal amount of $20 million. Treasury agreed to revise the SSBCI Policy Guidelines to clarify the requirement.¹⁶³

The audit also found that Kansas inaccurately reported in its March 31, 2012, SSBCI Quarterly Report a $173,822 advance for administrative costs issued to NetWork Kansas (a non-profit entity which, among other activities, administers the Kansas Capital Multiplier Loan Fund and the Kansas Capital Multiplier Venture Fund) as a loan; and that $29,247 of that advance was not subsequently reported as administrative expenses in the state's June 30, 2012, SSBCI Quarterly Report because those spent funds were previously incorrectly reported as a loan.¹⁶⁴ The audit also found that $13,181 of the $29,247 should be disallowed by Treasury because the funds were used to pay audit and tax consulting costs which were not properly allocated through a cost allocation plan or an indirect cost proposal as required by OMB Circular A-87.¹⁶⁵ Treasury agreed to work with Kansas "to correct its quarterly statements, remove the $13,181 in disallowed audit and tax consulting costs from the State's quarterly reports, and review Kansas' cost allocation plan for administrative costs."¹⁶⁶

Florida

Treasury's OIG reviewed all 7 SSBCI venture capital investments, totaling $37 million, issued by the Florida Venture Capital Program; and all 17 SSBCI loans, totaling approximately $14.6 million, issued by the Florida Loan Participation Program (11 loans, totaling $9.75 million), Florida Direct Loans Program (1 loan, totaling $3.5 million), Florida Loan Guarantee Program (3 loans, totaling $1.37 million), and Florida Capital Access Program (2 loans, totaling $780 for portfolio insurance) between the signing of the SSBCI Allocation Agreement on August 24, 2011, and December 31, 2012.¹⁶⁷ The OIG also reviewed the $378,634 in administrative expenses Florida charged against SSBCI funds during that time period to ensure they were allowable, reasonable, and allocable.

The OIG found that Florida "properly used the majority (92%) of the SSBCI funds it expended" and that "23 of the 24 transactions we sampled were compliant with program guidelines related to prohibited relationships, maximum transaction amounts, use-of-proceeds, capital-at-risk, and other restrictions noted in the [Small Business Jobs] Act and SSBCI Guidelines."¹⁶⁸ The questionable transaction involved the use of $4 million in SSBCI funds in a $34.7 million investment "that involved multiple equity instruments, which we determined exceeded the $20 million restriction in the [Small Business Jobs] Act intended [to] be placed on the amount of credit support that may be extended to a recipient."¹⁶⁹ The OIG concluded that although two equity instruments were involved [$4 million from the SSBCI and $30.7 million from private capital], the transaction constituted one investment package because if the business were to fail, both equity instruments would be affected."¹⁷⁰ The OIG recommended that Treasury "revise the SSBCI Policy Guidelines to clarify how the $20 million restriction on credit support should be applied when an investment involves multiple equity instruments."¹⁷¹ Treasury agreed to revise the program's guidance concerning the $20 million credit support restriction.¹⁷²

The OIG also found that Florida had overstated its administrative expenses by approximately $55,000. Florida officials indicated that the overstatement "occurred because of incorrect selection criteria used to pull administrative cost information from the state accounting system" following the merger of several state agencies. Florida officials informed Treasury of the error, and made adjustments to its administrative expenses to account for the error in its March 31, 2013, SSBCI Quarterly Report.¹⁷³

The OIG also found that Florida had "overstated by approximately $23 million the amount of SSBCI funds that had been obligated because it included FLVCP [Florida Venture Capital Program] reserves that were set aside for future follow-on investments to existing investees."¹⁷⁴ Florida officials asserted that its reporting of these funds was in compliance with the definitions provided in the SSBCI Policy Guidelines and FAQ documents at the time that the funds were reported.¹⁷⁵ However, state officials also noted that Treasury informed them in February 2013 that "its reserve commitment letters did not meet Treasury's criteria for designation as obligated funds" and that the state had submitted an updated disbursement request with its second tranche of funding," which was received in June 2013.¹⁷⁶ Subsequently, "Florida adjusted its quarterly statements for June 30, 2012, September 30, 2012, and December 31, 2012, to exclude amounts shown as obligated pursuit to the FLVCP reserve commitment letters."¹⁷⁷ Treasury also agreed to determine whether Florida has adequately addressed its reporting of obligated funds and whether additional action is warranted.¹⁷⁸

Louisiana

Treasury's OIG examined all 16 SSBCI loans and investments, totaling $4.9 million, and $206,007 in SSBCI administrative expenses reported by Louisiana between the signing of the Allocation Agreement on August 24, 2011, and December 31, 2012.¹⁷⁹ Of the $4.9 million, approximately $1.1 million was used by the state's Small Business Loan Guarantee Program and $3.8 million was used by the Louisiana Seed Capital Program. The program was found to be in full compliance with all SSBCI requirements.

West Virginia

Treasury's OIG reviewed a random sample of 28 SSBCI loans and investments, totaling approximately $9.5 million, made by West Virginia's four SSBCI programs (13 from the Seed Capital Co-investment Fund, 11 from the West Virginia Collateral Support Program, 3 from the Subordinated Debt Program, and 1 from the West Virginia Loan Guarantee Program) issued between the signing of the Allocation Agreement on November 18, 2011, and June 30, 2013. The OIG also examined West Virginia's $181,784 in SSBCI administrative costs. The program was found to be in full compliance with all SSBCI requirements.¹⁸⁰

Illinois

Treasury's OIG examined a random sample of 48 SSBCI loans and investments, totaling $34.5 million, issued by Illinois' five SSBCI programs (35 from the Illinois Participation Loan Program, 8 from the Invest Illinois Venture Fund, 3 from the Illinois Capital Access Program, 1 from the Collateral Support Program, and 1 from the Conditional Direct Loan Program) between the signing of the Allocation Agreement on July 26, 2011, and March 31, 2013. The OIG also examined Illinois' $1.03 million in SSBCI administrative costs.¹⁸¹

The OIG found that "Illinois appropriately used most of the $34.5 million in SSBCI funds it had expended as of March 31, 2013, but spent $105,000 to participate in a loan that was used to purchase the stock of a company representing its entire ownership interest, which is prohibited by the SSBCI Policy Guidelines."¹⁸² The OIG also identified 22 other transactions "that did not fully comply with lender sex offender certification requirements" and found that "Illinois neglected to execute lender certifications on the State's behalf as prescribed in the National Standards" for direct loans and state-run venture capital investments.¹⁸³ Also, the OIG found that Illinois unintentionally overstated, in the state's 2012 Annual Report, the amount of private financing associated with a loan in which the state participated by $4.7 million. This occurred because the financing structure of the transaction was changed without the state's knowledge. Illinois' administrative costs were found to be in full compliance with all SSBCI requirements.¹⁸⁴

Treasury informed the OIG that it will recoup from Illinois the $105,000 expenditure identified by the OIG as being a prohibited expenditure, require Illinois to modify any Master Agreements with lenders that do not include required language that mandates lenders notify the state of changes in the sex offender status of their principals, and require Illinois to provide lender certifications when it is acting as a direct lender under the SSBCI program. Treasury also indicated that it will work with Illinois to adjust the $4.7 million overstatement in the state's 2012 Annual Report and determine whether a general default has occurred as a result of the OIG findings.¹⁸⁵

South Carolina

Treasury's OIG examined a random sample of 38 SSBCI loans issued by South Carolina's two SSBCI programs (10 from the South Carolina Capital Access Program and 28 from the South Carolina Loan Participation Program), totaling $11.4 million, between the signing of the Allocation Agreement on July 6, 2011, and June 30, 2013. The OIG also examined South Carolina's $136,449 in SSBCI administrative costs.¹⁸⁶

The OIG found that South Carolina appropriately used most of its SSBCI funds, "but misused $427,500 to participate in a loan that was used to finance the building of a new church sanctuary and make renovations to the existing sanctuary, which is prohibited by the SSBCI Policy Guidelines."¹⁸⁷ The OIG noted, however, that while South Carolina misused those funds, the misuse was "not reckless or intentional because SSBCI Policy Guidelines do not explicitly prohibit the use of SSBCI funds for non-secular purposes."¹⁸⁸ The OIG also identified eight other transactions "that did not comply with the National Standards because the State did not verify that the borrower and lender assurances were complete and duly executed prior to the transfer of SSBCI funds.¹⁸⁹ South Carolina's administrative charges were found to be in full compliance with all SSBCI requirements.

Treasury informed the OIG that it will publish guidance to clarify that using SSBCI funds to support transactions with a non-secular identity is not a permitted business purpose, and determine whether a general event of default has occurred as a result of South Carolina's not fully complying with borrower and lender assurance requirements.¹⁹⁰ South Carolina informed Treasury that it had added an additional line item to its internal control compliance checklist to ensure that all borrower and lender assurance requirements are signed and dated prior to the transfer of SSBCI funds.¹⁹¹

American Samoa

American Samoa was awarded $10.5 million in SSBCI funds in January 12, 2012, and received its first disbursement of $3.465 million later that month. Treasury's OIG found that American Samoa had not obligated or spent any SSBCI funds for credit support as of September 30, 2013. As a result, the OIG's audit focused on whether American Samoa's $50,307 in SSBCI administrative costs "were reasonable, whether the territory was fully positioned to extend credit, and whether the territory was in compliance with the program's reporting and certification requirements."¹⁹²

The OIG "identified $49,155 in unsupported personnel and travel expenses that should be disallowed," and found that "American Samoa has not provided Treasury with records that would allow the Department to determine whether the Territory is 'fully positioned' to provide credit support to small businesses, as required by its Allocation Agreement."¹⁹³ The OIG also found that American Samoa "did not obtain Treasury's prior approval for three changes to the entity designated to administer the SSBCI funds; did not submit two of its quarterly reports or its 2012 annual report to Treasury on time, causing Treasury to declare a general event of default of American Samoa's Allocation Agreement; and incorrectly certified the accuracy of two quarterly reports to Treasury and did not certify the accuracy of three other quarterly reports."¹⁹⁴ Based on its findings, the OIG recommended that Treasury disallow the $49,155 in unsupported administrative expenses, "determine whether a reduction, suspension, or termination of future funding to the Territory is warranted," and if funding is not terminated, "require that the Territory first comply with the terms of its Allocation Agreement, and approve the agreement modifications, before disbursing additional funds."¹⁹⁵

Treasury informed the OIG that it will disallow the $49,155 in unsupported administrative costs, determine whether American Samoa has again defaulted on its Allocation Agreement, and determine what form of remedy may be appropriate.¹⁹⁶ Treasury also indicated that if American Samoa's funding is not terminated, that Treasury "will not disburse additional funds before requiring that the Territory first comply with the terms of the Allocation Agreement."¹⁹⁷

Officials with American Samoa's Department of Commerce agreed with the recommendation to disallow the questioned SSBCI administrative expenses, which, they noted, were made by a previous American Samoa administration. However, they also noted that they were "somewhat taken aback with the harshness and severity of the positions taken" in the OIG's audit.¹⁹⁸ They pointed out that the OIG report did not reflect the "significant organizational issues facing the Governor which necessitated his decision with respect to the location and management of this vital program" and that "to the best of our knowledge Treasury SSBCI supported the decision made by the Governor."¹⁹⁹ They also noted that since the audit they had filed with Treasury all missing quarterly and annual reports, hired consultants to design and implement a compliance program for their SSBCI program, and sent, in February 2014, a modified Allocation Agreement for Treasury's review. They requested that Treasury approve the program modification changes it requested, and maintained that its SSBCI program now "complies with all Treasury regulations and guidance and is fully positioned to provide small businesses with credit assistance."²⁰⁰

North Carolina

Treasury's OIG examined a random sample of 45 SSBCI loans issued by North Carolina's three SSBCI programs (31 were from the North Carolina Capital Access Program, 9 were from the North Carolina Loan Participation Program, and 5 were from the North Carolina Venture Capital Fund-of-Funds Program), totaling $4.9 million, between the signing of the Allocation Agreement on May 23, 2011, and December 31, 2012. The OIG also reviewed 46 of the state's SSBCI administrative cost transactions, totaling $720,257.²⁰¹

The OIG found that North Carolina appropriately used most of its SSBCI funds, "but [due to misrepresentations by a lender] contributed $6,690 to a reserve fund under the Capital Access Program for a loan that refinanced one previously made to the borrower by the same lender."²⁰² The OIG noted that "such refinancings are prohibited by the [Small Business Jobs] Act and constitute a misuse of funds [but not an intentional or reckless misuse of funds due to the lender's misrepresentations]."²⁰³

The OIG also found that North Carolina did not obtain fully compliant lender sex offender assurances for 19 (or 42%) of the 45 transactions tested, as required.²⁰⁴ The OIG noted that North Carolina chose to rely on annual lender certifications of compliance with this requirement, which is permitted; but it neglected to require lenders to notify the state should an event occur that rendered the certifications obsolete.

North Carolina also "inaccurately reported to Treasury the total amount of an enrolled investment on three separate occasions because it misreported the private investor's contribution to the investment;" and "reported $10.3 million in capital commitments with SSBCI funds to four angel investment funds as obligated funds even though only $2.9 million had been pledged to investees."²⁰⁵ The OIG expressed concern that "while obligating funds on a multi-year basis generally is an accepted practice," using capital commitments to angel investment funds with multi-year investment horizons "to measure performance and qualifying a state for additional transfers of SSBCI funds is inappropriate and does not meet the intent of the Small Business Jobs Act."²⁰⁶ The OIG found that all 46 administrative cost transactions it reviewed were in full compliance with SSBCI guidelines.²⁰⁷

The OIG recommended that Treasury (1) verify, as North Carolina had reported, that $6,690 in SSBCI funds has been withdrawn from the prohibited loan and that the SSBCI account has been reimbursed for the same amount; (2) determine whether there has been a general event of default under North Carolina's Allocation Agreement resulting from the state's failure to fully comply with the lender assurance requirements and for inaccurate reporting of Venture Capital investment amounts; (3) revise the definition of funds obligated for Venture Capital programs to include only funds that have been designated for specific investees; (4) require participants to distinguish in their Quarterly Reports the Venture Capital funds previously reported as obligated to specific investees from that obligated to Angel Funds but not yet disbursed to investees; and (5) adopt a standard definition of "funds used" for all program reporting purposes instead of defining "funds used" differently for different purposes.²⁰⁸

Treasury informed the OIG that it will (1) verify that North Carolina has withdrawn SSBCI funds from the prohibited loan and replenished the SSBCI account; (2) determine whether a general event of default has occurred; (3) change its disbursement procedures to confirm prior to making a disbursement that states are not holding excess idle cash that is not likely to be expended, obligated, or transferred to small businesses within a reasonable time period; (4) explain in the Summary Quarterly Reports that funds "expended, obligated, or transferred" include obligations to Venture Capital funds not yet linked to specific small business investments; and (5) make every effort to follow the definition of "funds used" in the SSBCI Policy Guidelines.²⁰⁹

Idaho

Treasury's OIG examined a random sample of 30 SSBCI loans enrolled in the Idaho Collateral Support Program (ICSP), totaling $50.3 million, for which Idaho provided $7.6 million in collateral; and 12 loans that were committed for enrollment into the ICSP, totaling $10.8 million, for which Idaho had reserved $2 million in collateral, as of September 30, 2013. Treasury had previously reviewed Idaho's administrative expenses from January 2012 to September 2012, and had reduced Idaho's final allotment by $31,806 for expenses that were not adequately supported in accordance with OMB Circular A-87. Subsequent to that review, Idaho reported an additional $272,744 in administrative expenses, as of September 30, 2013. The OIG reviewed the additional $272,744 in administrative expenses for compliance with SSBCI guidelines.²¹⁰

The OIG found that Idaho appropriately used the $9.6 million in collateral support that was reviewed, but "mistakenly overstated by $111,923 the total principal for 3 of [the] 42 loans we reviewed because the amounts reported were not based on the final loan documents."²¹¹ The OIG also noted that Idaho "inaccurately reported $781,000 as Treasury-approved subsequent private financing" but Treasury acknowledged the mistake "was due to inconsistent guidance to the State."²¹²

Idaho was provided a copy of the OIG's audit prior to its deadline for submitting its 2013 SSBCI Annual Report to Treasury. As a result, the state was able to correct its 2013 Annual Report prior to submitting it to Treasury to account for two of the three loan principal amounts that were overstated. The state also indicated that it had implemented new controls in February 2014 "which now require a copy of the Bank's promissory note to verify the actual/final loan origination amount prior to funding the collateral support account on the enrolled loan" to ensure that the amount reported is the actual amount of the executed loan.²¹³ Idaho also indicated that it "will work with Treasury to rectify the erroneous inclusion of subsequent private financing and incorrect loan origination amounts in their 2012 report."²¹⁴ Treasury informed the OIG that it would work with Idaho to resolve the issues identified in the audit.²¹⁵

Idaho's $272,744 in administrative expenses reported since Treasury's earlier audit were found to be in full compliance with SSBCI guidelines.²¹⁶

Indiana

At the request of Treasury SSBCI program officials, Treasury's OIG was asked to determine whether two investments made by the Indiana Angel Network Fund (IANF), under Indiana's Venture Capital Program, complied with SSBCI Policy Guidelines. The OIG found that the two IANF investments, one totaling $499,986 and the other totaling $300,000, involved transactions between the Board Chairman of Elevate Ventures and the investees.²¹⁷ Elevate Ventures manages the IANF's investments on behalf of the Indiana Economic Development Corporation (IEDC), and approved and executed the two investments in question.

The OIG found that the $499,986 investment constituted an "intentional" misuse of funds because the Board Chairman of Elevate Ventures had a controlling interest and voting stock ownership of more than 10% in the investee, which created a "prohibited related party interest."²¹⁸ The OIG noted that "SSBCI Policy Guidelines prohibit an investee receiving SSBCI funds from a related interest of any such executive officer, director, principal shareholder or immediate family."²¹⁹ Intentional misuse of funds "is defined as a use of allocated funds that the participating state or its administering entity knew was unauthorized or prohibited."²²⁰

The $300,000 investment was found to be in compliance with SSBCI guidelines. However, the OIG noted that the closeness of the relationship between the Elevate Board Chairman and the applicant (the Board Chairman's adult son was the company's CEO), while not prohibited, "may raise the appearance of partiality and should be addressed by SSBCI Policy Guidelines."²²¹

The OIG recommended that (1) Treasury recoup the $499,986 of federal funds "intentionally" misused and declare a specific event of default of its Allocation Agreement with Indiana; (2) determine whether the state's funding should be reduced, suspended or terminated as a result of the specific event of default; and (3) require the state to ensure that IEDC reviews each IANF investment decision going forward.²²²

Treasury agreed with all three recommendations, but indicated that it "would not characterize [the $499,986] investment as an 'intentional' misuse of funds based on the facts set forth in the report" because "intentional misuse requires knowledge that the use of the funds is contrary to the program rules, and action taken must be in a knowing effort to violate those rules."²²³

Indiana reported that it had completed an independent audit of the remainder of its SSBCI investments and did not find any other prohibited party transactions or other violations. The state also noted that the Board Chairman of Elevate Ventures had resigned, effective December 31, 2013; that the $499,986 investment had been repaid with a 15% return on February 6, 2014; and that the investment "had led to the creation of numerous new jobs for the people of Indiana."²²⁴ Indiana also reported that it "will independently review any future potential investment conflict."²²⁵

Concluding Observations

The SSBCI was enacted as part of a larger effort to enhance the supply of capital to small businesses. Advocates argued that the SSBCI would help to address the recent decline in small business lending and create jobs. Opponents were not convinced that it would enhance small business lending, and worried about the program's potential cost to the federal treasury.

As mentioned previously, it is still too early to determine the full extent of the program's effect on small business lending. Less than 60% of the program's funds have been obligated or spent by the states. Also, as Treasury has noted, determining the SSBCI's influence on small business lending is likely to be more suggestive than definitive because differentiating the SSBCI's effect on small business lending from other, exogenous factors, such as changes in the lender's local economy and changes in the demand for small business loans, is methodologically challenging, especially given the relatively small amount of financing involved relative to the national market for small business loans. As mentioned previously, the SSBCI's $1.5 billion in financing represents less than 0.3% of outstanding non-agricultural small business loans.²²⁶

Treasury's OIG's audits of 21 states' implementation of their SSBCI programs suggests that many states have experienced difficulty complying with the program's administrative requirements, which are designed to reduce the likelihood of loan defaults, investment losses, and fraudulent use of funds. The release of Treasury's SSBCI National Standards for Compliance and Oversight document, on May 15, 2012, proved useful as states become more familiar with, and accustomed to, the SSBCI's rules and regulations.²²⁷ However, given the relatively large number of new small business investment programs receiving SSBCI funding, the relatively large number of entities involved in the program (Treasury officials, state officials, potentially hundreds of lenders and investment companies, and potentially thousands of small businesses), program oversight is likely to remain a congressional concern.

Author Contact Information

² U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses, and for other Purposes, report to accompany H.R. 5297, 111th Cong., 2nd sess., May 27, 2010, H.Rept. 111-499 (Washington: GPO, 2010), pp. 37, 38; and National Federation of Independent Businesses, "Issues: The Economy," Washington, DC, at http://www.nfib.com/advocacy/economy.

³ For further information and analysis concerning the Small Business Jobs Act of 2010, see CRS Report R41385, Small Business Legislation During the 111th Congress, by Robert Jay Dilger and Gary Guenther; and CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay Dilger.

⁴ For further information and analysis concerning the Small Business Lending Fund see CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger.

⁵ U.S. Office of Management and Budget, "Appendix, Budget of the U.S. Government, FY2013: Department of the Treasury," p. 1061, at http://www.gpo.gov/fdsys/pkg/BUDGET-2013-APP/pdf/BUDGET-2013-APP.pdf.

⁶ Ibid.

⁷ U.S. Office of Management and Budget, "Appendix, Budget of the U.S. Government, FY2014: Department of the Treasury," p. 991, at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tre.pdf.

⁸ U.S. Department of the Treasury, "State Small Business Credit Initiative, FY 2015: President's Budget," p. 6, at http://www.treasury.gov/about/budget-performance/CJ15/21.%20SSBCI.pdf.

⁹ U.S. Department of the Treasury, "State Small Business Credit Initiative: A Summary of States' Quarterly Reports as of March 31, 2014," p. 2, at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Quarterly%20Report%20Summary%20March%202014.pdf.

¹⁰ Ibid.

¹¹ U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses, and for other Purposes, report to accompany H.R. 5297, 111th Cong., 2nd sess., May 27, 2010, H.Rept. 111-499 (Washington: GPO, 2010), pp. 37, 38.

¹² U.S. Department of the Treasury, "State Small Business Credit Initiative: A Summary of States' Quarterly Reports as of March 31, 2014," p. 3, at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Quarterly%20Report%20Summary%20March%202014.pdf.

¹³ Federal Deposit Insurance Corporation, "Statistics on Depository Institutions," at http://www2.fdic.gov/SDI/main.asp. As of March 31, 2014, there was $585,266,469,000 in outstanding non-agricultural small business loans (defined as the sum of "total loans secured by nonfarm nonresidential properties of $1,000,000 or less" and "total commercial and industrial loans to U.S. addressees of $1,000,000 or less").

¹⁴ U.S. Department of the Treasury, "State Small Business Credit Initiative, FY 2015: President's Budget," p. 5, at http://www.treasury.gov/about/budget-performance/CJ15/21.%20SSBCI.pdf.

¹⁵ Ibid., p. 3.

¹⁶ Ibid., p. 6.

¹⁷ Ibid., p. 4.

¹⁸ The White House, "Remarks by the President in State of the Union Address," at http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address.

¹⁹ U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses, and for other Purposes, report to accompany H.R. 5297, 111th Cong., 2nd sess., May 27, 2010, H.Rept. 111-499 (Washington: GPO, 2010), p. 17.

²⁰ U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses, and for other Purposes, report to accompany H.R. 5297, 111th Cong., 2nd sess., May 27, 2010, H.Rept. 111-499 (Washington: GPO, 2010), p. 18.

²¹ U.S. Congress, House Committee on Financial Services, Incentives to Promote Small Business Lending, Jobs, and Economic Growth, 111th Cong., 2nd sess., May 18, 2010, Serial No. 111-137 (Washington: GPO, 2010).

²² U.S. Congress, House Committee on Financial Services, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses, and for other Purposes, report to accompany H.R. 5297, 111th Cong., 2nd sess., May 27, 2010, H.Rept. 111-499 (Washington: GPO, 2010), pp. 21, 22.

²³ Ibid., p. 16.

²⁴ Ibid., p. 18.

²⁵ Ibid., p. 37.

²⁶ Ibid., p. 38.

²⁷ Ibid.

²⁸ H.Res. 1436. A second rule (H.Res. 1448) was issued on June 16, 2010, to allow consideration of two amendments that were revised to comply with House "pay-go" rules.

²⁹ Representative Melissa Bean, "The Small Business Jobs and Credit Act of 2010," House debate, Congressional Record, vol. 156, no. 90 (June 16, 2010), p. H4514.

³⁰ Representative Randy Neugebauer, "The Small Business Jobs and Credit Act of 2010," House debate, Congressional Record, vol. 156, no. 90 (June 16, 2010), p. H4514, H4515.

³¹ On June 29, 2010, cloture on a motion to proceed to H.R. 5297 was invoked in the Senate, by a vote of 66-33. That same day, Senator Harry Reid proposed a motion to commit H.R. 5297 to the Senate Committee on Finance with instructions to report back forthwith S.Amdt. 4407, an amendment in the nature of a substitute, which included the Small Business Lending Fund (SBLF) and most of the provisions later included in S.Amdt. 4594. In response to perceived opposition to the SBLF, S.Amdt. 4407 was withdrawn on July 21, 2010. In its place, Senator Harry Reid proposed for Senator George LeMieux S.Amdt. 4500, to establish the Small Business Lending Fund Program. He also proposed for Senator Max Baucus S.Amdt. 4499, an amendment in the nature of a substitute, which contained S.Amdt. 4407, with modifications, minus the SBLF. On July 22, 2010, cloture on S.Amdt. 4500 was invoked in the Senate, by a vote of 60-37. On July 27, 2010, Senator Harry Reid withdrew S.Amdt. 4500 and introduced for Senator Max Baucus S.Amdt. 4519, which included the SBLF, the provisions in S.Amdt. 4499, with modifications, $1.5 billion in emergency disaster agricultural assistance, and additional revenue off-sets. On July 29, 2010, a motion to invoke cloture on S.Amdt. 4519 failed, by a vote of 58-42. Debate on the motion focused on differences concerning the SBLF and the number of amendments to be offered. On August 5, 2010, Senator Harry Reid introduced for Senators Max Baucus and Mary Landrieu S.Amdt. 4594, an amendment in the nature of a substitute. It contained the provisions in S.Amdt. 4519 except that it removed a provision to eliminate the advance payment option for the earned-income tax credit that would have raised $1.1 billion, removed a provision that would have reallocated $500 million in future spending from P.L. 111-5, the American Recovery and Reinvestment Act of 2009, and removed a provision to provide $1.5 billion in emergency agricultural assistance funding. On September 14, 2010, the Senate invoked cloture on S.Amdt. 4594, by a vote of 61-37, and passed it on September 16, 2010, by a vote of 61-38. See Senator Harry Reid, "Text of Amendments: SA 4519," Congressional Record, vol. 156, no. 111 (July 27, 2010), pp. S6309-S6337; Senator Kay Hagan, "Motion to Invoke Cloture on amendment No. 4519," Roll Call Vote No. 221 Leg., Congressional Record, vol. 156, no. 113 (July 29, 2010), p. S6473; Senator Harry Reid, "Small Business Lending Fund Act of 2010," Remarks in the Senate, Congressional Record, vol. 156, no. 113 (July 29, 2010), pp. S6472, S6473; Senator Mitch McConnell, "Small Business Lending Fund Act of 2010," Remarks in the Senate, Congressional Record, vol. 156, no. 113 (July 29, 2010), pp. S6472, S6473; Senator Kay Hagen, "Motion to Invoke Cloture on H.R. 5297, the Small Business Lending Fund Act of 2010," Rollcall Vote No. 236 Leg., Congressional Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158; and Senator Al Franken, "Small Business Lending Fund Act of 2010," Rollcall Vote No. 237 Leg., Congressional Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158.

³² Senator Al Franken, "Small Business Lending Fund Act of 2010," Rollcall Vote No. 237 Leg., Congressional Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158.

³³ Senator Carl Levin, "Small Business Lending Fund Act of 2010," remarks in the Senate, Congressional Record, vol. 156, part 124 (September 15, 2010), p. S7123.

³⁴ U.S. Department of the Treasury, "SSBCI Program Profile: Capital Access Program," at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Capital_Access_Program_FINAL_May_17.pdf.

³⁵ Ibid.

³⁶ Ibid.

³⁷ Ibid. State CAPs under the SSBCI program may not enroll the unguaranteed portions of SBA guaranteed or other federally guaranteed loans without the express, prior written consent of Treasury. Also, restrictions apply to refinancing and other uses.

³⁸ Ibid.

³⁹ U.S. Department of the Treasury, "SSBCI Program Profile: Loan Participation Program," at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Loan_Participation_FINAL_May_17.pdf.

⁴⁰ Ibid.

⁴¹ Ibid.

⁴² U.S. Department of the Treasury, "SSBCI Program Profile: Loan Guarantee Program," at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Loan_Guarantee_FINAL_May_17.pdf.

⁴³ Ibid.

⁴⁴ Ibid.

⁴⁵ U.S. Department of the Treasury, "SSBCI Program Profile: Collateral Support Program," at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Collateral_Support_FINAL_May_17.pdf.

⁴⁶ Ibid.

⁴⁷ Ibid.

⁴⁸ U.S. Department of the Treasury, "SSBCI Program Profile: Venture Capital Program," at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI_Program_Profile_Venture_Capital_FINAL_May_17.pdf.

⁴⁹ Ibid.

⁵⁰ Ibid.

⁵¹ Ibid.

⁵² 12 U.S.C. § 5708(b). Treasury reports that SSBCI administrative expenses, which include the cost of government employee salaries, contract support, and reimbursement to the Treasury Office of the Inspector General for program audits, were $5,393,000 in FY2011, $4,746,000 in FY2012, and $6,431,000 in FY2013; and is estimated to be $8,299,000 in FY2014. See U.S. Department of the Treasury, "State Small Business Credit Initiative: FY2013 President's Budget Submission," pp. 3, 8, at http://www.treasury.gov/about/budget-performance/Documents/16%20-%20FY%202013%20SSBCI%20CJ.pdf; U.S. Department of the Treasury, "State Small Business Credit Initiative: FY2014 President's Budget," pp. 3, 8, at http://www.treasury.gov/about/budget-performance/CJ14/16.%20SSBCI%20CJ%20FINAL%20ok.pdf; and U.S. Department of the Treasury, "State Small Business Credit Initiative: FY2015 President's Budget," pp. 3, 9, at http://www.treasury.gov/about/budget-performance/CJ15/21.%20SSBCI.pdf.

⁵³ 12 U.S.C. § 5703(d)(6). If more than three municipalities or combinations of municipalities from the same state are approved, Treasury is required to allocate federal funds to the three municipalities (or combination of municipalities) with the largest populations. See 12 U.S.C. § 5703(d)(5).

⁵⁴ U.S. Department of the Treasury, "State Small Business Credit Initiative: Application," at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Application.pdf.

⁵⁵ Treasury anticipates that its total administrative costs over the lifetime of the SSBCI program will be about $36.85 million.

⁵⁶ U.S. Department of the Treasury, "State Small Business Credit Initiative: Frequently Asked Questions," at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci-faqs.aspx#gen3.

⁵⁷ Ibid.

⁵⁸ Applicants were entitled to the funding provided by the SSBCI formula. American Samoa requested $10,418,500. The minimum SSBCI allotment is $13,168,350. All other applicants requested the amount provided by the SSBCI formula. See U.S. Government Accountability Office, State Small Business Credit Initiative, GAO-12-173, December 7, 2011, p. 9, at http://www.gao.gov/assets/590/586727.pdf.

⁵⁹ Ibid.

⁶⁰ U.S. Department of the Treasury, "State Small Business Credit Initiative: A Summary of States' Quarterly Reports as of March 31, 2014," p. 2, at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Quarterly%20Report%20Summary%20March%202014.pdf.

⁶¹ U.S. Department of the Treasury, Office of the Inspector General, Small Business Lending Fund Program Oversight Office, "Small Business Lending Fund Oversight Reports," at http://www.treasury.gov/about/organizational-structure/ig/Pages/Office-of-Small-Business-Lending-Fund-Program-Oversight.aspx.

⁶² U.S. Government Accountability Office, State Small Business Credit Initiative, GAO-12-173, December 7, 2011, p. 21, at http://www.gao.gov/assets/590/586727.pdf.

⁶³ Ibid., p. 11.

⁶⁴ An independent analysis of the SSBCI program funded by Treasury recommended that "Future federal venture capital initiatives should require relevant program-specific training for VC program managers. VC program managers empowered by state government leaders range from novice to expert with respect to their preparedness to manage VC programs, and therefor need a common baseline of knowledge about options for design and operation of a state venture capital program." See Cromwell Schmisseur LLC, "Information and Observations on State Venture Capital Programs: Report for the U.S. Department of the Treasury and Interested Parties in the State Small Business Credit Initiative (SSBCI)," February 2013, p. 6, at http://www.treasury.gov/resource-center/sb-programs/Documents/VC%20Report.pdf.

⁶⁵ Ibid., p. 14.

⁶⁶ Ibid.

⁶⁷ Ibid., pp. 14, 15.

⁶⁸ Ibid., p. 16.

⁶⁹ Ibid.

⁷⁰ Ibid., p. 21.

⁷¹ U.S. Treasury, "Correspondence with the author," June 22, 2012. For the first two goals, the measurement period starts once all required documentation from the requesting participating state is received.

⁷² Ibid.

⁷³ Ibid.

⁷⁴ U.S. Government Accountability Office, Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury's Programs, GAO-13-76, December 5, 2012, p. 22, at http://www.gao.gov/assets/660/650555.pdf.

⁷⁵ Ibid., p. 24.

⁷⁶ Ibid., p. 25.

⁷⁷ Ibid., p. 40.

⁷⁸ Ibid.

⁷⁹ Ibid, pp. 40-41.

⁸⁰ U.S. Department of the Treasury, State Small Business Credit Initiative Office, "Email correspondence with the author," July 9, 2013.

⁸¹ Ibid.

⁸² U.S. Government Accountability Office, Small Business Lending: Opportunities Exist to Improve Performance Reporting of Treasury's Programs, GAO-13-76, December 5, 2012, p. 35, at http://www.gao.gov/assets/660/650555.pdf.

⁸³ Ibid.

⁸⁴ U.S. Department of the Treasury, State Small Business Credit Initiative: A Summary of States' 2012 Annual Reports, September 25, 2013, at http://www.treasury.gov/resource-center/sb-programs/Documents/SSBCI%20Summary%20of%20States%202012%20Annual%20Reports%20FINAL.pdf.

⁸⁵ U.S. Government Accountability Office, State Small Business Credit Initiative: Opportunities Exist to Enhance Performance Measurement and Evaluation, GAO-14-97, December 18, 2013, p. 9, at http://www.gao.gov/products/gao-14-97.

⁸⁶ Ibid., p. 8.

⁸⁷ Ibid., pp. 8-9.

⁸⁸ Ibid., 13.

⁸⁹ Ibid., p. 16.

⁹⁰ Ibid., p. 18.

⁹¹ Ibid.

⁹² Ibid.

⁹³ Ibid.

⁹⁴ Ibid.

⁹⁵ Ibid., p. 44.

⁹⁶ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Treasury Needs to Strengthen State Accountability for Use of Funds," August 5, 2011, at http://www.treasury.gov/about/organizational-structure/ig/Pages/by-date-2011.aspx.

⁹⁷ Ibid., p. 1.

⁹⁸ Ibid., p. 14.

⁹⁹ Ibid., p. 19.

¹⁰⁰ Ibid., p. 20.

¹⁰¹ Ibid. p. 10.

¹⁰² U.S. Department of the Treasury, "SSBCI National Standards for Compliance and Oversight," May 15, 2012, at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx.

¹⁰³ U.S. Department of the Treasury, Office of Inspector General, "Small Business Lending Fund: California Needs to Improve Its Oversight of Programs Participating in the State Small Business Credit Initiative," May 24, 2012, at http://www.treasury.gov/about/organizational-structure/ig/Agency%20Documents/OIG-SBLF-12-003.pdf.

¹⁰⁴ U.S. Department of the Treasury, Office of Inspector General, Small Business Lending Fund Program Oversight Office, "Small Business Lending Fund Oversight Reports," at http://www.treasury.gov/about/organizational-structure/ig/Pages/Office-of-Small-Business-Lending-Fund-Program-Oversight.aspx.

¹⁰⁵ U.S. Department of the Treasury, Office of Inspector General, "Small Business Lending Fund: California Needs to Improve Its Oversight of Programs Participating in the State Small Business Credit Initiative," May 24, 2012, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Agency%20Documents/OIG-SBLF-12-003.pdf.

¹⁰⁶ U.S. Department of the Treasury, Office of Inspector General, Small Business Lending Fund Program Oversight Office, "Fiscal Year 2013 Audit Work Plan," pp. 12-29, at http://www.treasury.gov/about/organizational-structure/ig/Pages/Office-of-Small-Business-Lending-Fund-Program-Oversight.aspx.

¹⁰⁷ Ibid.

¹⁰⁸ U.S. Department of the Treasury, Office of Inspector General, "Small Business Lending Fund: California Needs to Improve Its Oversight of Programs Participating in the State Small Business Credit Initiative," May 24, 2012, p. 3, at http://www.treasury.gov/about/organizational-structure/ig/Agency%20Documents/OIG-SBLF-12-003.pdf.

¹⁰⁹ Ibid.

¹¹⁰ Ibid.

¹¹¹ Ibid.

¹¹² Ibid., pp. 13-14.

¹¹³ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Montana's Use of Funds Received from the State Small Business Credit Initiative," September 27, 2012, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF12006.pdf.

¹¹⁴ Ibid.

¹¹⁵ Ibid., pp. 2, 9.

¹¹⁶ Ibid., p. 3.

¹¹⁷ Ibid., p. 12.

¹¹⁸ Ibid., p. 16.

¹¹⁹ Ibid.

¹²⁰ Ibid., p. 18.

¹²¹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Vermont's Use of Federal Funds for Capital Access and Credit Support Programs," November 30, 2012, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-001.pdf.

¹²² Ibid, pp. 2-3.

¹²³ Ibid., pp. 3-4.

¹²⁴ Ibid., p. 3.

¹²⁵ Ibid., p. 15.

¹²⁶ Ibid.

¹²⁷ Ibid., p. 14.

¹²⁸ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Michigan's Use of Federal Funds for Capital Access and Other Credit Support Programs," December 13, 2012, pp. 2-3, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-002.pdf.

¹²⁹ Ibid., p. 3.

¹³⁰ Ibid.

¹³¹ Ibid., p. 13.

¹³² Ibid., pp. 15-16.

¹³³ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Texas' Use of Federal Funds for Other Credit Support Programs," January 29, 2013, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-003.pdf.

¹³⁴ Ibid., p. 7.

¹³⁵ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Massachusetts' Use of Federal Funds for Capital Access and Other Credit Support Programs," May 14, 2013, pp. 1-3, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13007.pdf.

¹³⁶ Ibid., p. 3.

¹³⁷ Ibid.

¹³⁸ Ibid., p. 19.

¹³⁹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Delaware's Use of Federal Funds for Capital Access and Other Credit Support Programs," March 29, 2013, p. 11, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13006.pdf.

¹⁴⁰ Participating states must require the financial institution lender to obtain an assurance from each borrower stating that the loan proceeds will not be used for an impermissible purpose under the SSBCI Program. For example, the loan proceeds must be used for an approved "business purpose" and the loan proceeds cannot be used to: repay a delinquent federal or state income taxes unless the borrower has a payment plan in place with the relevant taxing authority; repay taxes held in trust or escrow; reimburse funds owed to any owner, including any equity injection or injection of capital for the business' continuance; or purchase any portion of the ownership interest of any owner of the business.

¹⁴¹ Ibid., p. 3.

¹⁴² Ibid., p. 4.

¹⁴³ Ibid., pp. 3-4.

¹⁴⁴ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: New Jersey's Use of Federal Funds for Other Credit Support Programs," February 27, 2013, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13005.pdf.

¹⁴⁵ Ibid., p. 4.

¹⁴⁶ Ibid., p. 8.

¹⁴⁷ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Alabama's Use of Federal Funds for Capital Access and Other Credit Support Programs," June 4, 2013, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13008.pdf.

¹⁴⁸ Ibid., pp. 1-2.

¹⁴⁹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Missouri's Use of Federal Funds for Other Credit Support Programs," July 24, 2013, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF13009.pdf.

¹⁵⁰ Ibid., p. 3.

¹⁵¹ Ibid.

¹⁵² Ibid.

¹⁵³ Ibid., p. 26.

¹⁵⁴ Ibid., p. 22.

¹⁵⁵ Ibid.

¹⁵⁶ Ibid.

¹⁵⁷ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Washington's Use of Federal Funds for Capital Access and Other Credit Support Programs," August 15, 2013, pp. 1, 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-011.pdf.

¹⁵⁸ Ibid., p. 2.

¹⁵⁹ Ibid.

¹⁶⁰ Ibid., p. 7.

¹⁶¹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Kansas' Use of Federal Funds for Other Credit Support Programs," September 5, 2013, p. 2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-13-013.pdf.

¹⁶² Ibid.

¹⁶³ Ibid., p. 18. Note: Kansas officials explained that the three loans in question were (1) "made to separate legal entities which were operated as separate businesses at separate locations, but who sold product to a common buyer"; (2) "not contrived to avoid the $20 million cap on loans"; and (3) "while the similarity in names and inadvertent language in the applications make the independence of the loans more difficult to ascertain, review of the facts shows SSBCI loan support was not to a single loan in excess of $20 million. Rather, SSBCI funds were used to support separate loans to separate businesses." See ibid., p. 20.

¹⁶⁴ Ibid., pp. 3, 12, 13.

¹⁶⁵ Ibid., p. 13.

¹⁶⁶ Ibid., p. 19. Treasury also agreed to inform Kansas "that the State is required to obtain lender assurances from relevant companion lenders in future transactions, but agrees with Kansas that retroactively collecting companion lender assurances [as was recommended by the OIG] is impractical and unnecessary." See ibid., p. 18. Treasury agreed to clarify the SSBCI National Standards for Compliance and Oversight document to specify which companion lenders must submit assurances.

¹⁶⁷ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Florida's Use of Federal Funds for Capital Access and Other Credit Support Programs," November 15, 2013, pp. 1, 13, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-002%20Final%20Report%2011%2015%2013%20web.pdf.

¹⁶⁸ Ibid., p. 7.

¹⁶⁹ Ibid.

¹⁷⁰ Ibid., pp. 7, 8.

¹⁷¹ Ibid., p. 11.

¹⁷² Ibid., pp. 12, 15.

¹⁷³ Ibid., p. 9.

¹⁷⁴ Ibid., p. 4.

¹⁷⁵ Ibid., p. 19.

¹⁷⁶ Ibid.

¹⁷⁷ Ibid., p. 20.

¹⁷⁸ Ibid., p. 15.

¹⁷⁹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Louisiana's Eligibility for its Second Transfer of Funds and the Allowability of Reported Administrative Expenses," January 9, 2014, p. 1, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF14003.pdf.

¹⁸⁰ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: West Virginia's Use of Federal Funds for Other Credit Support Programs," March 19, 2014, pp. 1-2, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-004.pdf.

¹⁸¹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Illinois' Use of Federal Funds for Capital Access and Other Credit Support Programs," March 26, 2014, p. 17, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-005.pdf.

¹⁸² Ibid., pp. 2-3.

¹⁸³ Ibid., p. 3.

¹⁸⁴ Ibid., pp. 12-13.

¹⁸⁵ Ibid., pp. 19-20.

¹⁸⁶ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: South Carolina's Use of Federal Funds for Capital Access and Other Credit Support Programs," March 26, 2014, p. 12, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-006.pdf.

¹⁸⁷ Ibid., pp. 2-3.

¹⁸⁸ Ibid., p. 3.

¹⁸⁹ Ibid.

¹⁹⁰ Ibid., pp. 13-14.

¹⁹¹ Ibid., p. 16.

¹⁹² U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: American Samoa's Administrative Expenses and Reporting," March 26, 2014, p. 1, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-007.pdf.

¹⁹³ Ibid., p. 2.

¹⁹⁴ Ibid., pp. 2-3.

¹⁹⁵ Ibid., p. 13.

¹⁹⁶ Ibid., p. 17.

¹⁹⁷ Ibid.

¹⁹⁸ Ibid., p. 19.

¹⁹⁹ Ibid.

²⁰⁰ Ibid., pp. 14, 19-24.

²⁰¹ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: North Carolina's Use of Federal Funds for Capital Access and Other Credit Support Programs," March 27, 2014, pp. 1-2, 16, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-SBLF-14-009.pdf.

²⁰² Ibid., pp. 3, 8-9.

²⁰³ Ibid.

²⁰⁴ Ibid. pp. 10-11.

²⁰⁵ Ibid., pp. 3-4.

²⁰⁶ Ibid., p. 14.

²⁰⁷ Ibid., p. 16.

²⁰⁸ Ibid., p. 17.

²⁰⁹ Ibid., pp. 18, 22-23.

²¹⁰ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Idaho's Use of Federal Funds for its Collateral Support Program," May 19, 2014, pp. 2, 10, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/Idaho%2005%2019%202014%20FINAL%20for%20web.pdf.

²¹¹ Ibid., p. 3.

²¹² Ibid.

²¹³ Ibid., pp. 16-17.

²¹⁴ Ibid., p. 14.

²¹⁵ Ibid.

²¹⁶ The OIG also identified five loans, totaling approximately $9.8 million and supported by $1.3 million in SSBCI collateral, that provided interim financing of real estate acquisitions, construction projects, or equipment purchases that had been approved for the SBA's 504/Certified Development Company loan guaranty program. The OIG expressed concern that Treasury's reporting of jobs created or retained by recipients of SSBCI supported loans may potentially duplicate the SBA's reporting of jobs created or retained by 504/CDC loan program recipients. Treasury agreed to explain clearly in the Summary of States' Annual Reports that there is a possibility for duplicate reporting of job creation and retention figures in such circumstances. See ibid., pp. 5-7, 11, 15.

²¹⁷ U.S. Department of the Treasury, Office of Inspector General, "State Small Business Credit Initiative: Indiana's Use of Federal Funds for Other Credit Support Programs," June 18, 2014, pp. 2, 6-10, at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIGSBLF14011.pdf

²¹⁸ Ibid., p. 6.

²¹⁹ Ibid.

²²⁰ Ibid., p. 1.

²²¹ Ibid., p. 10. The OIG noted that "the son is not considered an immediate family member because he does not reside with his father nor is he a minor. Therefore, while the investment constituted a related party transaction, it did not meet the criteria needed to establish it as a prohibited related party interest. The conflict of interest existing for [the $300,000 investment] . . . was disclosed to the Board of Elevate Ventures in accordance with Elevate Venture's conflict-of-interest policy, and the Board approved the investment without any review by the State." See ibid., p. 9.

²²² Ibid., p. 10.

²²³ Ibid., pp. 10-11, 14.

²²⁴ Ibid., pp. 16-17.

²²⁵ Ibid.

²²⁶ Federal Deposit Insurance Corporation, "Statistics on Depository Institutions," at http://www2.fdic.gov/SDI/main.asp. As of December 31, 2013, there was $582,392,523,000 in outstanding non-agricultural small business loans (defined as the sum of "total loans secured by nonfarm nonresidential properties of $1,000,000 or less" and "total commercial and industrial loans to U.S. addressees of $1,000,000 or less").

²²⁷ U.S. Department of the Treasury, "SSBCI National Standards for Compliance and Oversight," May 15, 2012, at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx.