An oversight report said the Small Business Administration needed to improve its system for gauging the risk of lenders that receive SBA loan guarantees.

The report, released Monday by the Government Accountability Office, said the rating system developed by an SBA contractor to assess lender risk was "generally successful" in identifying high- and low-risk lenders, but its application was "limited."

The GAO said the agency's contractor had not followed prudent steps to validate its ratings, nor does the SBA itself use alternative forms of data to verify the risk findings.

"Because SBA does not follow sound validation practices or use its own data to independently assess the risk ratings, the effectiveness of its lender risk rating system — the primary system SBA relies on to monitor and predict lender performance — may deteriorate as economic conditions and industry trends change over time," the report said.

The watchdog also questioned why the agency does not use the risk rating system to determine which lenders need closer scrutiny, like the bank regulatory agencies do. Typically, the bank regulators will analyze a bank's off-site examination data to help guide its on-site review.

"Without targeting the most risky lenders for on-site reviews or gathering information related to lenders' credit decisions, SBA cannot effectively assess the risk posed by lenders or ensure that its lender risk rating system incorporates updated information on emerging lending trends," the GAO said.

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