The Office of Inspector General (“OIG”) is currently auditing the SBA to determine if the Agency is properly mitigating its risk of loss. Specifically, a focus has been placed on loans that were approved and closed during the 7(a) Recovery Act. The Recovery Act provided the SBA with $730 million to expand the Agency’s lending programs and create a stimulus during a need for recovery. This stimulus included increasing the guaranty to 90% and there was concern that some lenders would not exercise sufficient due diligence. The Office of Inspector General was allocated funding for this ongoing audit.
The audit found six defaulted loans that totaled $6.7 million, and the SBA purchased its guaranteed share of the principal loan balances for approximately $4.6 million. The OIG reviewed all origination, closing and purchase actions as documented in the SBA and lender loan files. It also reviewed information in the SBA’s Loan Accounting System as well. It’s findings were from an audit from March 2012 and February 2013.
The OIG determined these six 7(a) Recovery Act loans were not originated and closed in accordance with SBA’s rules and regulations including Standard Operating Procedures (SOP) 50 10 and the Code of Federal Regulations (CFR). The deficiencies were not detected during SBA’s purchase reviews and it was recommended the SBA proceed to collect these amounts from the lender.
All of the Lenders cited utilized the Preferred Lender Status (PLP) in making these loans. These lenders determined eligibility and creditworthiness as part of their designated status. The OIG findings included:
One PLP lender approved a 90% loan for the purchase of all outstanding stock of a company and for the refinancing of debt. However, the lender did not properly analyze repayment ability based upon historical financial statements and projections. The loan was processed as if a 10% owner was purchasing 100% of the ownership of the same company, but there was no adequate documentation to support this change of ownership. The bank’s narrative showed three individuals owned the company and the closing statements did not demonstrate that all the individuals were bought out at closing not supporting the 100% purchase. A detailed analysis by the OIG on the cash flow also questioned the underwriting.
Another loan was made by a PLP lender for debt refinance and working capital and the lender did not obtain an appraisal on the property that was used as collateral, as required. Additionally the the borrowers had a negative net worth and demonstrated difficulty in paying the business loans that were being refinanced. Use of proceeds were improperly documented.
Certainly PLP status comes with expedited delivery of the program, but the pitfalls are also greater. These issues are not always limited to PLP lenders as in this case.