July 15, 2014
By Bob Coleman
Editor, Coleman Report
However, I think we can all agree, except for the lender and SBA of course, that this case study is a mess and the loan should never been approved. The LGPC is the Loan Guaranty Processing Center in Citrus Heights.
Please read on an empty stomach.
Writes the OIG, “On July 2, 2012, LGPC loan specialists approved this loan for $3,000,000. The lender submitted a reconsideration request to the LGPC to refinance same institution debt. The loan application had been previously declined by the LGPC because it did not meet the SOP requirements due to a transfer of risk to the SBA and several other reasons.
“The borrower had historical net operating losses for four consecutive years from 2008 to 2011. As a result of the historical losses, the borrower hired a financial advisory consulting company that assisted the borrower with preparing the 2012 cash flow projections and a strategy for making the business profitable. The projections were based on the borrower’s new plan of cost reduction measures, signed sales contracts, and sales contracts that were being negotiated. However, interim financial statements showed the borrower continued to have a net loss and that projections were not being met. Furthermore, the treasurer of the business noted it was not realizing many of its sales and expense projections. Based on the historical losses, interim financial statement, and statements from the business’ officers, we determined that the 2012 cash flow projections were not supported.
“A 2012 audit report, prepared by a Certified Public Accounting (CPA) firm, noted that the borrower had suffered recurring losses from operations and had negative stockholder’s equity that raised substantial doubt about its ability to continue as a going concern. Additionally, the CPA firm noted that the borrower defaulted on its loan with the lender and violations were waived through August 1, 2012. Further, the lender overextended the company’s line of credit by $900,000 and the audit report stated that there was no guarantee the company would obtain the required credit facilities or payoff the current loan when it came due. We determined the borrower essentially defaulted on its original loan from the lender and, therefore, we believe the loan approved by the LGPC constituted an inappropriate transfer of risk to the SBA.”