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SBA Hot Topic Tuesday – SBA Loan Officers Make Mistakes Too

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September 9, 2014

By Bob Coleman
Editor, Coleman Report

This is fifth and last installment of our coverage of the June SBA Inspector General audit of SBA approval on non PLP 7(a) loans.

SBA’s Loan Guaranty Processing Center approved a $2 million 7(a) loan that refinanced same-institution debt and transferred the loss from the lender to SBA.

The problem was the loan was approved with negative cash flow.

“The lender performed repayment ability calculations that showed the borrower did not have sufficient cash. The 2010 and interim 2011 financial statements showed a negative cash balance from the business operations of ($69,228) and ($88,392), respectively.

“This indicated the borrower needed to use funds from the line of credit to keep the business in operation.

“Finally, documentation within the loan file supported that the borrower had delinquencies on its credit report and made several late payments on the line of credit from the lender, further supporting an inability to service its debts from the cash flow of the business.

“We also determined that this loan had a significant collateral shortfall. We determined there was no business or personal assets available to secure the $2 million SBA loan.

“The SOP states that an SBA guaranteed loan may not be used to refinance same institution debt where there is an appearance that the lender will shift to the SBA all or part of a potential loss from that same debt. The borrower had an existing $4.5 million line of credit with the lender. Of the $4.5 million, the SBA loan was used to term out $2.0 million while $2.5 million remained as a line of credit with the lender. The lender kept its first lien position on the inventory and accounts receivable, and another lender had first lien position on business equipment. The lender stated the borrowing base for the line of credit was reduced by the $2 million SBA loan and noted that both the line of credit and the SBA loan had sufficient collateral.

“However, the value provided was the borrowing base calculation for these assets and not their liquidation value. As documented by the loan specialists, the SBA had a second lien position against these assets and their liquidation would not result in recovery for the SBA.

“Approving this SBA loan reduced the lender’s risk while increasing the risk to the SBA. The borrower defaulted on the loan approximately 20 months after disbursement. The SBA purchased this loan for $1,368,771.”

Read the full Audit Report 14-13: Significant Opportunities Exist to Improve the Management of the 7(a) Loan Guaranty Approval Process

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