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SBA Inspector General Demands Denial and Reimbursement of a $670,000 SBA 7(a) Guaranty Payment – Part 2 of 6 Coverage of the June OIG Report

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sbaoiglogoJuly 11, 2013

By Bob Coleman
Editor, Coleman Report

Today is part two of our periodic coverage of the June 14, OIG report about improper SBA payments to lenders for SBA 7(a) ARAA stimulus, 90% guaranty purchases.

In December 2010, SBA paid $670,000 to The Washington Trust Company for its share of a loss on a SBA guaranteed loan.

However, SBA’s Inspector General audited the transaction and determined SBA acted in error.

The OIG concluded the lender’s credit report did not match the loan authorization. The loan authorization indicated that the use of proceeds included debt refinancing of $854,000 and working capital of $146,000.

However, the lender’s narrative indicated that the $146,000 amount was actually used to refinance debt. Designating the funds as working capital allowed the lender to circumvent the documentation refinancing requirements.

The two business applicants had negative net worth as of December 31, 2008, of $140,075 and $317,022. They were having difficulties paying the business loans that were to be refinanced with the subject SBA loan. The difficulties were evident as the bank accepted a payoff of $95,630 less than the amount due to rid itself of the non-performing loans. The lender did not consider that it and the SBA would likely sustain losses by refinancing the debt, and did not obtain additional collateral or alter loan terms to protect SBA’s interests.

Another problem for the lender is the commercial property used as collateral for the loan was not appraised during the application process.

Instead, the lender used a September 2008 appraisal prepared for the bank holding the defaulted note that the subject loan was to refinance. The appraisal valued the property at $160,000. In June 2010, after the borrower’s business showed signs of distress, the lender obtained its own appraisal of the property that valued the property at $70,000.

SBA has reversed itself and now believes the lender errors should result in repayment of the guaranty purchase.

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