SBA Inspector General Installment 6 of 6 from the June 2013 Audit
November 13, 2013
By Bob Coleman
Editor, Coleman Report
My last installment of last June’s SBA Inspector General Audit released last June about six loans SBA paid to lenders for its guaranty purchase. The OIG disagreed with SBA’s payments and is seeking to clawback $4.6 million from the lenders.
All six loans were SBA 7(a) Recovery Act loans, with a 90% SBA guaranty. Each was classified an early default, failing within 18 months of disbursement.
Loan #6 is an American Bank of Commerce SBA 7(a) loan for debt refinance, purchase inventory and working capital. SBA honored the guaranty purchase for$680,900 in March 2011.
Now, two years later the OIG says lender errors voided the guaranty.
The lender error? The number one industry error of failing to document equity injection.
Writes the Inspector General;
“The lender’s credit memorandum and, more importantly, the SBA loan authorization required a
$400,000 equity injection to be used for inventory purchases. Instead, the loan file evidenced:
1. Two wire transfer deposits totaling $100,000 from unidentified or unsubstantiated sources.
2. No proof of deposit into the business account for two checks totaling $100,000.
3. Three partial standby debt agreements totaling $350,000, two of which were executed
approximately eight months after loan disbursements began and one executed at an unknown
time.
4. Invoices for both equipment and inventory some of which were purchased as much as three
months before the purported equity injections occurred and five months before the loan
was approved.
“SOP 50 10 5(A) requires debt that is on partial stand-by (interest payments only being made) may be considered equity only when there is adequate historical business cash flow available to make the payments.”
The two most recent tax transcripts provided by the borrower, prior to loan approval, showed an
operating loss of $71,457 in 2006, and a loss of $314,897 in 2007.
Fortunately for the lender, SBA did not support the OIG’s recommendation.
SBA writes, “(SBA) does not concur with the recommendation. The lender was contacted as part of the NGPC audit response effort, and has provided additional supporting information. All issues detailed in
the subject finding have been resolved as a result of additional information provided by the
lender. This information will be provided to the OIG to satisfy this recommendation.”