March 2, 2022
C-Suite Wednesday – SBA’s Identification of Improper Payments in 7(a) Program is a Challenge Says the OIG
“Our reviews of high-risk loans have consistently identified issues regarding eligibility, repayment ability, size standards, franchise agreements, business valuations, appraisals, equity injection, and debt refinance. Our review program also has helped us identify concerns with change of ownership transactions and SBA’s identification of improper payments,” reads the Top Management and Performance Challenges Facing the Small Business Administration in Fiscal Year 2022.
The OIG established a High-Risk 7(a) Loan Review Program in 2014 to evaluate lender compliance with the requirements for 7(a) loans that are $500,000 or more and defaulted within the first 18 months of disbursement. This program uses an internal scoring system to prioritize loans for review based on the level of risk.
Since 2014, OIG audits have identified several 7(a) loans that were ineligible, given to borrowers who did not have the ability to repay, or were not properly closed, which results in improper payments.
In the Fiscal Year 2021 SBA Agency Financial Report, the Office of Inspector General states that the identification of improper payments in SBA’s loan programs continues to be a challenge. The OIG found in FY19 that lenders were not in compliance with SBA requirements for 5 of the 8 loans reviewed. This amounts to $8.7 million in questioned costs. While the agency completed purchase and quality control reviews on each of these loans, they did not identify or fully address the material deficiencies noted by the OIG.
The SBA noted in their response to this report that the OIG conducted its assessment of their progress on this challenge before improper payment rates for FY21 were estimated and finalized. They also discussed their Corrective Action Plan to address the root cause of this issue which will include:
•Internal training for purchase processors, reviewers, and approvers for determining eligibility, repayment ability, size standards, business valuations, appraisals, equity injections, and others, in order to ensure proper recommendation of loan guarantee purchase or loan guaranty denial.
•Recovery of lender expenses that were either withheld from recovery proceeds the lender remitted to SBA or paid to the lender but were not fully justified or determined to be ineligible.