December 4, 2019

By Caity Witucki
Contributing Editor, Coleman’s SBA Compliance Report

Coleman’s SBA Compliance Report – SBA Recommends New Corrective Enforcement Actions for High-Risk Lenders

According to SBA SOP 51 00, one of the objectives of on-site reviews is to ensure that lenders take prompt and effective corrective actions, as deemed appropriate. However, a recent audit of the SBA’s oversight of high-risk lenders found that OCRM did not have clear and specific guidance to outline adequate corrective and enforcement actions for 85% of the loans selected for review.

13 CFR §120.1400 states that SBA lenders agree to the terms, conditions, and remedies in loan program requirements. It also states that the SBA may undertake one or more enforcement actions if the SBA determines that the grounds applicable to the enforcement action exist. Examples of grounds that may trigger enforcement actions include the following:

  • Failure to maintain eligibility requirements for specific SBA programs and delegated authorities.
  • Failure to comply materially with any requirement imposed by loan program requirements.
  • Not performing underwriting, closing, disbursing, servicing, liquidation, litigation, or other actions in a commercially reasonable and prudent manner.
  • Repeated failure to correct continuing deficiencies.

The audit determined that SBA’s risk mitigation was inadequate because OCRM did not establish clear and specific guidance to outline the appropriate corrective or enforcement actions for numerous identified deficiencies. For example, the SBA OIG determined that OCRM failed to recommend adequate corrective actions when they identified a lender that had a pattern of deficiency affirming reasonable assurance of repayment, assessing borrower equity injection, and demonstrating and assessing credit elsewhere. According to the audit, OCRM required the lender to revise its written policies and procedures but did not cancel the guarantees or require the lender to correct the loan deficiencies.

The SBA OIG also determined that OCRM failed to recommend consistent corrective actions when the office found ten lenders who did not include adequate proof of credit elsewhere. The audit reports that OCRM required two of the lenders to update their policies and procedures and provide a credit elsewhere analysis. However, OCRM only required the eight other lenders to update their policies and procedures.

As a result of the audit, the SBA OIG has recommended that the Director of OCRM should conduct periodic overall assessments of the high-risk lender review results and recommended risk mitigation actions to ensure analysts recommend appropriate and consistent corrective and enforcement actions. OCRM agreed with the recommendation and plans to implement new risk mitigation actions starting April 30, 2020.

SOP 51 00
SBA OIG Report 20-30
13 CFR §120.1400