September 3, 2019

By Caity Witucki
Contributing Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday – Inadequate Support for Equity Injection Results in Guaranty Denial

A recent OIG review of “high risk” SBA 7(a) loans — over $500,000 and defaults within 18 months has resulted in the recommendation of denying the guaranty of two loans.

This evaluation of a $3 million loan defaulted after the borrower made only 10 payments. SBA honored the guaranty and purchased the loan from the secondary market for $2,506,611. However, SBA’s share of the balance was reduced to $2,335,493 due to recoveries during liquidation. Unless the lender can correct the following deficiencies, the lender will be required to reimburse SBA for the reduced amount after liquidation — “plus interest.”

Inadequate Support for Equity Injection
According to the OIG report, the lender’s credit memo for the $3 million early defaulted loan stated that the equity injection was based on improvements to the borrower’s building. However, the lender’s file did not contain adequate support for the source of the equity injection. The file contained invoices stamped ‘paid’ from a construction company for the 2 years prior to disbursement, but it did not contain documentation to support the source of those payments. Supposedly, the funds used to pay for the improvements were gifted from family members, but the SBA inspector general review found no evidence in the lender’s file to support that the improvements were made and that the funds used to pay for the improvements were gifted and not borrowed.

Inadequate Support for Debt Refinance
According to the lender’s credit memorandum, $298,500 of the $3 million early defaulted loan was to be used to refinance a working capital loan with an interest rate of 24%. However, the SBA inspector general did not find sufficient documentation to verify the terms of this debt or its original purpose. Since the SOP states that SBA guaranteed loan proceeds may not be used to refinance debt that was ineligible for SBA financing at the time it was originally made, the lender is required bring the loan into compliance by properly documenting the purpose of the borrower’s working capital loan or they will be forced to seek recovery of the $2,335,493 plus interest on the guaranty paid by the SBA.


SBA OIG Report 19-15

Read about the other loan that was recommended for denial:
SBA Hot Topic Tuesday – SBA Inspector General Recommends $3 Million 7(a) Guaranty Denial