September 24, 2019

By Caity Witucki
Contributing Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday – Inappropriate Use of Delegated Authority Results in Recommended Guaranty Denial

The SBA Inspector General recently evaluated a $1,970,000 7(a) loan used to purchase a business, refinance debt, and provide working capital. The Inspector General’s evaluation found that the lender approved the loan outside of its delegated authority. As a result, the lender did not comply with SBA requirements related to the origination and closing of the loan. Due to the lender’s noncompliance with SBA requirements, the Inspector General recommended that the SBA should require the lender to bring the loan into compliance or seek recovery of the total amount of the loan plus interest on the guaranty paid by the SBA.

Inappropriate Use of Delegated Authority

According to the Inspector General’s report, the borrower was in the process of a change of ownership transaction which required a business valuation. The business valuation revealed that $2,038,442 of the business’ value consisted of intangible assets. As a result, the borrower was required to provide a 25% equity injection for the lender to process the application under delegated authority.

The loan authorization for the $1,970,000 7(a) loan did not require an equity injection. However, the lender financed the transaction using a companion loan, which required an equity injection in the form of a $1,000,000 standby agreement. As a result, the combined purchase price was $4,310,832. Therefore, a 25% equity injection should have been at least $1,077,708.

After the funds had been disbursed, the borrower made 12 loan payments before defaulting on the loan. The SBA honored its guaranty and purchased the defaulted loan at a reduced cost. Upon review the Inspector General determined that the lender was not authorized to approve the loan under delegated authority because it did not require an equity injection of at least 25% of the selling price. As a result, the lender will be required to bring the loan into compliance or seek recovery of $1,267,333 plus interest.

SOP 50 10 5(h) Section IV H 7(b)
U.S. Small Business Administration Office of Inspector General Management Advisory 19-19