SBA Hot Topic Tuesday – Inspector General Case Study of an Early Defaulted SBA Loan

August 12, 2014

By Bob Coleman
Editor, Coleman Report

sbaoiglogo2Our fourth case study installment of SBA Inspector General audit criticism of the Loan Guaranty Processing Center in Citrus Heights is about cash flow projections.

SBA’s Loan Guaranty Processing Center approved an SBA 7(a) $1.9 million loan in 2011. The loan defaulted 14 months later and SBA honored the guaranty of $1.4 million.

In its review, SBA’s Inspector General criticized the lender and SBA of their underwriting of the cash flow projections.

Writes the OIG, “The lender submitted cash flow projections for a new urgent care location, but there was no support for a significant amount of the income source.

“Specifically, the projections had three line items for income, which included: 1) medical urgent, 2) lease of the remaining space, and 3) product/service C.

“However, there was no support or discussion about what made up the product/service C income line item, and there was no lease agreement in place. While the lender’s credit memo indicated that income from the borrower’s other urgent care locations could support this new location, the financial statements submitted with the loan package were unreliable due to (1) the appearance that they represented time periods that were not requested by the loan specialists and (2) the calculation errors.

“As a result, the applicant’s ability to repay the SBA loan from the cash flows of the business was not appropriately verified.

“The loan specialists’ acceptance of 1) revenue streams that had not been realized (i.e. lease agreement) or adequately explained (product/service C), and 2) financial statements that did not appear to represent the time period requested was not prudent.

“And there is evidence supporting that the subject business never opened and a lease to rent out the remaining space was not executed.”

Read the full Audit Report 14-13: Significant Opportunities Exist to Improve the Management of the 7(a) Loan Guaranty Approval Process