December 12, 2017
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — Inspector General Claws Back $5 Million Paid to 6 Lenders in 2015
The $5 million is to be billed to six lenders that previously received payment from SBA honoring a 7(a) guaranty in FY 2015.
One loan is the gift that keeps on giving. Herndon denied the guaranty. SBA’s headquarters overturned the denial based on additional documentation received from the lender. Now, two years later OIG says Herndon was right, headquarters was wrong and the guaranty should have been denied.
SBA’s OIG estimates the total amount of lender “improper payments” was $32 million, or 3.6% of the $880 million in guaranties paid to lenders in FY 2015.
I’m not going to list the affected lenders. If you are curious you can look them up in yesterday’s attached audit report.
What is important from the audit are the errors OIG believes lenders made causing the guaranty repair or denial.
Writes the OIG:
Eligibility Deficiency Example
We noted one loan where the lender’s calculation of the cash flow improvement contained erroneous information. When the calculation was performed with the appropriate figures, the cash flow improvement fell significantly below the SBA threshold for eligibility. SBA requirements state that when refinancing long-term debt, the business must receive a permanent substantial benefit.
Repayment Ability Example
For one loan, the lender determined that repayment ability was sufficient even though the borrower had unsupported and unrealistic revenue projections and declining revenue prior to the change of ownership. The projections showed a 62 percent increase in revenue in the first year, after a decrease of 16 percent in the prior year. The loan file did not contain sufficient evidence to support how it would be achieved. SBA requirements state that borrower projections must be based on reasonable assumptions and no loan can be guaranteed by SBA unless there is a reasonable assurance of repayment in a timely manner.
Closing Deficiency Example
We identified one loan where the lender incorrectly indicated that loan proceeds were to be used to purchase land and improvements. Instead, the loan proceeds were used to make a payment to the estate of a deceased partner to facilitate a change of ownership. The lender did not comply with SOP requirements for a change of ownership transaction including the completion of a business valuation. SBA policies required the lender to obtain, or perform a business valuation.
Collateral/Liquidation Deficiency Example
We identified one loan where the lender failed to properly take a lien on a truck that was being refinanced with SBA loan proceeds. The loan being refinanced was solely secured by the truck. SBA requirements state that when SBA refinances secured debts, SBA expects to have at least the same security for the new debt, as long as the original loan was not over collateralized.
Other Deficiency Example
We also found that SBA identified one loan in which Care and Preservation of Collateral (CPC) expenses were deducted from recoveries at the time of liquidation, and the lender was then reimbursed for the same expenses at the time of the guaranty purchase. This resulted in a duplicative reimbursement of CPC expenses.