January 2, 2018
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — Managing SBA Loan Service Providers and Loan Brokers a Serious Management Challenge for 2018
Says SBA’s Inspector General in its FY 2018 annual report to SBA management.
Writes the OIG:
Increased Risk Introduced by Loan Agents
Prior OIG audits and investigations identified that SBA did not have a way to effectively identify and track loan agent involvement in its 7(a) and 504 loan portfolios and had outdated enforcement regulations. Additionally, OIG investigations have revealed a pattern of fraud by loan packagers and other for-fee agents in the 7(a) Loan Program, involving hundreds of millions of dollars.
Since 2005, OIG has investigated at least 22 cases with confirmed loan agent fraud, totaling at least $335 million. Further, OIG has determined that loan agents were involved in approximately 15 percent of all 7(a) loans and resulted in increased risk of default. Despite the prevalence of fraud in its loan portfolios, SBA’s oversight of loan agents has been limited.
OIG maintains that SBA also needs to develop a system to assign a unique identifier to loan agents that participate in the 7(a) Loan Program. The lack of a unique identifier limits SBA’s ability to perform effective oversight. In response to our loan agent’s report, SBA stated that it will explore the feasibility of implementing a registration system. To date, no solutions have been implemented.
In addition, a March 2015 audit (Report 15-06) noted that the outsourcing of traditional lender functions to Lender Service Providers (LSPs), a type of loan agent, has significantly increased in recent years. Specifically, in 2014, over 770 lenders—or approximately 28 percent of the active 7(a) lenders—had an approved agreement with at least one LSP. Additionally, SBA loan portfolios associated with the three largest LSPs exceeded that of many of the top 100 active SBA 7(a) program lenders.
Since our 2015 report, the number of SBA-approved LSP agreements has reached over 2,200, due in part to SBA’s effort to better control access by LSPs to its systems.
Specifically, SBA assigns an identifying number for all LSPs that access SBA systems and records all SBA-approved LSP agreements. This trend has enabled OCRM to develop initial performance metrics on LSP performance, but oversight is still limited. This audit also noted that a number of referrals regarding improper loan agent activities had not been acted upon by OCRM. In response, OCRM developed and now maintains a tracking system on referrals.
As loan agent involvement in the 7(a) program continues to increase, it will become especially important for SBA to have oversight tools in place to identify and track loan agent involvement in this sizeable program.
You may access the entire report here: