SBA Hot Topic Tuesday – SBA 7(a) Loan Guaranty Denied when Lender Failed to Disclose Material Fact

July 8, 2014

By Bob Coleman
Editor, Coleman Report

restaurantequipmentLast month, SBA’s Inspector General released a performance audit critical of the SBA 7(a) guaranty approval process.

The report recommended ways for SBA to do a better job in approving SBA 7(a) loans. It’s attached if you want to delve into the operational weeds of SBA staffing issues, training issues and risk mitigation strategies.

However, there is a good chunk of information for SBA lenders. Specifically, the OIG’s audit ruled a number of loans ineligible for SBA financing, e.g. the guaranty will be denied and the lender will absorb the entire loss.

Here is one case study.

SBA’s Loan Guaranty Processing Center in Citrus Heights approved a $98,550 SBA 7(a) loan in 2012.

The borrower was the prospective owner of a restaurant. However, the lender failed to disclose to SBA that the previous restaurant on the same property had outstanding delinquent SBA loans. And the equipment, leasehold improvements and inventory were now owned by the lender.

Concludes the OIG, “This transaction put the SBA at risk. The SBA ended up with two loans in liquidation with a total outstanding balance of $43,674 and the $98,550 subject loans, which were all associated to the same property. According the the CFR, the SBA is released from liability on a loan guaranty if the lender’s improper action or inaction has placed SBA at risk or the lender has failed to disclose a material fact to the SBA regarding a guaranteed loan in a timely manner.

“The borrower was essentially going to be operating the same business and hours as the previous failed restaurant. Therefore, disclosing that the previous restaurant was financed by an SBA loand and had defaulted was critical to SBA’s approval decision.

“We determined this loan was ineligible for SBA financing.”

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