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SBA Hot Topic Tuesday – SBA Inspector General Denys Two 7(a) Loan Guarantees

August 20, 2019

By Caity Witucki
Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday – SBA Inspector General Denys Two 7(a) Loan Guarantees

A recent OIG review of two “high risk” SBA 7(a) loans has resulted in the recommendation that the Director for the Office of Financial Program Operations require the lenders to bring the loans into compliance or seek recovery of the total loans plus interest on the guaranty paid by the SBA.

Evaluation of a $2,355,000 7(a) Loan Used to Purchase Equipment, Purchase Fixtures, Finance Leasehold Improvements, and Provide Working Capital

This $2,355,000 7(a) loan defaulted after the borrower made only 11 payments. SBA honored the guaranty and purchased the loan for $1,367,417. Unless the lender can correct the following deficiencies, the lender will be required to reimburse SBA for the full amount — “plus interest.”

Inappropriate Use of Delegated Authority

The lender approved the borrower’s loan knowing that the borrower already had an existing approval from another lender. The lender also reduced the loan amount to stay within SBA’s maximum guaranty threshold.

Inadequate Assessment of Borrower’s Eligibility

An affiliate of the borrower advanced funds to establish an overseas company for professional referrals to specialists in Japan. However, the lender did not consider the overseas company in the borrower’s size determination.

Inadequate Assurance of Repayment Ability

The lender used projections that were based on financials from an outdated business plan in which the borrower would have received more clients due to the business’ location. In addition, four months after the loan disbursed, the lender modified its projections to incorporate a contracted professional, but did not provide proof of the contract. Furthermore, the lender failed to consider the effect of an overseas affiliate on the borrower’s repayment ability.

Inadequate Support for Equity Injection

The lender provided documentation that the borrower injected $164,353. However, $99,668 was used for miscellaneous expenses dating back almost 4 years prior to the loan’s approval, $61,953 of the injection was paid by a non-income producing borrower, and $97,173 was provided by an affiliate who expected to be repaid.

Evaluation of a $975,000 7(a) Loan Used to Purchase Land and Improvements, Purchase a Business, Purchase Inventory, and Provide Working Capital

This $975,000 7(a) loan defaulted after the borrower made 13 payments. SBA honored the guaranty and purchased the loan from the secondary market for $733,031. However, SBA’s share of the balance was reduced to $691,715 due to recoveries during liquidation. Unless the lender can correct the following deficiency, the lender will be required to reimburse SBA for the full amount — “plus interest.”

Inadequate Support for Equity Injection

In the credit memo, the lender stated the source of a $230,000 cash injection would be funded from the sale of a business previously owned by the guarantors. The credit memo also indicated the guarantors had a fully drawn home equity line of credit in the amount of $200,000 with another bank. However, the lender did not fully document that the funds came from the sale of the business or that the guarantors had an outside source of income to support the home equity line of credit.

Source:
SBA Inspector General Management Advisory Report Number 19-16, August 14, 2019

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