December 18, 2018
By Dominic J Bartolone
Contributing Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — SBA Issues OIG Report on High Risk 7(a) Loan Review Program
For the SBA’s Semiannual Report to Congress, the Office of Inspector General (“OIG”) conducts audits of loans to detect and deter illegal and improper activities regarding SBA loan programs and products.
As part of the advisory for the popular 7(a) loan program, the OIG launched its High Risk 7(a) Loan Review Program by first reviewing two high-dollar, early-default 7(a) loans to determine if they were closed in accordance with the agency’s guidelines.
The investigation uncovered that both loans were originated and closed with lender deficiencies, and found that lenders for both files did not provide sufficient evidence that the loans were originated and closed in accordance to SBA protocols.
Specifically, the lenders did not provide adequate documentation to verify financial projections, confirm terms for debt being refinanced, verify the borrower’s ability to obtain credit elsewhere at reasonable terms, and prove that a franchise agreement was executed before disbursing funds.
They also found a material defect in the documentation to provide reasonable assurance, per SBA rules, that the borrowers met the requirement with regards to repayment ability, size eligibility, and equity injection.
As a result of the noncompliance by the lender, the defaulted loans ended up costing the SBA $1.3 million. The OIG recommended that the lenders immediately bring the loans into compliance or the SBA should begin recovery proceedings against the lenders. The SBA agreed with the recommendation and planned to work with the lenders to seek additional information that will bring the loans into compliance, or the agency will seek recovery.
The OIG also reviewed eight early-defaulted loans in FY 2018, four of which had been identified as having material lender deficiencies that justified the denial of SBA guarantees totaling approximately $2.7 million. One loan was identified for suspicious activity, a $665,000 guarantee, and was referred to the OIG’s Investigations Division.
Since 2014, the OIG’s High Risk 7(a) Loan Review Program investigated 27 loans with a combined purchase amount of $23.2 million. It recommended recoveries on 11 loans, totaling $8.5 million. It also referred five loans, totaling nearly $4 million, for further investigation.
In response, the SBA reported that it contacted the lender to obtain additional information on the loans identified as materially deficient. Of those 11 loans referred for recovery, the SBA has already recovered over $4 million for five of the deficient loans.