August 20, 2013
By Bob Coleman
Editor, Coleman Report
Monadnock Community Bank was paid $555,000 by SBA for the purchase of a SBA 7(a) guaranty two years ago.
However, a SBA Inspector General audit released in June wants the bank to give it back, citing faulty lender repayment analysis.
Says the OIG, “The lender improperly calculated the total annual payments for the SBA Loan. The lender stated that the total required debt service was $115,638 when the loan agreements demonstrated it was $176,257. Additionally, the lender’s own calculations of the Debt Service Coverage Ratios (DSCR) of 0.06 for 2007 and 0.40 for 2008, demonstrated an inability for this business to service the SBA loan debt.
“There was also no explanation as to why the borrower’s sales were expected to increase by $209,000, or 20 percent in 2009 when the business appraisal estimated only a $10,000 increase. The borrower also overstated their income by approximately $12,000, or 7.1 percent, for 2007 when compared against tax returns. The adjustment yields an operating loss of $9,580. Based on the unsupported projections and insufficient historical cash flow demonstrated there was not reasonable assurance of repayment ability for this loan.
The OIG also slammed the lender over “Character is the first C.”
“Considering the borrower’s prior incursion into this industry, which resulted in the board of directors removing him as president, a thorough analysis of a business plan and managerial experience would have been prudent. The lender, however, did not perform an analysis as to how the change of ownership would have benefited the businesses as required by SOP 50 51 5(A). The Lender did not document any industry related experience of the borrower or management experience related to geographic or product diverse entities. Furthermore, there was no business plan in place to achieve the successful integration and continued operation of the three businesses.”
Unlike other instances where SBA has disagreed with OIG, SBA delivered the bad news to the bank.
“The Director concurred with this recommendation and will request a full recovery of $555,368 from the lender no later than May 31, 2013.”