July 16, 2013
Today is part three of our periodic coverage of the June 14, OIG report about improper SBA payments to lenders for SBA 7(a) ARAA stimulus, 90% guaranty purchases.
In April 2011, SBA paid $967,869 to High Trust Bank for its share of a loss on a SBA 7(a) guaranteed loan.
However, SBA’s Inspector General reviewed the transaction and believes SBA made a mistake in purchasing the guaranty, and the lender should refund the guaranty purchase back to the federal government.
The loan proceeds were used to refinance existing debt.
The OIG believes High Trust Bank did not correctly analyze cash flow, “The lender did not analyze repayment ability based on historical income statements and projections, including the reasonableness of the supporting assumptions to ensure the business’ cash flow were adequate to service the debt.”
“The lender performed repayment ability calculations based on the borrower’s projected net income for 2009.
“We determined that the accepted projected financial statements had material deficiencies and lacked supporting assumptions.
“Specifically, the projections omitted the prorated share of employee benefits and the only supporting assumption for the projected net income was the lender’s statement that lithe owner has taken drastic measures to reduce expenses and increase sales to level off the company.
“This statement was inaccurate based on the financial data provided by the borrower. Historical financial statements showed that this business did not have sufficient cash flow to service the debt.
“If the first quarter actuals were expanded for the three additional quarters, the financial statements would show a loss of $287,000 compared to the borrower’s projected 2009 net income of $118,000. Additionally, the lender did not provide a sufficient and reasonable explanation for its projections.”
Fortunately for the lender, SBA has disagreed with the OIG and is not recommending voiding the guaranty – yet. SBA has agreed to take another look at the transaction.
Concludes the OIG, “SBA did not provide a specific rational for his non-concurrence. This recommendation will be resolved during the audit follow-up and resolution process.”