June 16, 2015
By Bob Coleman
Editor, SBA OIG Report
SBA’s Inspector General has issued a second audit of early defaulted ARAA SBA 7(a) loans. Nine loans were reviewed, and three loan guaranties were deemed to have been improperly purchased from lenders by SBA.
We’ll examine each of the three loans in separate Coleman Reports.
Today’s loan guaranty was purchased by Herndon in August 2012 and TD Bank received a check from the feds for $1.5 million. The borrower had made only four payments.
The guaranty was voided in a January OIG Audit cited with three lender mistakes.
· Failure to verify equity injection
· Processed the loan as a startup business instead of a business acquisition loan
· Incorrectly calculated cash flow
“The loan authorization required that the borrowers inject $300,000 in equity prior to disbursement. The lender did not properly verify the source of the equity injection, that the money was injected into the business prior to disbursement of the SBA loan, or that the full amount of the equity injection was received. Loan documentation showed that $202,837 was provided in connection with the loan closing and at the time the SBA loan was disbursed. However, adequate documentation supporting the source of these funds was not provided. Finally, copies of three checks totaling $100,000 were provided by the borrowers at closing. However, no evidence was present in the loan file supporting that two of these checks totaling $50,000 were processed.”
Questionable Eligibility (Change of Ownership)
“The lender improperly categorized the business as a start-up even though the bank’s own credit memorandum stated that the transaction was for the acquisition of an existing business. In addition, the sales agreement referred to as the ‘Agreement for Restaurant Sale and Purchase’ between the buyer and seller included restrictive covenants and goodwill. Finally, the settlement statement showed $601,000 of the transaction was for purchasing a business. Therefore, this loan should have been processed as a change of ownership and the lender should have adhered to SBA requirements that pertain to a change of ownership transaction. According to SOP 50 10 5(A), for a change of ownership, the lender must analyze and verify the historical earnings of the business and perform a business valuation. The loan documentation did not contain either of these.”
Inadequate Assurance of Repayment Ability
“According to SOP 50 10 5(A), the lender’s analysis must include a financial analysis of repayment ability based on historical income statements or tax returns and projections, including the reasonableness of the supporting assumptions. The loan documentation did not include an adequate assessment of reasonableness supporting how the business would achieve sales of $1.7 million within the first year. Additionally, the lender’s analysis did not support how the business would achieve a net income before taxes rate that was more than three times the industry average. The absence of an initial month-by-month financial analysis makes it difficult to evaluate repayment ability of a business in transition of ownership. This was especially important considering that there would be $150,000 of renovations that would impact the business’ ability to generate revenue. The loan defaulted within 15 months from the first disbursement with the borrower making only four of the required principal and interest loan payments.”
(Originally posted on March 19, 2014)