Part 5 of my 6-part periodic coverage of the June 14th SBA Inspector General audit that dinged SBA 7(a) lenders with retroactive guaranty denials.
The OIG questioned a $310,637 guaranty payment in February 2011 to Plaza Bank.
The OIG says the lender did not properly analyze repayment ability based on historical financial statements and projections. Additional deficiencies included an inadequate analysis of managerial experience and an unverified equity injection.
Inadequate Repayment Ability Analysis
Writes the OIG, “The borrower’s pro forma income statement for May 2009 through April 2010 included an approximate 132 percent increase in sales and an approximate 133 percent increase in income when compared to the 2008 historical data. Our review, however, did not identify support to justify this increase.”
“During our review, we determined that the owner had made financial decisions that were detrimental to the continued success of the business prior to loan disbursement. Specifically, after renting the building for approximately seven months, the borrower purchased the building by signing two 6-month balloon payment notes totaling $1,750,000. However, the borrower did not have the certification needed to signify the business as a competent and reliable manufacturer. This certification is necessary to make competitive bids for contracts.
“Additionally, the borrower had a history of poor financial decisions. He had already filed for bankruptcy once, had installment agreements with the Internal Revenue Service for 2004 and 2007 back taxes, and was accumulating credit card debt to operate the business.
“The lender applied a liquidation factor of 90 percent to calculate a collateral value of $1,494,000. However, no accompanying information was found to support why the SBA’s recommendation of 75 percent liquidation factor for commercial property was disregarded in lieu of a liquidation factor of 90 percent. Additionally, the lender did not consider whether the $760,000 variance between the sales comparisonapproach and income approach to valuation was appropriate in its final value determination. There were additional assets available to secure the loan, and therefore, the inflated liquidation value of the commercial property allowed the lender to ignore the other available collateral and caused this loan to be insufficiently collateralized.
Unsubstantiated Equity Injection
“The lender did not include the required $169,000 equity injection as an item in the loan authorization even though the bank required it in the credit memorandum. Additionally, the lender did not substantiate the source of the equity injection. The loan file included a gift letter, a bank statement showing fund availability for the gift, and a final closing statement showing a deposit of $172,000 into the lender’s account.
“The file, however, did not contain any substantial evidence that the funds
presented at closing truly originated from the gift check or wire transfer. . .large unexplained deposits should always be questioned and the source of the funds documented. A promissory note, gift letter or financial statement alone is generally not sufficient evidence of cash injection.”