The Inspector General Strikes Back – “First in a Series of Memorandums”
June 26, 2013
By Bob Coleman
Editor, Coleman Report
Flush with cash to audit lender SBA 7(a) recovery act loans, our friends at the Inspector General don’t disappoint in their just released “first memorandum” of federal government improper payments to SBA 7(a) lenders.
Their findings? Lenders were wrong with their documentation 100% of the time. Eight of the eight loans reviewed were found to have had the guaranties improperly paid by Herndon says the OIG.
Here is a $1.4 million payment by SBA to Compass Bank that the OIG wants back:
Compass Bank failed to properly analyze repayment ability based on historical financial statements and projections. Further, the bank did not properly verify that the transaction resulted in a 100% ownership by the borrower says the OIG.
Writes the OIG….
Eligibility
The loan was processed as if a 10 percent owner of a company was purchasing 100 percent ownership of the same company. Through the distribution of the loan proceeds; however, we did not find adequate documentation in the lender’s loan file to support the Change of Ownership action. According to Standard Operating Procedure (SOP) 50 10 5(B), for a change of ownership the lender must verify that the transaction results in 100 percent ownership by the purchasing owners. The bank provided a narrative regarding ownership showing that three individuals shared the company with 85 percent, 10 percent, and 5 percent of the ownership. However, the loan closing statements did not demonstrate that the individual with five percent ownership was bought out at closing. As a result, there is no assurance the transaction resulted in the borrower owning 100 percent of the business, as required by the SOP.
Inadequate Assurance of Repayment Ability.
According to SOP 50 10 5(B), the lender’s analysis must include a financial analysis of repayment ability based on historical income statements and/or tax returns and projections, including the reasonableness of the supporting assumptions. We found that the lender used a borrower-prepared, interim, seven month financial statement for calculating repayment ability. The lender, however, did not identify that the financial statements contained discrepancies and omissions. Specifically, the interim income statement submitted on July 31, 2009, was missing three material expense items that were present on other historical financial statements provided to the lender. This included compensation of officers, salaries, and depreciation. Using historical data, we conservatively estimated these missing expenses, which resulted in an estimated loss of $329,968 instead of the $291,241 profit that was presented. Furthermore, there was evidence of off-book financing, which was missing from both the financial statements provided to the bank and the federal tax returns. The off-book financing included a restructured $785,055 promissory note dated July 10, 2009. The promissory note was issued to a company that later filed a court petition to enforce payment of the promissory note. These findings demonstrate that the lender did not consider all of the borrower’s liabilities in its repayment ability analysis. A proper analysis would have identified the existence of a Uniform Commercial Code (UCC) financing statement filing dated March 25, 2009. This statement identified the borrower as the current debtor and would be evidence for additional unreported debt.