Audit Report 6-22: Audit of an SBA Guarantied Loan to R. R. Fox, Inc.
Date Issued: Wednesday, May 17, 2006
Report Number: 6-22

On May 17, 2006, the OIG issued Audit Report 6-22, Audit of an SBA Guarantied Loan to R.R. Fox, IncThe objective of the audit was to determine if the lender originated, serviced, and liquidated the purchased loan in accordance with SBA rules and regulations.

The Small Business Administration (SBA) is authorized under Section 7(a) of the Small Business Act to provide financial assistance to small businesses in the form of government-guarantied loans. These loans are made by participating lenders under an agreement to originate, service, and liquidate loans in accordance with SBA regulations, policies, and procedures. The SBA is released from liability on a loan guaranty, in whole, or in part, within SBA’s exclusive discretion, if a lender failed to comply materially with SBA regulations, the loan agreement, or did not make, close, service, or liquidate a loan in a prudent manner.

During an on-going review of the guaranty purchase process at the National Guaranty Purchase Center (Center) in Herndon, Virginia, the OIG identified a problematic loan made by Bank One to R. R. Fox, Inc., which is the subject of this audit report. On July 1, 2004, Bank One merged with JPMorgan Chase Bank who became responsible for servicing and liquidating SBA guarantied loans approved by Bank One.

The subject loan was part of a sample selected from a universe of 7(a) loan purchase requests processed at the Center by Headquarters personnel from the Office of Financial Assistance (OFA). The loan was processed as a regular 7(a) guarantied loan; therefore, the SBA was responsible for determining if the borrower met eligibility and credit requirements. The lender was required to service and liquidate the loan in accordance with SBA regulations, policies, and procedures.

The $510,800 loan was approved on November 22, 2002, with a 75 percent SBA guaranty. The borrower was in the business of pursuing collection on charged off credit card debt. The purpose of the loan was to finance the purchase of assets from an existing business and to provide working capital. The loan was disbursed on December 27, 2002. The borrower defaulted on April 4, 2003, less than four months after loan disbursement. The SBA purchased the guaranty for $373,258 on June 9, 2004.

The OIG found that valuations submitted by the lender were not independently prepared, and recommended that the SBA seek recovery of $375,258 from the lender on the guaranty paid.