AUDIT OF AN SBA GUARANTEED LOAN TO
JUST A CUT LAWN CARE, INC.
Audit Report Number: 7-06
December 28, 2006
U.S. SMALL BUSINESS ADMINISTRATION
OFFICE OF INSPECTOR GENERAL
WASHINGTON, D.C. 20416
Issue Date: December 28, 2006
Report Number: 7-06
To: Janet A. Tasker Acting Associate Administrator for Financial Assistance
/s/ original signed
From: Debra S. Ritt
Assistant Inspector General for Auditing
Subject: Audit of an SBA Guaranteed Loan to Just A Cut Lawn Care, Inc.
The purpose of this memorandum is to notify you of a $28,660 improper payment that should be recovered. During our ongoing audit of the guarantee purchase process at the National Guaranty Purchase Center, we identified a problematic loan [Exemtion2] made by First Georgia Bank (lender) to Just A Cut Lawn Care, Inc. (borrower). First Georgia Bank was subsequently acquired by United Community Bank and therefore, United Community Bank became responsible for servicing and liquidating SBA guaranteed loans approved by the lender. The audit was conducted during May 2006, in Chicago, Illinois, in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States.
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-guaranteed loans. SBA loans are made by participating lenders under an agreement (SBA Form 750) to originate, service and liquidate loans in accordance with SBA regulations, policies, and procedures. If a lender fails to comply materially with SBA regulations, the loan agreement, or does not make, close, service, or liquidate a loan in a prudent manner, SBA has exclusive discretion to release itself from liability, in whole, or in part, on the loan guarantee.
On August 28, 2001, SBA approved a loan for $66,395 to provide a borrower with working capital and to refinance business-related credit card debt and term loans. The loan was processed under Low Doc procedures and therefore, SBA was responsible for determining the eligibility and credit risk of the borrower. The loan was fully disbursed on September 11, 2001, and the borrower defaulted on August 11, 2003. A purchase review was completed by the National Guaranty Purchase Center on April 26, 2005, and no material deficiencies were identified. SBA purchased the guarantee on May 3, 2005 for $42,172.
The Lender Did Not Ensure Loan Proceeds Were Used as Required by Loan Terms
The lender did not verify that credit card debt refinanced with loan proceeds was business-related as required by the loan authorization. This deficiency was not detected during the guarantee purchase process and, as a result, SBA made a $28,660 improper payment when it honored the guarantee.
The loan authorization required the lender to document that the borrower used the loan proceeds for the purposes provided in the authorization. The loan authorization specifically required the lender to verify business-related debt on five of the credit cards being refinanced with loan proceeds. It also required the lender to complete and sign SBA Form 1050, Settlement Sheet, for each disbursement and retain the forms in its loan file. Upon signing the 1050s, the lender certified that the loan proceeds were used in accordance with the loan authorization.
The lender disbursed $28,869 to pay off five credit cards for which it was required to verify that the debt was business-related. Only $209 of the debt, consisting of purchases from Sears for a work belt, a tape holder, a tool bag, a padlock, and power tool bits, appeared to be business-related. The remaining $28,660 of debt consisted of (1) unsupported cash advances totaling $10,176, (2) charges that appeared to be personal in nature,(1) such as for bed and bath linens, an appliance repair, shoes, a bag, a log carrier, and a ride-on-vehicle, (3) unsupported credit card balances due to gaps in the provided statements, and (4) fees and penalties. There was no assurance that any of these charges were business-related and as a result, recovery of $28,660 from the lender is warranted.
We recommend that the Acting Associate Administrator for Financial Assistance:
1. Seek recovery of $28,660 from United Community Bank on the guarantee paid.
The lender who assumed the loan provided written comments on a draft of this report. United Community Bank stated that the lender relied on support and authorization from the Coastal Area District Development Authority (CADDA) to verify that the credit card debt refinanced with loan proceeds was business-related as required by the loan authorization. United Community Bank claimed that an August 15, 2001, letter from CADDA, which was attached to its comments, indicated that the credit card statements and receipts were verified and determined to be business-related.
With regard to the collateral issue presented in our draft audit report, United Community Bank claimed that the borrower’s bankruptcy filing prior to loan default prevented the lender from performing a timely site visit until permission was granted by the Bankruptcy Court. The lender’s comments are included as Appendix I.
Office of Inspector General Response
SBA’s loan authorization was provided to First Georgia Bank which was subsequently acquired by United Community Bank. The loan authorization specifically required First Georgia Bank to verify that certain debt being refinanced with loan proceeds was business-related. The authorization did not include a provision for the lender to rely on an outside party for the required verification. Furthermore, the August 15, 2001 letter from CADDA does not state that the credit card statements and receipts were verified and determined to be business-related as claimed by United Community Bank. As a result, we continue to support our position with regard to this matter.
With regard to the bankruptcy issue, we believe the lender could have petitioned the court for permission to make a site visit shortly after the August 4, 2003, bankruptcy filing and certainly well before April 2004.
The Agency provided written comments on a draft of this report. SBA Management agreed that the lender should be required to repay the $28,660 of loan proceeds disbursed to repay credit card debt that the originating lender did not confirm to be business debt.
SBA Management also agreed that the lender should have petitioned the court to permit it to make the site visit. However, SBA stated that the lender’s deficiency is not material because the loan collateral is primarily lawn mowing equipment and the realizable value for used equipment collateral is minimal. As a result, SBA Management would not be able to recover the recommended $11,622 for this deficiency. SBA Management’s comments are included as Appendix II.
Office of Inspector General Response
We agree that the realizable value for the used equipment collateral would have been minimal, and therefore, have modified our recommendation.
The finding in this report is the conclusion of the Office of Inspector General’s Auditing Division based on testing of SBA operations. The finding and recommendation are subject to review, management decision, and corrective action in accordance with existing Agency procedures for follow-up and resolution. Please provide your proposed management decision for our recommendation within 30 days of the date of this report on the attached SBA Form 1824, “Recommendation Action Sheet,” and show your proposed corrective action and target date for completion.
We appreciate the courtesies and cooperation of the Office of Financial Assistance representatives during this audit. If you have any questions concerning this report, please call me at (202) 205-[Exemption 2]or Robert Hultberg, the Program Director, at (202) 205-[Exemption 2].
United Community Bank
United Community Bank
PO Box 398
Blairsvine, Georgia 30514
December 6, 2006
SBA Office Oflnspector General
1145 Hemdon Parkway, Suite 900
Herndon, VA 20170
RE: Draft Audit Report On An SBA Guaranteed Loan To Just A Cut Lawn Care, Inc.
The following is a response to the draft audit report that was dated November 7, 2006 and issued by Debra Ritt, Assistant Inspector General for Auditing. The recommendation of the audit resulted in a $40,322 improper payment based on two findings. (1) The lender did not ensure loan proceeds were used as required by Joan terms and (2) The lender did not secure the collateral. The following outlines our disagreement to the recommendation of the audit.
The lender relied on support and authorization from the Coastal Area District Development Authority (CADDA) to verify that the credit card debt refinanced with the Joan proceeds was business related as required by the loan authorization. Please see the attached letter dated August 15, 2001. Teena Hicks at CADDA has indicated that the credit card statements and receipts included in the refmance of this loan were verified and determined to be business related by CADDA.
The borrower filed Chapter 7 bankruptcy on August 4, 2003 and the Joan defaulted on August 11 , 2003. The lender did not perfonn a site visit within 60 days after an unremedied default or within 15 days of an adverse event due to the fact that the borrower filed bankruptcy prior to the default date. As a result, the lender was not able to perfonn the site visit until petmission was granted by the Bankruptcy Court.
Based on the information provided in the response above, United Community Bank believes that the payment should be honored.
To view the continuation of Appendix I, see the attached document.
To view Appendix II, see the attached document.
AUDIT REPORT DISTRIBUTION
Recipient No. of Copies
Associate Deputy Administrator for Capital Access.................................................1
Deputy General Counsel............................................................................................1
United States Government Accountability Office.......................................................1
Office of the Chief Financial Officer Attention: Jeff Brown.......................................1
1 For example, purchases were from the Tackle Shack, Wal-Mart, Golden Isles Marina, Island Rock Café, Atlantic Marine, Tommy Hilfiger, Dexter Shoe, First Coast Golf, Bonaventure Golf, Staples, Spanky’s, Cellular One, The Stadium Club, JC Penney, and Sears.