Report 7-08 – Audit Of The SBAExpress And Community Express Loan Purchase And Liquidation Process
Date Issued: Friday, December 29, 2006
Report Number: 7-08

AUDIT OF
THE SBAEXPRESS AND COMMUNITY EXPRESS LOAN PURCHASE
AND LIQUIDATION PROCESS

AUDIT REPORT NUMBER: 7-08

December 29, 2006

US SMALL BUSINESS ADMINISTRATION
OFFICE OF INSPECTOR GENERAL
Washington, DC 20416

AUDIT REPORT
Issue Date: December 29, 2006
Number: 7-08

To: Janet A. Tasker, Acting Associate Administrator, Office of Financial Assistance

/s/ Original Signed
From: Debra S. Ritt, Assistant Inspector General For Auditing

Subject: Audit of the SBAExpress and Community Express Loan Purchase and Liquidation Process

Attached is a copy of the subject audit report. The report contains three findings and twelve recommendations addressed to your office. Your response is synopsized in the report and included in its entirety at Appendix D.

The recommendations in this report are subject to review and implementation of corrective action by your office in accordance with the existing Agency procedures for audit follow-up. Please provide your management decision for the recommendations to our office within 30 days of the date of this report using the attached SBA Forms 1824, Recommendation and Action Sheet.

Any questions or discussion of the finding and recommendation contained in the report should be directed to Robert Hultberg, Director, Credit Programs Group, at (202) 205-[Exemption 2].

Attachments

DRAFT
EXECUTIVE SUMMARY

The objective of the audit was to determine if the SBAExpress and Community Express Loan Purchase process adequately identified lender deficiencies that would have affected purchase decisions and whether SBA adequately monitored the liquidation process for both loan programs. The audit examined two statistical samples drawn from all 2,729 SBAExpress and Community Express loan disbursements approved after January 1, 2000 and purchased before February 1, 2005, which were valued at $130.6 million.
We statistically sampled 45 SBAExpress and Community Express loan purchases, with an original gross amount valued at $2 million to determine whether SBA adequately identified lender deficiencies. We reviewed information contained in both SBA and lender files for these loans. To assess whether SBA adequately monitored the technical assistance requirement, we statistically sampled 43 loans with an original gross amount totaling $935,000.

Our audit disclosed that SBA purchased SBAExpress and Community Express loans without obtaining information needed to assess whether lenders verified borrowers’ use of loan proceeds, determined eligibility and creditworthiness, or verified borrower financial information. As a result, SBA did not detect lender deficiencies in 44 of the 45 loans sampled, which caused SBA to make improper purchase decisions. Based on the high rate of deficiencies, we estimate that $128 million to $130.6 million in disbursements on the 2,729 loans approved after January 1, 2000, and purchased before February 1, 2005, were not properly reviewed by SBA.

When projecting the results of our sample to the universe of 2,729 purchased loans, Lender deficiencies went undetected because guidance provided to lenders did not identify all of the necessary documents needed to make proper purchase decisions and conflicted with instructions provided by SBA Headquarters concerning IRS tax verifications.
Our review also determined that lenders did not disclose material facts on two loans that were purchased for $27,134, which would have impacted the purchase decisions. Specifically, the lenders did not reveal that one borrower used loan proceeds for an unauthorized purpose and that another borrower had previously been denied an SBA loan. Consequently, SBA should be released from its liability for its guarantees on these loans. These deficiencies were documented in the lender files and would not have been detected through the current purchase review process.

SBA also erroneously paid lenders approximately $304,000 in additional guarantees on 43 Community Express loans that were ineligible for additional guaranty coverage because the lenders provided no evidence that the borrowers were provided the required technical assistance. This occurred, in part, because many lenders were directed by SBA not to provide evidence of technical assistance, and SBA purchase reviewers were instructed not to review loan files for evidence of technical assistance. SBA should either obtain proof of technical assistance or recover those portions of the guarantees that were improperly paid.

Further, SBA did not timely refer $25 million in purchased loans that were over 180 days delinquent to the Department of Treasury for collection, as required by the Debt Collection Act. Approximately 79 percent of these loans were delinquent over 2 years as of March 1, 2005. SBA officials believed the Agency was exempt from this requirement and placed a low priority on loan liquidations due to the increasing volume of defaulted express loans. Consequently, SBA missed opportunities to reduce losses on loans purchased under the expedited loan processes.

Given the high rate of deficiencies identified by the audit, we recommend that SBA review all loans approved after January 1, 2000, and purchased before February 1, 2005, to ensure lenders complied with program requirements and revise program guidance to ensure that; (1) adequate documentation is provided and reviewed before purchase decisions are made, and (2) defaulted loans are properly and timely referred to the Department of Treasury for collection. We also recommended that SBA mitigate its losses on defaulted loans by:

  • pursuing recovery of a $7,414 guarantee on a loan that was awarded to an ineligible type of business, and denying liability for $23,033 in guarantees on four loans where purchase reviewers missed lender deficiencies;

  • seeking recovery of $27,134 for two guarantee purchases for which the lenders failed to disclose material facts that would have affected the purchase decisions;

  • pursuing recovery of some or all of the $304,000 in additional guarantees provided lenders who did not demonstrate they provided the required technical assistance to borrowers; and

  • referring $25 million in purchased loans that are more than 180 days delinquent to the Department of Treasury for collection.

Management concurred with 6 of the 12 report recommendations and proposed corrective actions that are responsive to 2 other recommendations. Management’s proposed actions on all but 1 of these recommendations (recommendation 2) are fully responsive.

Management did not agree to take actions that will responsibly address the remaining four recommendations. Specifically, management:

  • neither agreed nor disagreed to recover $7,414 from a lender who awarded an SBA loan to an ineligible company until it obtains additional information (recommendation 3).
  • did not agree it should ensure lenders are eligible for the additional guarantee coverage provided under the Community Express program by obtaining evidence that technical assistance was offered to borrowers on the 43 loans we reviewed (recommendation 8).
  • disagreed that it should refer to Treasury $25 million in loans that were over 180 days delinquent and not in a bona fide workout status, as required by the Debt Collection Act (recommendation 10).
  • did not agree to place adequate emphasis on liquidation follow-up and to ensure controls are in place to refer eligible non-tax debts to the Department of Treasury because it believed this recommendation had already been implemented, even though the audit identified instances where this had not occurred (recommendation 11). 

Consequently, the OIG will pursue resolution of the remaining four recommendations through the audit resolution process, and seek additional actions from management on recommendation 2.

To view the complete report, please see the attached document.