Report 7-28 – SBA’s Oversight of Business Loan Center, LLC
Date Issued: Wednesday, July 11, 2007
Report Number: 7-28

SBA'S OVERSIGHT OF
BUSINESS LOAN CENTER, LLC

Report Number: 7-28

Date Issued: July 11, 2007

Report 7-28, SBA's Oversight of Business Loan Center, LLC, contains numerous redactions that were requested by the Small Business Administration (SBA) Office of General Counsel (OGC). The SBA OGC believes that this text is subject to the deliberative privilege and bank examiners' privilege and should not be disclosed under exemptions 5 and 8 of the Freedom of Information Act. Although the Office of Inspector General does not necessarily agree with the extent of these redactions, as a courtesy, we have agreed to redact this text. To the extent that these redactions make the report difficult to understand, the following summary of the report is provided.

The OIG initiated an audit of the SBA's oversight of Business Loan Center, LLC (BLX) as a result of a recent OIG investigation of allegations regarding fraudulent loans originated by BLX. The OIG investigation resulted in the arrest of a BLX Executive Vice President and 18 other individuals, not employed by BLX, for allegedly making over $76 million in fraudulent loans to unqualified loan applicants.

The audit identified problems with the manner in which SBA addressed performance and compliance issues with BLX's lending activities and SBA's actions to protect government funds once deficiencies were identified. Since 2001, SBA' s oversight activities identified recurring and material issues related to BLX's performance. Despite these recurring problems, SBA continued to renew BLX's delegated lender status and SBA took no actions to restrict BLX's ability to originate loans or to mitigate financial risks through the purchase review process. The audit also determined that the organizational placement of SBA's Office of Lender Oversight (OLO) presented a potential conflict because OLO did not have compatible goals with the organization to which it reports, and that SBA lacked clear enforcement policies. The OIG recommended that SBA take certain actions to mitigate the risk posed by BLX, identify actions to address the potential organizational conflict, and develop more definitive guidance on enforcement actions.

U.S. Small Business Administration
Memorandum
Office Inspector General
Date: July 11, 2007
To: Michael Hager Associate Administrator for Capital Access
From: Debra S. Ritt
Assistant Inspector General for Auditing

Subject: SBA's Oversight ofBusiness Loan Center, LLC Report No. 7-28

This is the first of two reports resulting from our audit of the Small Business Administration's (SBA) oversight of Small Business Lending Companies (SBLC). The audit was performed as a result of a recent Office oflnspector General (OIG) investigation of allegations regarding fraudulent loans originated by Business Loan Center, LLC (BLX), a subsidiary of a portfolio concern held by Allied Capital Corporation. The OIG investigation resulted in the arrest of a former BLX executive vice president and 18 other individuals, not employed by BLX, for allegedly making over $76 million in fraudulent loans to unqualified loan applicants.

This report addresses whether: (1) SBA's oversight activities identified performance or compliance issues with BLX's lending activities that warranted attention; and (2) SBA acted appropriately to protect government funds once deficiencies were identified. Our audit focused on SBA's oversight ofBLX from 2001 to 2006.

To determine whether SBA was aware of performance or compliance issues associated with loans originated by BLX, we reviewed quarterly risk ratings assigned the lender between June 2004 and November 2006 by SBA's Loan and Lender Monitoring System (LILMS). We reviewed on-site examination reports issued between October 2001 and April2006 by the Farm Credit Administration on SBA' s behalf, and related corrective actions addressing reported deficiencies. We also interviewed a Farm Credit Administration examiner to gain an understanding of the scope and methodology used in the SBLC on-site examination process. Further, we reviewed field office input regarding renewals ofBLX's delegated lender status and information on lender deficiencies noted in SBA's guarantee tracking system.

To determine if SBA acted appropriately to protect government funds once deficiencies were identified, we interviewed personnel in SBA's Office of Lender Oversight (OLO), Office of Financial Assistance (OFA), and commercial loan servicing centers. We assessed whether a corrective action plan established for BLX was effective in improving BLX's lending performance and evaluated SBA's decision-making process in renewing BLX's delegated lending authority over the past 6 years. Finally, we interviewed staff at the National Guaranty Purchase Center to determine whether performance issues associated with BLX were considered in decisions to purchase guarantees on loans originated by BLX. We conducted our audit between January and February 2007 in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States.

To read the complete report, please see the attachment below.