Office of the Inspector General Monthly Update - May 2008

Business Loan Programs

OIG Issues Report on Oversight of SBA Supervised
Lenders.

On May 9, 2007, the OIG issued an audit on
Oversight of SBA Supervised Lenders. This is the
second report from this audit. The first report focused
on SBA’s oversight of Business Loan Center. Based
on the prior results, the scope of the audit was
expanded to examine four other SBA-supervised
lenders considered to present the highest levels of risk
to the Agency. The overall objectives were to (1)
determine whether SBA effectively addressed
performance issues to mitigate the risk presented by
these lenders and (2) identify opportunities that may
exist to improve the oversight process.

The audit disclosed that, although SBA determined
that the lenders reviewed posed a higher risk of
financial loss than other 7(a) lenders, it did not take
sufficient enforcement actions to mitigate the
increased risk. Specifically, the four lenders were
consistently rated as high-risk, had actual loan
purchase rates exceeding those of other large lenders,
were reported as having recurring performance and
compliance issues during onsite examinations, and in
the case of at least two of the lenders, consistently did
not meet performance benchmarks established by
SBA. As of September 2007, SBA had incurred a
cumulative net loss from the four lenders of $329
million, and between September 2005 and September
2007 purchased over $239 million in guaranties from
the lenders.

The audit also determined that SBA continued to
renew and expand authorities delegated to lenders,
allowing them to make loans without prior SBA
approval. Although SBA met with lender
management and reduced delegated lending authority
periods when renewals were granted, it did not take
progressively more stringent enforcement actions
when lender performance did not improve or, in some cases, deteriorated. SBA did not take adequate risk
mitigation measures because (1) there was a conflict
between SBA’s lender advocacy and oversight roles,
which impacted SBA’s treatment of lenders; (2) there
was a lack of clear policies describing the
circumstances under which enforcement actions would
be taken; and (3) loan production goals made it
difficult to maintain a proper balance between SBA’s
lender advocacy and oversight roles.

Finally, the audit identified weaknesses that further
impacted SBA’s supervision of the lenders, including
untimely reviews of purchased loans at the National
Guaranty Purchase Center (NGPC), timing of onsite
examinations that did not coincide with delegated
lending authority decisions and a limited scope of such
examinations, inconsistent implementation of
corrective action plans, and high risk loans identified
by SBA’s Loan and Lender Monitoring System
(LLMS) that were not shared with lenders to effect
corrective action.

To strengthen SBA’s oversight of its supervised
lenders, we made seven recommendations that
addressed establishing oversight and enforcement
criteria and risk mitigation goals, improvements to
onsite examinations, the sharing of high risk loan
information with lenders, and the staffing of the
NGPC. The Agency agreed with five
recommendations, partially agreed with one
recommendation, and reported that it had already
accomplished one recommendation.


Company and Two Individuals Enter Settlement
Agreement.

On April 17, 2008, an investment
company and two individuals (hereafter called the
defendants) entered into a settlement agreement with
SBA and the Department of Justice (DOJ) based on
their connection with a Small Business Investment
Company (SBIC). They agreed to pay SBA and the
Department of Justice (DOJ) $7,950,000 and $2,000,000, respectively. A criminal investigation
revealed that the defendants facilitated the creation of
a technology company as an SBIC by knowingly
assisting the manager of the SBIC and others to
conceal material information from SBA. The
defendants also knowingly helped the manager
structure entities that he controlled so as to conceal
relationships that violated SBA regulations. The OIG
is conducting this investigation jointly with the Federal
Bureau of Investigation (FBI).

Residential Property Owner Enters Guilty Plea.

On
May 1, 2008, a Virginia property owner entered a
guilty plea to one count of mail fraud and one count of
false oaths in a bankruptcy proceeding. He engaged in
an extensive mortgage fraud scheme involving two
residential properties that he owned. The properties
were sold or refinanced despite the presence of a
number of liens and judgments, including a judgment
against him related to a defaulted SBA-guaranteed
loan. Each time a property was sold or refinanced, he
created bogus documents purporting to dismiss the
encumbrances. He then diverted the loan proceeds for
his personal use. The total loss to lending institutions
was over $3.6 million. The property owner also made
a false statement under oath in a bankruptcy
proceeding concerning the sale of one of his
properties. The OIG is conducting this investigation
jointly with the FBI, the U.S. Postal Inspection
Service, and the U.S. Secret Service.

Suspended Attorney Sentenced.

On May 22, 2008, a
suspended New Jersey attorney was sentenced to 30
months in jail, three years probation, restitution of
$993,000 to be paid jointly and severally with other
defendants, and a $200 special fee. Acting as a loan
broker, the suspended attorney helped a businessman
obtain an SBA-guaranteed loan through a small
business lending company to supposedly purchase a
supermarket owned by the businessman’s mother. The
suspended attorney knew that there was no sale of a
business and, in exchange for a 10 percent fee,
submitted false documents to the lending company to
obtain the SBA loan. Specifically, he and the
businessman provided forged power of attorney
documents to improperly pledge collateral not
belonging to the businessman and also falsified a
$250,000 cash injection. Moreover, the loan proceeds
were not used as designated. The suspended attorney
also directed the owner of an accounting business to
prepare a fraudulent tax record to make the
businessman’s company appear stronger than it actually was. The suspended attorney illegally
received approximately $80,000 of his fee from the
loan proceeds and laundered that fee by having it sent
to the owner of the accounting business. The
businessman has been sentenced and the owner of the
accounting business is awaiting sentencing on separate
charges. The OIG is conducting this joint
investigation with the FBI.

Agency Management

OIG Issues Report on Planning for the Loan
Management and Accounting System Modernization
and Development Effort.

On May 14, 2007, the OIG
issued an audit on Planning for the Loan Management
and Accounting System (LMAS) Modernization and
Development Effort. The LMAS project, currently in
the planning phase, was initiated in November 2005 to
modernize SBA’s mainframe-based Loan Accounting
System (LAS) and make it independent from the
mainframe, which is inflexible, presents security risks,
and is based on obsolete technology. Our objectives
were to assess the progress the Agency had made since project inception, the soundness of SBA’s project
management approach, and the adequacy of oversight
activities established to review the conduct of and
requirements for the planning effort, as well as to
communicate areas of risk that need to be addressed as the LMAS project progresses.

The audit disclosed that, despite the urgency of
addressing LAS security vulnerabilities, SBA was
unable to replace the system prior to the expiration of
the mainframe contract in February 2007, causing the
Agency to renew costly contracts for mainframe and
application support services for another 5 years.
These services are expected to cost approximately $6
million per year. Also, by delaying its mainframe
migration, SBA is not adhering to Federal guidance
that requires timely remediation of information
security risks. We also reported that SBA lacked both
an enterprise-wide and project-level quality assurance
function to ensure that LMAS adheres to quality
standards, and an approved quality plan for the project
that establishes the standards and procedures that will
be employed to ensure adherence to requirements of
the Office of the Chief Information Officer (CIO).

The report contained one recommendation addressed
to the Associate Administrator for Capital Access, two recommendations addressed to the CIO, and two recommendations addressed to the LMAS project
manager. SBA generally agreed to implement the first
three recommendations, but did not provide a response
regarding the recommendations addressed to the
LMAS project manager.

This monthly update is produced by the SBA OIG,
Eric M. Thorson, Inspector General.

The OIG has established an e-mail address
(oig@sba.gov) that we encourage the public to use to
communicate with our office. We welcome your
comments concerning this update or other OIG
publications. To obtain copies of these documents
please contact:

SBA OIG
409 Third Street SW., 7th Floor
Washington, DC 20416
E-mail: OIG@SBA.GOV
Telephone number (202) 205-6586
FAX number (202) 205-7382
Many OIG reports can be found
on the Internet at:
http://www.sba.gov/IG/igreadingroom.html
If you are aware of suspected waste, fraud, or
abuse in any SBA program, please call:
TOLL-FREE at (800) 767-0385
Or email:
OIGHotline@sba.gov