Office of Inspector General Monthly Update - March 2008

Business Loan Programs

Ongoing Investigation Results in Indictments.

In
January 2007, agents from the SBA OIG and the U.S.
Secret Service arrested 18 individuals sought in
connection with a scheme in which a lender’s former
executive vice president and others not employed by
the lender conspired to fraudulently qualify loan
applicants for SBA-guaranteed loans. The scheme
involved as many as 76 fraudulent loans totaling about
$76 million. The following case is part of this ongoing
investigation, which is being conducted jointly with
the U.S. Secret Service.

• On March 4, 2008, a Michigan woman pled guilty
to one count of conspiracy. From April 2002 to
November 2006, she conspired with others to
defraud SBA by (1) claiming to be the 100%
owner of a business on several loan application
documents, (2) overstating her financial status,
(3) alleging that the source of a $250,000 equity
injection was a gift from an uncle, (4) making
misrepresentations on the management resume,
and (5) obtaining the loan in her name only for a
brother-in-law, who was in fact the owner and
intended operator of the business. The $825,000
SBA-guaranteed loan was made by a Detroit
lender in August 2002.

OIG Issues Report on an Audit of UPS Capital
Business Credit’s (UPSC) Compliance with Selected
7(a) Lending Requirements.

On March 21, 2008, the
OIG issued an audit on UPS Capital Business Credit’s
(UPSC) Compliance with Selected 7(a) Lending
Requirements. The objective of the audit was to
determine whether UPSC materially complied with
SBA’s requirements for documenting (1) borrower
equity injection, (2) use of loan proceeds, and (3)
qualifications for debt refinancing. The OIG reviewed
a statistical sample of 36 of 103 loans originated by
UPSC and purchased by SBA between October 2003 and March 2007. The OIG did not identify problems in
the areas of equity injection and qualifications for debt
refinancing. However, it was determined that 16
(about 44 percent) of the 36 loans in the sample did
not have adequate supporting documentation to show
how borrowers used the loan proceeds. These loans
had an outstanding balance of about $4.3 million.
When projected to the 103 loans purchased by SBA
during the time period reviewed, it was estimated that
44 percent of $11.2 million in guaranties purchased by
SBA as of March 31, 2007, were made without the
appropriate documentation showing how the borrower
used the loan proceeds.

The OIG recommended that the Director, Office of
Financial Assistance, obtain the appropriate
documentation for the use of loan proceeds for the 16
loans, establish a corrective action plan addressing the
lender’s procedures for documenting the use of loan
proceeds, and repair one loan for improper use of loan
proceeds. The Agency concurred with the OIG’s
recommendations, and stated that actions were being
taken to satisfactorily address the three report
recommendations.

OIG Issues Report on an Audit of Loan Classifications
and Overpayments on Secondary Market Loans.

On
March 26, 2008, the OIG issued an audit on Loan
Classifications and Overpayments on Secondary
Market Loans. The objectives of the audit were to
determine if SBA (1) classified secondary market
loans appropriately, (2) purchased loans from the
secondary market in a timely manner, and (3) pursued
lenders for overpayments it made to secondary market
investors. Our audit disclosed that an estimated
$161 million in secondary market loans were reported
as current even though loan payments were 60 days or
more past due. Furthermore, it was determined that
SBA did not purchase guaranties from the secondary
market in a timely manner and, as a result, incurred
$7.4 million of additional interest expense. While SBA generally pursued lenders for overpayments it made to
secondary market investors, the OIG identified
instances where SBA had overbilled lenders by $1.9
million on loans where transcripts either were not
provided or were incomplete. Finally, the OIG
identified approximately $1.1 million of income that
SBA reported from ongoing guaranty fees it never
collected from lenders.

The report contains 10 recommendations addressed to
the Director, Office of Financial Assistance and
one recommendation addressed to the Chief Financial
Officer. The Agency agreed with two of the
recommendations, partially agreed with three of the
recommendations, disagreed with four of the
recommendations, and neither agreed nor disagreed
with one recommendation. The Agency also indicated
it had already taken the proposed action for one
recommendation.

Slaughtering Business President Indicted.

On March
12, 2008, the president of a slaughtering business
located in San Angelo, Texas, was indicted on four
counts of wire fraud and aiding and abetting, and two
counts of making a false statement to a bank and
aiding and abetting. Between 2002 and 2004, the
business president received $1,236,500 in SBAguaranteed
loans and an additional $1,812,000 in non-
SBA loans. He is accused of using false and fraudulent
representations and documents to convince at least
four different lenders that he had sufficient collateral
and income to repay the financing he received. The
OIG is conducting this investigation jointly with the
Federal Bureau of Investigation.

New York Business Owner Pleads Guilty.

On March
19, 2008, the owner of a New York trading company
pled guilty to one count of conversion and
concealment of property mortgaged and pledged to the
SBA. In February 2005, he received a $250,000 SBAguaranteed
loan from a New York bank. The loan was
secured by his primary residence in New Jersey. In
July 2006, he sold his primary residence for a profit of
approximately $487,000 and concealed the sale from
the bank and SBA. He also signed an Affidavit of Title
which concealed from the buyers that SBA had an
interest in the property. He subsequently defaulted on
his SBA loan. The case was initiated based upon a
referral from the OIG’s Early Fraud Detection
Working Group.

California Man Pleads Guilty.

On March 20, 2008, a
California man was indicted on two counts of mail
fraud and aiding and abetting and causing an act to be
done, one count of possession of 15 or more
unauthorized access devices, and five counts of
aggravated identity theft. The investigation revealed
that he was a leader behind a sophisticated identity
theft ring operated for the purpose of obtaining
fraudulent SBAExpress lines of credit, conventional
and/or residential loans, and credit cards. He created
three identities using other individuals’ Social Security
account numbers, fictitious businesses, and credit
cards obtained for each false identity. He also falsely
claimed to be a U.S. citizen. He applied for business
lines of credits at various lenders using these false
identities and was awaiting responses from lenders
when the OIG and other participating agencies
arrested him on different California state felony
charges relating to a fraudulent $35,000 SBAExpress
and $1,445,000 residential mortgage loans. He pled
guilty to those charges and was sentenced on March 7,
2008, to time served in prison (344 days), three years
probation, restitutions of $34,650 to SBA and a bank
and $1,445,000 to another lender, and a $200 fine. The
OIG is conducting this investigation jointly with the
Los Angeles Police Department; California
Department of Insurance; Department of Homeland
Security, Immigration and Customs Inspection
Bureau; Postal Inspection Service; and the Social
Security Administration OIG.

Illinois Business Man Indicted.

On March 20, 2008, an
Illinois businessman was indicted by a federal grand
jury in the Northern District of Illinois on one count of
bank fraud and one count of wire fraud in connection
with schemes to defraud SBA, an Illinois lending
company, and an Illinois bank. The schemes involved
two SBA-guaranteed loans—a $660,000 loan to a
sealant business and a $200,000 loan to an equipment
rental company—to be used for his nearly
simultaneous purchases of the businesses. At the time
of his loan applications, he had been arrested and
faced theft and fraud charges related to a third
business he owned. He concealed this information
from the lenders and certified that he had never been
arrested or charged with any offense. Moreover, he
falsified the required equity injections for both loans
by altering a previously-cancelled business check to
show the required $27,000 investment into the
equipment company. On the same day that he reported
he would be the sole owner of sealant company, he
converted some of the collateral stock he would receive to two friends in exchange for $80,000 cash.
He concealed the sale and used the funds to partly
finance the required equity injection. He also admitted
that, after he defaulted on the loans, he sold collateral
machinery and tools from both businesses.

California Dry Cleaners Owner Indicted.

On March
21, 2008, the owner of a dry cleaning business was
indicted by a federal grand jury on two counts of
making false statements to a financial institution and
one count of causing an act to be done. The owner and
his partner had been approved for a $650,000 SBAguaranteed
loan from a California bank to purchase the
business in December 2003. After a public records
check for additional assets, the bank learned that he
had not disclosed his criminal history on his loan
application. An OIG investigation confirmed that he
had a prior criminal record that was not disclosed on
his SBA Statement of Personal History (Form 912) or
on the bank’s documents. Specifically, he had been
found guilty of making false statements to a financial
institution in July 1999. The investigation also
revealed that the $350,000 cash injection to purchase
the business had been borrowed by the owner of the
dry cleaning business, even though a letter submitted
by another individual to the bank indicated that the
$350,000 was not borrowed. The OIG investigation
resulted from a referral by the bank.

Disaster Loan Program

OIG Issues Report on an Audit of Annual Credit
Reviews for Gulf Coast Hurricane Disaster Loan
Disbursements.

On March 28, 2008, the OIG issued an
audit report on Annual Credit Reviews for Gulf Coast
Hurricane Disaster Loan Disbursements. The audit
disclosed that SBA’s monitoring efforts were not
adequate to ensure that the financial status of
borrowers had not deteriorated to levels that would
adversely impact their loan repayment ability.
Generally, the audit found that the Office of Disaster
Assistance (ODA) did not: (1) perform annual credit
reviews, as required by Agency procedures, before
making loan disbursements; (2) obtain updated
financial information on borrowers; and (3) cancel
loans, as required, when the borrower had no
repayment ability. ODA disbursed $4.9 million on
about 70 percent of 159 sampled loans without
verifying that loan recipients were creditworthy.
Although SBA originally established annual credit
reviews as a management control, internal ODA policy memos extended the period for credit reviews,
effectively eliminating reviews on 10,100 loans
totaling over $1 billion in disbursements. Additionally,
although disbursement deadlines for these loans are
included the Disaster Credit Management System
(DCMS), funds were continually disbursed after the
deadlines (this occurred for 74 of the 159 loans
reviewed during our audit).

The OIG recommended that the SBA reinstitute the
requirement that updated financial records and credit
reports be collected during annual credit reviews and
ensure that the reviews are performed when
disbursements are made a year after loan
authorization. The OIG also recommended that written
justification be provided for disaster assistance policy
made outside of the Agency’s SOP clearance process,
and that internal controls be implemented to ensure
that the DCMS prevents the payment of loan proceeds
after disbursement deadlines expire. ODA generally
concurred with the audit findings, but non-concurred
with three of the four recommendations, commenting
on several issues raised in the report. The Agency
agreed that not all credit reviews were completed as
required, but believed it had the authority to relax
credit review requirements, even though such action
circumvented its own regulations and standard
operating procedures. The OIG believes that since
ODA’s decision not to comply with credit review
requirements placed a significant amount of loan funds
at risk, it should have secured approval for such action
from executive levels of the Agency.

OIG Issues Report on an Audit of the Withdrawal of
Disaster Loan Applications to Individuals and
Businesses Impacted by the Gulf Coast Hurricanes.

On March 28, 2008, the OIG issued an audit report on
the Withdrawal of Disaster Loan Applications to
Individuals and Businesses Impacted by the Gulf
Coast Hurricanes. The audit disclosed that SBA
generally acted appropriately when withdrawing
incomplete loan applications. However, for 30 of the
96 loans sampled, SBA withdrew the loans without
providing applicants with advance notice. When the
results were projected to the universe, it was estimated
that SBA inappropriately withdrew between 2,075 and
3,879 loan applications. Of the 30 loans withdrawn
without advance notice, 12 were withdrawn within 4
days of SBA’s attempted contact, 12 applicants did not
receive a withdrawal letter advising them of the
necessary steps to have their applications reaccepted,
and one application was erroneously withdrawn.
However, the OIG was unable to determine a
significant impact upon applicants. Of the 30
applicants, the OIG was able to reach 7, only 1 of
whom still desired the loan.

The OIG recommended that SBA implement better
internal controls, preferably through DCMS, to ensure
that 14-day letters and withdrawal letters are sent to
applicants, as required. The OIG also recommended
that SBA revise production goals to exclude loan
application withdrawals.

ODA generally agreed with the recommendations, but
asserted that the production standards used when
processing the Gulf Coast hurricane loans, and
discussed in a February 24, 2006 memo from the
Director of Loan Processing, were not new. However,
the OIG’s report did not claim that these production
goals were new. It merely reported that loan officers
who were interviewed believed that the established
goals were unreasonable and frequently took priority
over providing customer service. It was noted that the
goals may have seemed unreasonable because many of
the loans were being processed by newly hired
employees who may have lacked the experience
needed to achieve the goals.

Statutory/Regulatory/Policy Reviews

In an effort to proactively identify and correct
potential Agency inefficiency and management
problems at the onset of policy and regulatory
development, the OIG reviewed, cleared, and/or
provided comments, as appropriate, on 5 Agency
initiatives, including proposed legislation, SBA
Standard Operating Procedures, and Agency notices
containing directives to its employees.

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