Report 9-08 – Audit of the Liquidation Process at the National Guaranty Purchase Center
Date Issued: Friday, January 30, 2009
Report Number: 9-08

To: Darryl K. Hairston
Acting Administrator

Eric R. Zarnikow
Acting Associate Administrator, Office of Capital Access

John A. Miller
Director, Office of Financial Program Operations

/s/ Original Signed

From: Debra S. Ritt
Assistant Inspector General for Auditing

Subject: Final Report on the Liquidation Process at the National Guaranty Purchase Center
Report No. 9-08

This report presents the results of our audit of the liquidation process for 7(a) loans at the National Guaranty Purchase Center. The Small Business Administration (SBA) guarantees loans that are made by participating lenders. Upon loan default, SBA authorizes participating lenders to continue servicing the account and, should liquidation and/or litigation become necessary, to completely liquidate or sue upon the loan instrument. During the liquidation process, the Center reviews and approves lender actions, as necessary. When no further recovery is expected on a loan, the Center also performs a comprehensive review of the lender’s wrap-up report, liquidation plan, and relevant  documentation to determine if the lender materially complied with SBA’s liquidation requirements.

The audit objectives were to determine if (1) the Center’s liquidation process, which culminates in loan  charge-off, identified and addressed lender noncompliance with SBA’s procedures to mitigate losses, and (2) the Center adequately managed loans in liquidation status.

To address the first objective, we reviewed 54 loans totaling $6.1 million. The sample was drawn from a universe of 7,120 loans totaling $696 million that had been charged off between October 1, 2005 and July 31, 2007. We reviewed information in SBA’s loan files and documentation from lenders and interviewed SBA officials to  determine whether the Center identified lender noncompliance with SBA’s procedures during liquidation and/or charge-off. The loans examined had received purchase reviews prior to the Center’s reengineering of the purchase process in fiscal year (FY) 2008. Because we had previously identified weaknesses in SBA’s purchase review process in the district offices and at the Center before the purchase process was reengineered, we also examined lender compliance with SBA’s loan origination and servicing requirements to determine whether additional repairs and denials should have been made. Any additional repairs or denials resulting from lender noncompliance in these areas would have reduced the amount to be charged off, thereby minimizing SBA’s losses. While the purchase process now in place at the Center may have corrected prior deficiencies in the purchase process, it was necessary to review the origination and servicing of the sampled loans that were purchased under the old process to ensure the charged-off amounts were correct.

To address the second objective, we reviewed 60 loans totaling $15 million that had not been charged off. These loans were statistically sampled from a universe of 9,143 loans totaling $1.4 billion that were in liquidation between July 31, 2006 and July 31, 2007, and had not undergone a documented liquidation action by the Center during this period. We interviewed lenders and SBA officials, and reviewed SBA loan files, as necessary. For both loan samples, we reviewed data contained in SBA’s Loan Accounting System, Guaranty Purchase Tracking System, Centralized Loan Chron System and the Herndon Action Tracking System.

We conducted our audit from June 2007 to September 2008, in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States. A listing of sampled loans is presented in Appendix I, and our sampling methodology is provided in Appendix II.