Report 9-18 - SBA’s Management of the Backlog of Post-Purchase Reviews at the National Guaranty Purchase Center
Date Issued: Tuesday, August 25, 2009
Report Number: 9-18

U.S Small Business Administration Memorandum

To: John A. Miller
Director,Office of Financial Program Operations
/s/ Original Signed

From: Debra S.Ritt
Assistant Inspector General for Auditing

Subject: SBA’s Management of the Backlog of Post-Purchase Reviews at the National Guaranty Purchase Center Report No.9-18

This report presents the results of our audit of SBA’s management of the backlog of post-purchase reviews at the National Guaranty Purchase Center (Center). By the end of fiscal year (FY) 2007,the Center had accumulated a backlog of approximately 3,500 loans valued at over $1billion that had been purchased from the secondary market. The Center was required to perform a post-purchase review on each loan to evaluate whether the lender materially complied with SBA’s rules and regulations in originating, servicing, and liquidating the loans and to recover improper payments for any losses incurred as a result of lender noncompliance.

During FY2007,the former SBA Administrator established an initiative to eliminate the backlog of loans at the Center by May 2008. As part of this initiative, SBA contracted with Washington Products and Services, Inc.(WPS) to conduct post-purchase and charge-off reviews of the backlogged loans to identify lender compliance issues. The Center also charged off 313 loans that were purchased prior to 2002 without evaluating lender compliance with origination and closing requirements because the Office of Capital Access (OCA) believed the statute of limitations(1) had been exceeded, which prevented recovery from lenders. Production reports prepared by the Center in November and December 2007 showed that WPS reviews had been completed three times faster than the Center’s standard purchase reviews, raising concerns that SBA was not providing adequate oversight of the contractor and its reviews. In response to these concerns, the audit determined whether (1) reviews performed by WPS were post-purchase charged-off reviews of effective in identifying lender noncompliance, (2) loans performed by WPS and the Center appropriately identified lender noncompliance, and (3) SBAs decision to charge off older loans without performing post- purchase reviews was appropriate.
To address the first objective, we reviewed 30 statistically sampled loans, including 15 loans, from a universe of 786 loans reviewed by WPS charged-off between August 23, 2007 and December 14, 2007. We also reviewed an additional judgmentally selected early-defaulted loan. To address the second objective, we examined the 15 loans to determine if WPS or the Center identified lender noncompliance issues during the process . Finally, we reviewed seven loans - five that were randomly selected and 2 that were judgmentally selected - which had been charged off without a post-purchase review to determine if lenders complied with SBAs origination and closing requirements.

We reviewed information in SBAs loan files,and interviewed SBA officials and former WPS staff to determine whether WPS and/or the Center identified lender noncompliance during the post-purchase and whether charge-off lenders complied with SBA requirements on loans that were charged off without review. For all loans examined, we also reviewed loan information contained in SBAs Loan Accounting System, Guaranty Purchase Tracking System (GPTS), and the Centralized Loan Chron System.

We conducted our audit at the Center from January 2008 to December 2008 in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States. A listing of the sampled loans is present.

1 28 USC 2416 states that every action for money damages brought by an Agency of the United States, which is founded upon any contract, express or implied in law or fact, shall be barred unless the complaint is filed within 6 years after the right of action accrues or within 1 year after final decisions have been rendered inapplicable administrative proceedings required by contract or law, whichever is later. The discovery provision of 28USC 2416(c), however, extends this statute of limitations if facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with responsibility to act in the circumstances.

To view this full report, please see the attached file below