On February 14, 2000, the OIG issued Audit Report 0-05, An Audit of an Early Defaulted Loan. The loan was judgmentally selected for review as part of the OIG’s ongoing program to audit SBA guaranteed loans charged off or transferred to liquidation within 36 months of origination (early default). The objective of this audit was to determine if the early loan default was caused by lender or borrower noncompliance with SBA requirements. The SBA and lender loan files were reviewed. The OIG also interviewed lender personnel and the borrower. Since all borrower records had been destroyed, invoices maintained by the lender and subpoenaed bank records were analyzed.
Although the reason for the loan default could not be determined, an analysis of the loan file revealed that the lender did not evaluate a discrepancy between an Internal Revenue Service verification of the borrower’s Federal taxes and financial statements used to support the loan approval. As a result, the SBA inappropriately paid $484,051 (net) to honor the guarantee of a loan that should not have been made. Specifically, the OIG found that financial discrepancies were not evaluated nor reported to the SBA.