On March 22, 2000, the OIG issued Audit Report 0-09, 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 reviewed loan was approved to refinance the purchase of a business. The refinanced loans and notes were held by a second lender, the seller, and a third party. The $1 million loan was originated under regular 7(a) procedures (with a 75 percent SBA guarantee). The borrower defaulted seven months after the loan was disbursed, and subsequently filed for bankruptcy. The SBA paid the lender $834,081, including interest, to purchase the guarantee.
The OIG determined that the borrower was ineligible for an SBA guaranteed loan. Further, the OIG found that the borrower defaulted because sufficient cash flow was not available to service business debts. The lender and the SBA did not detect the inability to repay the loan because the borrower submitted financial statements that misrepresented its financial condition. The lender and the SBA compounded the problem by violating loan origination procedures that required the lender to obtain the seller’s historical financial data for the prior three years. As a result, the SBA lost $834,081 after the borrower defaulted.