On March 28, 2000, the OIG issued Audit Report 0-11, 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 using Preferred Lender Program procedures. The $350,000 loan was made to restructure an existing debt with a 75 percent SBA guarantee. In July 1997, the lender requested that the loan be placed in liquidation status after the borrower made only one payment. In July 1997, the borrower filed for bankruptcy and in October 1998, the SBA purchased the loan guarantee.
The OIG determined that the default occurred because the borrower lacked repayment ability, was not creditworthy at the time of loan origination, and lacked the financial assets to survive. The lender’s actions allowed the loan proceeds to be used, indirectly,for an ineligible purpose. As a result, the SBA inappropriately paid the lender $266,311 to purchase the guarantee. The OIG made two recommendations.