On March 28, 2000, the OIG issued Audit Report 0-12, 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 processed under Preferred Lender Program Procedures for $628,000. The purpose of the loan was to make leasehold improvements, pay construction and performance bond costs, purchase business machinery and equipment, and provide working capital. The SBA provided the lender with a guarantee of 75 percent of the loan amount. The borrower sold the business and defaulted on the loan without notifying the lender that the business had been sold. The SBA purchased the 75 percent loan guarantee in April 1998.
The OIG found that the lender and borrower did not follow loan origination guidelines for securing and disbursing the loan. The OIG also found that the borrower made an inaccurate statement on the loan application and submitted invoices for personal expenses to support loan disbursements. As a result, the SBA lost $479,890 when the defaulted loan guarantee was purchased.