On April 28, 2000, the OIG issued Audit Report 0-17, 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 $855,000. The purpose of the loan was, in part, to refinance a land note, construct a facility, and purchase inventory, equipment, and machinery. Loan proceeds were disbursed between September 1996 and February 1997. The loan was placed in liquidation in July 1998.
The OIG found that the lender did not adequately determine the borrower’s repayment ability. Specifically, the borrower defaulted because sufficient cash flow was not available to service business debts. The OIG concluded that the borrower lacked repayment ability at the time of the loan approval, and the the lender did not perform a proper evaluation of the new business’s projected income. As a result, the lender had not complied with SBA loan origination requirements. The OIG made two recommendations.