On July 26, 2000, the OIG issued Audit Report 0-22, 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 OIG found that the loan closing procedures were not prudent. Specifically, the lender, to assist in the purchase of real estate, inappropriately used funds designated for accrued real estate taxes and imprudently disbursed the balance to the borrower’s principals. The principals did not pay the taxes. As a result, when the loan defaulted, SBA’s recovery was reduced by the amount of the unpaid taxes plus interest and penalties. The SBA made two recommendations.