On September 18, 1995, the OIG issued Audit Report 5-3-W-010-018, Sources of Credit Elsewhere for 7(a) Business Loans. The 7(a) business loan program provides assistance to new or ongoing small businesses, primarily in the form of SBA-guaranteed loans made by private lenders. The objective of this audit was to determine how the SBA applied the rule that 7(a) loans not to be made to borrowers who have credit elsewhere (CE).
The OIG sent questionnaires to SBA loan specialists and district office managers throughout the country. The responses showed that for a variety of reasons, the loan specialists and district office managers tolerated loans to borrowers who could get credit elsewhere. Based on the estimates of those responding to the questionnaires, approximately $244 million to $316 million a year was loaned to borrowers who had credit elsewhere and were, therefore, ineligible to receive an SBA-guaranteed loan. This practice diverted funds from eligible borrowers and gave an unfair competitive advantage to SBA lenders.
The OIG recommended that the Associate Administrator for Financial Assistance:
- Reemphasize the credit elsewhere rule to district offices and participating lenders.
- Reemphasize the requirement that lenders certify that conventional credit was not available for loan refinancing from other sources at reasonable terms.
- Require district offices to consider the availability of credit elsewhere when reviewing applications for SBA loan guarantees.
- Require district offices to include an evaluation of credit elsewhere practices in periodic reviews of lenders, and verify that such evaluations are accomplished through the Computerized Internal Control Review process.
- Obtain a legal opinion from the Office of General Counsel on the practice of permitting lenders to make SBA loans if the lender has a regulatory restriction that precludes a conventional loan.