On May 13, 1998, the OIG issued Audit Report 8-7-019-014, Audit of Atlanta District Office 7(a) Loans. The audit was part of a nationwide review to determine whether 7(a) loans were processed, disbursed, and used in accordance with Small Business Administration (SBA) requirements. The Atlanta District Office was assigned 927 loans valued at $402 million from March 1, 1996, to June 30, 1997. The loans, made to small business concerns within the state of Georgia, were processed by the District Office and the Preferred Lender Program Processing Center. The OIG selected a random sample of 30 loans valued at $12.5 million for review.
The SBA has established procedures for lenders and SBA loan officers to follow to reduce risk associated with loan making and to assure that only eligible loans are guaranteed. Failure to follow these procedures increases the chance that ineligible or risky loans will be approved. The OIG reviewed lenders' compliance with 22 such procedures. In the period audited, the OIG determined that for 15 of the 30 loans, lenders did not follow at least one of the procedures reviewed. For the 15 loans, the non-compliance with procedures consisted of the following:
- A conflict of interest was not reported to the SBA (1 loan). The lender allowed the borrower to use $218,306 of a $378,000 loan to repay debt owed to the lender. The lender's refinancing of its own debt increased the risk that the loan was not· objectively made.
- A portion of loan proceeds was not used for eligible purposes (2 loans). Proceeds totaling $29,479 were used to pay personal debt and to fund an equity injection on a SBA 504 program loan. These are prohibited uses of loan proceeds.
- Cash injections were not verified prior to disbursement (4 loans). Without the required cash injections, borrowers may have insufficient working capital and commitment to the business. For the four loans, borrowers did not inject $239,188 as required by the loan agreement
- Business financial information was not verified with the IRS prior to disbursement of loan proceeds (7 loans). Without verified business financial data, loan decisions could be based on financial data that is not credible. For one loan totaling $340,000, the lender did not verify business financial information with the IRS. The required verifications for the other six loans were made after disbursement.
- Business and personal credit reports were not obtained (4 loans). Credit reports are necessary to determine the borrowers' credit history and whether the borrowers have shown past willingness to pay debts. Our subsequent review disclosed satisfactory credit.
- A size determination was not made properly (1 loan). Loans issued by the SBA can only be made to businesses that meet small business size standards. The affiliates ofthe borrower were not included in the size determination.
- Joint payee checks or other controls were not used in disbursing $10,000 of loan proceeds for other than working capital (1 loan). Without the use of joint payee checks or other controls, the loan proceeds are at risk for improper use. A review of the use ofthe loan proceeds disclosed no problems.
- The OIG also identified four loans either lacking timely disbursements or with misrepresentations. Two loans with guarantees totaling $1.4 million were not disbursed within the time specified in the loan authorization. For a third loan, the lender made a false representation to the SBA regarding receipt of the IRS verification, and for the fourth loan a borrower made a false statement concerning his criminal history.
As of December 31, 1997, there were 21loans, of the 30 sampled, that were curren;, 1 was past due, 1 was paid in full, 4 were canceled, and 3 were undisbursed. Lender responses regarding the loans indicated the deficiencies were due to both intentional and unintentional loan officer errors, as well as loan officer lack of knowledge of SBA requirements.
The OIG recommended that the Atlanta District Office Director take the following actions to protect SBA's interests:
- Reduce the guarantee percentage to reflect the borrower's ineligible use of proceeds.
- Obtain a verification of the equity injection from the lender or reduce the guarantee percentage to reflect the lack of injections.
- Obtain a guarantee release or an indemnification agreement.
- Re-emphasize lender responsibilities for verification of equity injections and IRS fmancial data.
- Cancel guarantees for each loan not disbursed by the time specified in the loan authorization.
- Require lenders to request either an extension of the disbursement period or cancellation of the loan guarantee when disbursement is not made within the specified time limit.
The OIG recommended that the Director of the PLP Loan Processing Center take the following actions to protect SBA's interests:
- Obtain a guarantee release from the lender, or, in the event the lender fails to releasethe SBA from the guarantee, recommend revocation of the guarantee to the Administrator.
- Obtain a verification of the equity injection from the lender or reduce the guarantee percentage to reflect the lack of injection.
In response to a draft report, the Atlanta District Director and the Director of the PLP Center disagreed with the recommendations relative to finding 1. The District Director agreed with the recommendations in finding 2.