On July 22, 1998, the OIG issued Audit Report 8-7-F-020-014, Audit of Wisconsin 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 SBA’s procedures for lenders and loan officers are intended to reduce risk. Failure to follow these procedures increases the chance that ineligible or risky loans will be approved.
The Wisconsin District Office was assigned 613 loans valued at $182.5 million from March 1, 1996, through June 30, 1997. The District Office and the Preferred Lender Program Processing Center processed the loans made to small business concerns within the state of Wisconsin. The OIG selected a random sample of 30 loans valued at $8.9 million for review and eviewed lenders' compliance with 22 SBA procedures.
The OIG determined that in the period audited, for 15 of the 30 loans, lenders did not follow at least one of the procedures reviewed. For the 15 loans, noncompliance with procedures consisted of the following:
- One loan was approved for an ineligible purpose, to pay taxes owed by the deceased owner's estate. The Code of Federal Regulations (CFR), Part 120, requires loan proceeds to be used for operating business purposes such as working capital expenses.
- A lender disbursed loan proceeds for an unauthorized purpose. The Authorization and Loan Agreement specifies how loan proceeds may be used. In this case, the lender improperly disbursed $48,331 of the loan proceeds to another lender to pay the borrower's mortgage, reducing the overall funds available.
- In two loans, the OIG found that equity injections were not verified prior to disbursement. Without the required cash injections, borrowers may have insufficient working capital to operate the business. For the two loans, borrowers did not inject a total of $27,320 as required by the loan agreement. One of these loans also had an Internal Revenue Service (IRS) verification deficiency.
- For 10 loans, financial information was not verified with IRS prior to disbursement of loan proceeds. Without verified financial data, loan decisions could be based on financial data that is not credible. For one of these loans, the lender did not verify business financial information with the IRS. The required verifications for the other nine loans were made after disbursement.
- In one loan, use of loan proceeds was not verified. Without verification by lenders, borrowers could use proceeds for unauthorized purposes. In another loan, the lender did not verify use of loan proceeds as required by the loan agreement and settlement sheet, however, a subsequent review disclosed that the loan proceeds were used appropriately.
- In two loans, joint payee checks were not used to disburse loan proceeds for loans totaling $560,000. Without the use of joint payee checks or other controls, the loan proceeds are at risk for improper use. However, a review of the use of loan proceeds disclosed no problems.
- For two loans totaling $376,000, business credit reports were not obtained. Credit reports are necessary to determine the borrowers' credit history, and whether the borrowers have shown past willingness to pay debts. A subsequent review disclosed satisfactory credit history.
- For three loans totaling $821,000, settlement sheets were not completed prior to March 1997, as required by SBA. The deficiencies were not significant enough to invalidate the loan guarantees.
- One loan, with a guarantee totaling $615,000, was not executed and disbursed by the time specified in the loan authorization.
- On two loans, the borrowers made false statements concerning their criminal histories.
As of January 31, 1998, the OIG determined that 25 of the 30 sampled loans were current, 2 were past due, 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 Wisconsin District Director take the following actions to protect SBA's interests:
- Rescind the loan approval for one loan before disbursement.
- Reduce the guarantee percentage for one loan to reflect the ineligible use of loan proceeds.
- Obtain verification of equity injections from lenders or reduce the guarantee percentage for two loans to reflect the lack of injection.
- Require the lender to verify the seller's financial statements for one loan.
- Re-emphasize to lenders their responsibility to comply with SBA loan requirements, including:
- approving loans and making disbursements only for eligible or authorized purposes,
- verifying required equity injections,
- validating financial data with the IRS,
- verifying use of loan proceeds,
- using joint payee checks, when appropriate, and obtaining business credit reports,
- cancel the guarantee for one loan that was not disbursed within the required time limit,
- inform lenders to either request an extension of the disbursement period or cancel the loan guarantee when disbursement is not made within the specified time limit
The District Director generally agreed with the recommendations. The Director, however, stated that action for four loans could be delayed until loan purchase after default.