On September 30, 1998, the OIG issued Audit Report 8-8-F-002-028, Audit of Los Angeles 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 Los Angeles District Office was assigned 1,908 loans valued at $662.1 million from March 1, 1996, to June 30, 1997. The OIG selected a random sample of 30 loans, valued at $10 million, to review. The District Office and the Preferred Lender Program Loan Processing Center processed the sample loans, which were made to small business concerns within the state of California. The OIG reviewed lenders' compliance with 22 such procedures and determined that lenders did not follow at least 1 of the 22 SBA procedures for 11 of the 30 loans reviewed. The noncompliance with procedures consisted of the following:
- The proceeds for two loans totaling $270,000 were used either for an ineligible purpose or were not used in accordance with the terms of the loan agreement.
- Lenders did not verify equity injections totaling $233,400 for two loans valued at $422,000.
- Financial information was not verified with Internal Revenue Service prior to disbursing six loans valued at about $1.2 million.
- The borrower for one loan showed financial statement income that exceeded his average tax return income by 275 percent. The borrower also lacked loan repayment ability and had a poor credit history.
- Available collateral was not taken to secure one loan.
- Compensation agreements were not prepared for two loans totaling approximately $1.3 million, and the borrowers were charged prohibited fees totaling $15,600.
- Two loans totaling $700,000 were canceled, but the lenders did not notify SBA of the cancellations for at least 8 months.
During the audit, the OIG notified the District Director that a participant in the Preferred Lender Program had not followed SBA’s lending policies and procedures in processing three PLP loans reviewed. In response, the District Director immediately issued a warning to the lender. The OIG made eight recommendations to the Associate Administrator, Office of Borrower and Lender Servicing; the District Director, Los Angeles District Office; and the Director, Preferred Lender Program Loan Processing Center, all of whom agreed with the report and recommendations.