On November 26, 1997, the OIG issued Audit Report 8-6-F-007-003, Audit of the Nevada State Development Company Loan Origination and Servicing Practices. The SBA certified Nevada State, a for profit corporation, as a CDC in 1983. Nevada State approved 408 loans valued at $125.4 million from its inception in 1983 to September 1996. The audit objective was to determine whether there was compliance with SBA policies and procedures related to the SBA’s Section 504 Program. The Code of Federal Regulations requires Certified Development Companies (CDCs) to operate in accordance with applicable statutes and regulations including SBA’s standard operating procedures. Further, CDCs must also maintain records as required by the SBA.
The OIG randomly selected 15 loans valued at $9.6 million originated by the CDC and approved by the SBA for review. The OIG performed detailed examinations of the 15 loan files, interviewed SBA and Nevada State officials and borrowers, and visited projects. This was the first audit of Nevada State operations. While Nevada State generally complied with SBA’s 504 Loan Program policies and procedures, loan files did not always contain documents relative to capital injection, site visits, collateral condition, or loan closing correspondence. Consequently, there was no evidence that SBA’s policies and procedures, designed to minimize the risks associated with loan origination and closing, were followed. Specifically, Standard Operating Procedure (SOP) 50 22 3, Section 24e, states that a CDC shall maintain information and documents related to its loan portfolio for SBA review, including: (1) evidence of the 10 percent capital injection, (2) evidence of field visits, (3) condition of the collateral, and (4) all correspondence related to the loan prior to closing. Examples of the deficiencies identified during this review are as follows:
· Two of the 15 loan files did not have evidence of the capital injection requirement. The Nevada State representative stated the firm had implemented new procedures during the previous six months that should resolve this deficiency. The new procedure informs the borrowers of the documentation requirements and Describes acceptable proof of capital injection.
· Site visit reports were not available for 5 of the 15 loans reviewed. Borrowers stated that they were not aware of any site visits. The Nevada State representative stated its site visits were unannounced and the borrowers may not have been aware of their presence.
· Construction phase records were missing for all 15 projects. The loan file documents did not indicate the status of the projects after the SBA loan authorization was issued nor did they indicate which projects were completed. The Nevada State representative stated the status of each project was discussed during the construction process with results maintained on a spreadsheet.
· For 3 of the 15 loan files, the OIG did not find copies of bank commitment letters or a statement that the bank would not finance the entire project without SBA participation.
The OIG made one recommendation.