On March 9, 2001, the OIG issued Audit Report 1-10, Audit of an Early Defaulted Loan. The SBA is authorized under Section 7(a) of the Small Business Act to provide financial assistance to small businesses in the form of government guaranteed loans. Those loans guaranteed by the SBA are made by participating lenders under an agreement to originate, service, and liquidate loans in accordance with SBA rules and regulations. This loan, approved by a Preferred Lenders Program partner, was selected, judgmentally, for review as part of the Office of Inspector General’s ongoing program to audit SBA guaranteed loans that defaulted within 36 months of origination.
The objective of the audit was to determine if the borrower’s default was due to lender or borrower non-compliance with SBA requirements. The loan, which carried a 75 percent SBA guarantee, was approved for one amount but was increased twice for relocation of the business and construction overruns. The borrower defaulted on this loan nine months after the first disbursement. The OIG found that the lender did not follow SBA lending procedures and that the borrower circumvented loan disbursement procedures. The OIG made two recommendations.