On March 21, 2001, the OIG issued Audit Report 1-13, 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. The Preferred Lenders Program allows participating lenders to make SBA-guaranteed loans under an agreement to originate, service, and liquidate loans in accordance with SBA rules and regulations. This audit was conducted as part of a larger OIG project to audit SBA-guaranteed loans that had 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 OIG found that improper lender processing procedures were used to approve the loan. Specifically, the lender did not follow SBA requirements in approving and disbursing the loan such as evaluating the borrower’s credit history or informing the SBA of adverse credit information. In addition, the lender did not disburse the loan proceeds prudently, report disbursements accurately, or ensure loan proceeds were used for authorized purposes. As a result, the SBA approved a loan to a non-creditworthy borrower who misused the loan proceeds. The OIG made two recommendations.