On October 29, 2001, the OIG issued Audit Report 2-01, Loan Origination and Servicing Practices of Net 1st National Bank. In a June 2000 examination report, the Office of the Comptroller of the Currency (OCC) identified 12 SBA- guaranteed loans that it believed increased the government’s risk of loss. The OCC referred this matter to SBA’s South Florida District Office who referred the matter to the OIG in July 2000. The OCC stated that the bank was materially mismanaging its 7(a) loan portfolio. The OCC and the bank subsequently entered into a consent order that required the bank to cease making SBA-guaranteed loans until its lending, processing, and servicing procedures improved. The consent order was lifted in November 2000.
The purpose of this audit was to determine if 7(a) loans were processed and serviced in accordance with SBA policies and procedures. If not, the OIG would determine if the deficiencies were material and the cause of the deficiencies. From the 72 committed, current, and troubled loans in the lender’s portfolio on October 31, 2000, the OIG selected nine loans for review, eight of which were cited in the OCC report, and one additional loan based on its troubled status. To verify that the lender had corrected the deficiencies cited by the OCC, the OIG reviewed three of the six new loans disbursed during the period November 2000 to March 2001.
The OIG found that prior to the consent order, the bank was not processing and servicing 7(a) loans in accordance with SBA policies and procedures. The bank did not have evidence of a comprehensive written SBA lending policy, and did not have competent experienced lending staff. Both the OCC and the OIG identified numerous deficiencies for loans processed prior to the execution of the consent order. In response to the OCC’s findings, the lender took actions to improve its loan processing and servicing practices. However, the OIG noted additional improvements that were needed, including: (1) equity injection documentation; (2) use of loan proceeds; (3) packager and loan service provider compensation; and (4) compensation documentation paid to outside agents. The OIG recommended that the District Director of the South Florida District Office require the bank to make improvements in its lending practices in the areas of equity injection, loan proceeds, and compensation paid to outside agents.