On February 27, 2002, the OIG issued Audit Report 2-03, Audit of SBA Guaranteed Loan to Darshan’s Paradise Inn. Prior audits of early default loans found that the lender in this audit, who stopped making SBA guaranteed loans in February 2001, did not always materially comply with SBA rules and regulations. Further, the lender was a Small Business Lending Company authorized by the SBA to make guaranteed loans under the Preferred and Certified Lenders Programs. These loans are made by participating lenders under an agreement with the SBA to originate, service, and liquidate loans in accordance with SBA regulations, policies, and procedures. The SBA is released from liability on a loan guarantee, in whole or in part, within SBA’s exclusive discretion, if a lender failed to comply materially with SBA regulations or the Loan Agreement, or failed to make, close, service, or liquidate a loan in a prudent manner.
The Office of Inspector General initiated an audit of 140 loans originated by the lender that were purchased by the SBA between January 1996 and February 2000, to determine if the loans were processed correctly. The audit identified several loans that had been originated, serviced, or liquidated in material non-compliance with SBA rules and regulations. One of these loans was to the subject of this report. The OIG reviewed this loan for compliance with 11 requirements found in SBA rules and regulations and the SBA-lender guarantee agreements.
The OIG determined that in December 1995, the lender approved a loan for $333,000 for the purchase of real estate. The last loan disbursement was made on January 11, 1996, and the borrower defaulted on January 1, 1998. The SBA purchased the loan guaranty for $245,981 on September 25, 1998. Subsequent payments resulted in a net loss of $224,546 on SBA’s portion of the principal.
The OIG found that the lender did not fully secure the SBA guaranteed loan. Specifically, the lender did not secure the loan with all available property as required by SOP 50 10 3 since the $333,000 loan was secured with only $259,000 in collateral. As a result, the loan was under-secured by $74,202, which increased the loss to the SBA. The OIG recommended that the SBA seek recovery of the guaranty.