On March 20, 2002, the OIG issued Action Memorandum 2-12, Improvements are Needed in the Small Business Lending Company Oversight Process. During the course of an on-going audit of the oversight of the Small Business Lending Company (SBLC) Program, the OIG discovered several issues related to (1) the FY 2001 SBLC examination reports, (2) coordination of program management and oversight; (3) off-site monitoring; (4) identification of problematic loans, and (5) reporting loans with suspected fraud.
The Small Business Lending Company (SBLC) Program was established in 1975 to provide financial assistance to eligible small business concerns in the form of SBA guaranteed loans. The SBLCs are non-depository lending institutions that the SBA licenses and regulates. In September 1998, the SBA contracted with the Farm Credit Administration (FCA) to perform annual safety and soundness examinations on each of the 14 SBLCs that participate in the guaranteed loan program. During FY 2001, the FCA performed seven examinations and final reports were issued in February 2002.
While conducting this audit, the OIG found that SBLC program management and oversight was adversely impacted due to untimely issuance of the FY 2001 SBLC examination reports. The SBA requires periodic safety and soundness examinations for all SBLCs that participate in the Guaranteed Loan Program to assess the viability of the SBLC on an on-going basis and identify areas in need of improvement or corrective action. As a general rule, the SBA waits until final examination reports are issued before taking supervisory or enforcement actions that aresubject to appeal. According to the SBA, final reports are needed to support these actions in the event of an appeal.
Until final reports are issued, the SBA relies mainly on the Preferred Lender Program approval and renewal process to hold SBLCs accountable for their actions. During FY 2001, FCA examiners performed seven SBLC examinations and provided draft reports on all seven to SBA between April and November 2001. Final reports were issued in February 2002; ten months after the first draft report was received. Because of these delays and SBA’s policy to delay enforcement actions until final reports are issued, two SBLCs were allowed to continue to operate in an unsafe and unsound manner despite early identification of material weaknesses during the FY 2001 SBLC examinations.
The OIG found that the informal structure of the SBLC program management and oversight contributed to delays in issuing final examination reports for FY 2001. This informal structure contributed, in part, to the delays in issuing the FY 2001 examination reports and does not meet the requirements of Circular A-129, Policies for Federal Credit Programs and Non-Tax Receivables. Second, the OIG determined that the Office of Lender Oversight (OLO) did not establish an off-site monitoring process for the SBLC program as described in the OLO strategic plan dated October 26, 2000. Off-site monitoring is needed to identify and assess changes in risk at each SBLC during the period between onsite examinations and justify enforcement of timely and meaningful corrective actions. This is particularly important since the annual safety and soundness examinations have been replaced with periodic examinations performed at intervals of between 18 and 24 months.
The OIG also found that the SBA did not flag problematic loans in its loan database. Problematic loans identified during the FY 2001 examinations were not identified as such in the Delinquent Loan Collection System (DLCS), as required. Flagging these loans alerts the purchase reviewers to the issues involved with these loans so that the adverse conditions are given full consideration during the guarantee purchase review process. Failure to flag problematic loans can result in erroneous guarantee purchase payments. Lastly, the SBA did not report loans with suspected fraud to the OIG. Specifically, only one of several potentially fraudulent loans identified during the FY 2001 SBLC examinations was referred to the OIG for further investigation, as required.