Audit Report 2-15: Audit of an SBA Guaranteed Loan to Colorado Taco Corporation
Date Issued: Friday, March 29, 2002
Report Number: 2-15

On March 29, 2002, the OIG issued Audit Report 2-15, Audit of an SBA Guaranteed Loan to Colorado Taco Corporation.  The objective of the audit was to determine if the lender originated, disbursed, and liquidated the loan purchased by the SBA in accordance with SBA rules and regulations.  Specifically, the OIG reviewed this loan for compliance with the 11 requirements found in SBA rules and regulations and SBA-lender guarantee agreements. Identified lender deficiencies were evaluated to determine if they resulted in a material loss to the SBA, which was defined as one exceeding $25,000.

 

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. These loans are made by participating lenders under an agreement to originate, service, and liquidate loans in accordance with SBA regulations, policies, and procedures. The SBA is released from liability on a loan guarantee if a lender fails to comply materially with SBA regulations, the Loan Agreement, or fails to make, close, service, or liquidate a loan in a prudent manner.

 

Heller First Capital Corporation (the lender) was a Small Business Lending Company authorized by the SBA to make guaranteed loans under the Preferred and Certified Lenders Programs (PLP). Under this program, lenders were permitted to process, close, service, and liquidate SBA guaranteed loans with reduced requirements for documentation to and prior approval by the SBA.

Under the Certified Lenders Program (CLP), the SBA processes loan guarantee applications and servicing actions on a priority basis. This lender also made loans under SBA’s Low Documentation Loan Program (LowDoc). Although this program streamlined the guarantee application process, participating lenders were expected to perform a loan analysis in a manner consistent with prudent lending practices. The analysis is included with the lender’s request for an SBA guaranteed loan.

 

The lender stopped making SBA guaranteed loans in February 2001.  General Electric Capital Corporation acquired the lender on October 25, 2001.  Prior audits of early default loans found that the lender did not always materially comply with SBA rules and regulations. In a January 2000 response to one of the audits, the lender acknowledged that the loan, which closed in 1997, would not have been approved under its current underwriting and closing procedures. A few months later in response to an SBA Preferred Lender Program review, the lender admitted that combined growth in volume and processing locations across the country was not in the best interest of the lender or SBA’s lending program. Consequently, certain regions exercised more discretion in both credit analysis and compliance with procedures than the lender would have liked.

 

Based on the lender’s acknowledgement of the lack of controls over the SBA guaranteed loan process, the OIG 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 were originated, serviced, and/or liquidated in material non-compliance with SBA rules and regulations. One of these loans was to the Colorado Taco Corporation. 

 

In October 1995, the lender approved a loan for $450,000 to Colorado Taco Corporation (borrower) under the CLP. The purpose of the loan was to purchase $170,000 of inventory and pay for leasehold improvements totaling $280,000. Originally, the loan was for two restaurants, but only one actually opened.  Thus, only $251,472 of the original loan amount was disbursed. The SBA purchased the loan guaranty for $194,804 on November 19, 1997.

 

The OIG determined that the lender did not comply with equity injection requirements.  Specifically, the lender did not ensure that the borrower injected the required amount of equity for the project. The authorization and loan agreement (A&LA) required the lender to obtain evidence that the principal injected $255,000 of equity into the business prior to the first loan disbursement. Eleven days after loan approval, the borrower submitted an accounting of equity injection expenditures for the project totaling $447,331. The expenditures were for construction, franchising fees, equipment, and other items. A review of documentation contained in the lender’s loan file showed that only $191,503 of the expenditures submitted by the borrower qualified as equity injection.   The OIG made one recommendation.