On December 19, 2002, the OIG issued Audit Report 3-01, Audit of an SBA Guaranteed Loan to Webcot Farms and Gin Co. 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 the SBA-lender guarantee agreements. All 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 are 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. The lender also made loans under SBA’s Low Documentation Loan Program (LowDoc). Although this program streamlined the guarantee application process, participating lenders are expected to perform a loan analysis in a manner consistent with prudent lending practices. The analysis is included with the lender’s request for a SBA guaranteed loan.
The lender stopped making SBA guaranteed loans in February 2001and was acquired by General Electric Capital Corporation 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 a SBA PLP 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 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 Webcot Farms and Gin Company.
Heller approved an SBA guaranteed loan for $1,100,000 to Webcot Farms & Gin Co. (borrower) under the Preferred Lenders Program. The purpose of the loan was to repay debt, purchase equipment, finance building improvements, payoff equipment leases, and to provide working capital. The last disbursement occurred on August 5, 1997, and the borrower defaulted on the loan after making ten payments. The SBA purchased the loan guaranty for $609,203 on October 14, 1999.
The OIG found that the lender approved and disbursed the loan to an ineligible borrower. Specifically, the principals had several delinquent Federal loans, were in a weak financial condition at the time of the approval, and their equity injection was not verified. The OIG recommended that the SBA seek recovery of $609,203 from General Electric Capital Corporation on the guaranty paid to Heller.