On May 28, 2002, the OIG issued Audit Report 2-19, Borrowers with Prior Defaulted Loans. The objective of the audit was to determine if and why SBA-guaranteed loans were made to applicants who had previously defaulted on an SBA loan resulting in a loss to the government. To identify those applicants, the OIG queried the SBA’s Loan Accounting System (LAS) and compared the social security numbers of loans approved and purchased from October 1995 to April 2001. The accuracy of Loan Accounting System (LAS) data was determined by comparing January 2002 data with data from SBA files and lender loan files. The OIG determined that the loan data was accurate for 42 of the 44 pairs of loan files reviewed.
This audit was initiated as a result of a previous audit of the Preferred Lender Program Oversight Process in which the OIG identified a borrower with three current loans who had sustained a loss on a prior SBA loan. A query of the SBA Loan Accounting System (LAS) using the Social Security Numbers of borrowers showed that this was not a unique situation. As a result, the OIG issued Advisory Audit Report AI-02, issued on January 9, 2001, on the identification of possible ineligible borrowers within the Section 7(a) Business Loan Program. The OIG found 180 loans made during fiscal years 1998 through 2000 whose principals had previously defaulted on SBA loans. Of the 180 loans, 31 were loan commitments valued at about $12.5 million. These commitments involved the Fastrack, Section 504, International Trade, and general business loan programs processed under preferred, express, and regular loan procedures. The OIG recommended that the Associate Deputy Administrator for Capital Access suspend loan disbursement until a determination was made whether the borrowers were the same, whether they disclosed the prior default on the loan application, and whether a waiver had been granted. In the event a waiver was not granted, the OIG recommended the loan commitment be cancelled. Management concurred with these recommendations.
For this audit, the OIG determined that ineligible applicants received loan guarantees. The OIG identified 168 loans that may have been ineligible and confirmed that 42 had principals with prior defaulted loans that resulted in losses. Of the remaining 126 loans, two contained SSN input errors, and the remainder (124), could not be confirmed because one of the pair of loan files was presumed to no longer exist. The OIG determined these errors were due to (1) premature destruction of loan files and (2) weak internal controls (such as unreliable applicant certification and a lack of SOPs). Specifically, the OIG determined that loan guarantees were inappropriately provided because the borrowers did not properly disclose losses incurred on prior loans, and the SBA did not have Standard Operating Procedures (SOPs) requiring loan officers to check for prior losses. Because of these inappropriate guarantees, the SBA honored or was at risk of honoring about $22.4 million in guarantees. The OIG made five recommendations.