On September 30, 1997, the OIG issued Audit Report 7-5-H-011-026, Business Loan Guarantee Purchases. In fiscal year 1995, the SBA purchased loan guarantees totaling $434.6 million on 2,819 defaulted business loans. The OIG audited a statistical sample of 58 purchased loans, totaling $7.8 million, to determine whether SBA’s decisions to purchase guaranteed business loans were appropriate. Appropriate decisions are those where (1) the SBA obtained all the necessary documentation to determine whether the lender complied with SBA’s loan making and servicing requirements (documentation), and (2) the lender complied with these requirements (lender compliance).
The audit found that 17 of the 58 sampled purchase decisions (29 percent), valued at $2.1 million, were inappropriate. For example, 10 loan files contained insufficient documentation to make a purchase decision and 7 had documentation that showed the lender did not comply with SBA’s loan making or servicing requirements. Based on a statistical projection of these results, the OIG estimated that 826 guarantee purchase decisions in fiscal year 1995, representing $102.9 million, were inappropriate.
District Office officials attributed purchase decisions being made without sufficient documentation in the files to inexperienced office staff not fully understanding the purchase decision process. After further review of 10 files in which the documentation appeared insufficient, the OIG concluded that:
- In one instance, the lender did not comply with requirements;
- In four instances, documentation was still insufficient to determine whether the SBA should have purchased each of these loans; and
- In five instances, the documentation showed that the purchase decisions were appropriate.
The SBA inappropriately paid $333,730 for guarantees on eight loans (seven based on the OIG’s initial review of the loan files and one after reviewing the District Office explanation). As a result, the SBA should not have purchased the guarantees, some in part and some in full. Based on a statistical projection of these results, the OIG estimated that the SBA should not have honored $16.2 million in guarantees on 389 loans that it purchased. These inappropriate purchase decisions occurred because SBA District Offices either made mistakes or were lenient when evaluating documentation on defaulted loans having lender loan servicing and origination errors. Lenient evaluations may stem from the District Offices’ dual conflicting roles of marketing SBA’s loan programs and providing oversight for lenders making loans. District Offices were forced to balance a favorable working relationship with lenders and the need to impose sanctions if SBA regulations are violated.
The SBA lacked timeframes for completing purchase reviews for defaulted secondary market loans. Additionally, several other recurring matters—lack of borrowers’ financial statements, incorrect calculation of SBA’s guarantee, purchase of excessive accrued interest, and a lack of documentation on personal guarantees—could have affected the amount of the guarantee the SBA purchased. Although the SBA had policies and procedures regarding all but the first of these matters, District Office officials did not always follow them.
The OIG recommended that the Administrator centralize the guarantee purchase process to eliminate the conflict of roles in the District Offices, improve the consistency and quality of the purchase decision, and ensure the SBA denies liability or reduces the guarantee when a lender has not complied with SBA requirements.
The OIG also recommended that the SBA: (1) obtain missing documents on the four loans where there was still insufficient information to make a purchase decision; (2) seek recovery of $333,730 on the eight loans where a full purchase should not have been made; (3) provide additional guidance on the types of information that should be obtained and reviewed to protect SBA’s interests; (4) establish time frames for completing purchase reviews of loans sold in the secondary market which later default; (5) develop guidelines for charging and collecting interest from the lender for any undue delay on their part in providing the SBA information to conduct purchase reviews resulting in denial of liability; and (6) notify District Offices of SBA policies related to the various recurring matters noted.