On April 28, 1998, the OIG issued Audit Memorandum 8-7-S-001-013, Use of Audited Financial Statements to Monitor Small Business Lending Companies. This was a limited review of financial statements of a major small business lending company. Small Business Lending Companies or SBLCs are non-depository lending institutions that are not subject to oversight by state and federal bank regulators. The SBA has sole responsibility for supervising, examining, and regulating SBLCs. Further, SBLCs are authorized by the SBA to make guaranteed loans under the Preferred and Certified Lenders Programs. Under the PLP Program, participating 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 program, the SBA processes loan guarantee applications and servicing actions on a priority basis.
During the course of the review, the OIG noted that the SBA was not routinely receiving audited financial statements for some of the SBLCs that participate in the 7(a) Loan Program. The 14 approved SBLCs are required by Title 13 of the Code of Federal Regulations Part 120.472 to submit audited financial statements to the SBA within three months after the close of each fiscal year. Audited financial statements are a key tool with which the SBA monitors the financial stability of the SBLCs and ensures compliance with program regulations.
As of March 5, 1998, only 9 of the 14 SBLCs had audited financial statements. Of those nine, one submitted only a balance sheet, four had unaudited financial statements, and one had audited consolidated financial statements for its parent company but not the SBLC. The OIG recommended that the SBA take steps to ensure that all SBLCs submit annual audited financial statements include the necessary information needed to monitor compliance with SBA capital requirements.