On March 26, 2002, the OIG issued Audit Report 2-14, Audit of an Early Defaulted Disaster Loan. This is one of a series of reports related to a review of early defaulted disaster loans. The objective of this audit was to determine whether the early loan default was due to SBA non-compliance with is policies and procedures, borrower non-compliance with the loan agreement, or borrower misrepresentations.
In October 1998, the SBA approved an $117,300 disaster loan to the borrowers to repair or replace damaged manufactured housing, personal property, clean up, debris removal, and refinancing to satisfy an outstanding lien. The borrowers made only four payments and defaulted in November 1999. The borrowers then abandoned the property with the SBA placing it in liquidation in September 2000. In February 2001 the property was auctioned resulting in a $21,888 recovery for the SBA.
The OIG determined that the borrowers defaulted on the SBA loan because of a lack of repayment ability. This occurred because the SBA miscalculated a portion of the borrower’s wages. Further, a discrepancy in financial information reported on the application was not reconciled against wages shown on the Federal tax return or other verifiable sources. Consequently, the wages used to calculate repayment ability were overstated. The agency’s Standard Operating Procedures (SOPs) state that cash flow, not collateral, is the basis for establishing repayment ability to provide reasonable assurance of an applicant’s ability to repay any proposed loan. The SOP also states that loan officers must exercise credit analysis skills, use discretion, and evaluate all information. In this loan, the SBA did not reconcile the wage discrepancy.