On September 29, 2001, the OIG issued Audit Report 2-06, Audit of CNA Surety Company. The OIG conducted this review of Net 1st National Bank (Net 1st) to determine if 7(a) loans were processed and serviced in accordance with SBA's policies and procedures. In a June 2000 examination report, the Office of the Comptroller of the Currency (OCC) identified 12 SBA guaranteed loans that it believed increased the government's risk of loss. The OCC referred this matter to SBA's South Florida District Office who referred the matter to the OIG in July 2000, reporting that the bank was materially mismanaging its 7(a) loan portfolio. The OCC and Net 1st entered into a consent order entered prior to the start of this audit. The order required the bank to cease making SBA guaranteed loans until its lending, processing, and servicing procedures improved. The consent order was lifted in November 2000.
The OIG audit confirmed that prior to the consent order, Net 1st was not processing and servicing 7(a) loans in accordance with SBA policies and procedures. The bank did not have evidence of a comprehensive written SBA lending policy and did not have competent experienced lending staff. Both the OCC and the OIG had identified numerous deficiencies for loans processed prior to execution of the consent order. Because of the OCC findings, the lender took actions to improve its loan processing and servicing practices. However, the OIG noted that additional improvements were required. Areas still needing improvement included: (i) equity injection documentation; (ii) use of loan proceeds, (iii) packager and loan service provider compensation; and (iv) compensation documentation paid to outside agents.
The OIG recommended that the District Director, South Florida District Office, require that Net 1st make improvements in its lending practices in the areas of equity injection, loan proceeds, and compensation paid to outside agents. The District Director agreed with each recommendation and notified Net 1st of the corrective actions to be taken.