On January 18, 2001, the OIG issued Audit Report 1-03, Independent Accountant’s Report on the Performance Audit of Ranger Insurance Company. The purpose of the SBA’s Surety Bond Guarantee Program (SBG) is to assist small, emerging, and minority construction contractors. The SBA indemnifies surety companies from potential losses by providing a Government guarantee on bonds issued to such contractors. The SBA guarantees up to 90 percent for contracts not exceeding $1.25 million. The SBA’s Office of Surety Guarantees (OSG) administers the SBG Program.
An Independent Public Accountant (IPA) conducted this audit on behalf of the OIG. The purpose of the audit was to determine if: (1) Ranger Insurance complied with policies and procedures — including SBA’s policies and standards generally accepted by the surety industry—in issuing SBA guaranteed bonds; (2) claims and expenses submitted to the SBA were allowable, allocable, and reasonable, and (3) fees due the SBA were accurately calculated and remitted in a timely manner.
The IPA obtained a universe of 42 bonds for which the SBA had paid claims from October 1, 1996, through September 30, 1999. The IPA selected four sample bonds based on the largest claim amounts. In addition, the IPA selected one bond to review at the request of the Office of Surety Guarantees (OSG) and one bond with claims activity originally approved in Fiscal Year (FY) 1999. Thus, the total sample size was six bonds with claims (net of recoveries) representing 61 percent of total claim payments (net of recoveries) per SBA’s Claim Payment History Reports. The IPA tested sample bonds for compliance with SBA regulations for underwriting and fees by reviewing underwriting files and Ranger’s accounting records. The IPA also tested claims incurred under sample bonds from October 1, 1996, through September 30, 1999, by reviewing Ranger’s supporting documentation in the claim files and accounting records. The IPA also obtained a list of all SBA-guaranteed final bonds from October 1, 1996, through September 30, 1999, and identified contractors with total bonds exceeding $1.25 million for contracts with the same bond issue dates within several months. The IPA then reviewed project descriptions to determine if the bonds were for a single project divided into more than one contract.
The IPA found that Ranger correctly calculated and remitted fees to the SBA in a timely manner. The IPA also concluded that management and financial controls were adequate to protect assets and prevent errors and fraud. However, the IPA found that Ranger did not comply in all material aspects with SBA regulations or comply with SBA’s regulations for underwriting bonds and processing claims. Specifically, Ranger did not: (1) notify the SBA of adverse financial information for two bonds in a timely manner, as required by SBA regulations; (2) remit or credit the SBA for overpayments or its share of recoveries within the timeframe established in SBA regulations, and (3) maintain complete underwriting documentation for two of the six sample bonds. As a result, the IPA questioned costs of $180,762.
The IPA issued the following three findings and recommendations:
Ranger did not notify the SBA— in a timely manner— of adverse financial information. Bond guarantees were approved, but eventually, Ranger received a substantial number of nonpayment notices on the bonds dating back as early as September 24, 1997. Ranger, however, but did not provide the SBA with any notice of this principal’s deteriorating financial condition. Even with nonpayment notices on the two bonds, Ranger issued a third bond on May 26, 1998. Several of the nonpayment notices were made in the one month before the third bond was executed. The same agent wrote all three of the bonds. When the third bond went into default on, claims paid under this bond were $34,346. Therefore, Ranger’s failure to notify the SBA of the adverse information was a material misrepresentation of fact and a substantial regulatory violation that prevented the SBA from making an informed decision about whether to cancel the bonding line.
The IPA recommended that the SBA (1) Deny liability for all claims paid under this guarantee, and require Ranger to reimburse the SBA the $34,346 paid in claims.; (2) Advise Ranger to comply with written policies and procedures that include legal requirements to ensure that the SBA is given timely notification of any adverse information, as required by federal regulations, and (3) Advise Ranger to comply with written policies and procedures to ensure that all remaining underwriting records are retained until the applicable statute of limitations has expired.
Ranger did not reimburse the SBA for a duplicate payment and two recoveries totaling $146,416.
Ranger received a $110,406 claim reimbursement from the SBA on July 7, 1998 and submitted a second payment request for $114,890, which included the $110,406 already paid by the SBA. The SBA paid the second claim amount of $114,890 in total on December 1, 1998, however, Ranger had not returned this duplicate payment to the SBA as of the audit date. In addition, Ranger received two recoveries for $16,300 on March 27, 1998, and $34,781 on July 29, 1998. Subsequent expenses reduced the total amount to a net recovery of $40,011. Ranger had not reimbursed the SBA $36,010 for its share of the recoveries.
The IPA recommended that the SBA require Ranger to (1) reimburse questioned costs of $146,416, and (2) Advise Ranger to revise its written policies and procedures to ensure that it reimburses or credits the SBA within 90 days of receipt of any recovery, as required by federal regulations.
Ranger did not maintain SBA underwriting forms, as required. Further, Ranger did not have written policies and procedures to ensure compliance with record retention requirements. Although Ranger no longer underwrites SBA-backed surety bonds, it must be able to provide critical underwriting documents that may be necessary to settle existing claims or to defend or enhance any litigation actions against either lenders, borrowers, or other claimants.