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Audit Report 3-08: Audit of SBA’s Oversight of the Fiscal Transfer Agent for the 7(a) Program

Date Issued: 
Thursday, January 30, 2003
Report Number: 

On January 30, 2003, the OIG issued Audit Report 3-08, Audit of SBA’s Oversight of the Fiscal Transfer Agent for the 7(a) Program.  The secondary market of SBA’s 7(a) loan program assists lenders in making long-term loans to small business.  Since 1989, Colson Services Corporation has been SBA’s Fiscal Transfer Agent (FTA).  The FTA serves as a central registry of owners of guaranteed interests and of all SBA guaranteed interests sold or resold in the secondary market.  The Master Reserve Fund (MRF) was created to facilitate operation of loan pooling in SBA’s 7(a) secondary market program by holding both the principal paid from borrowers and due to investors, as well as accumulated interest earnings.  The SBA’s Office of Capital Access oversees the Colson contract and the operations of the FTA.

The audit objectives were to determine whether: 1) the MRF was properly accounted for in accordance with Federal regulations; 2) the FTA was properly performing its fiscal transfer agent functions, and 3) the FTA contract was properly awarded, administered and monitored.

The OIG determined that the results of MRF operations were not properly accounted for in accordance with Federal accounting regulations and Federal financial management procedures.  The MRF also has not been treated in a manner similar to a trust fund and public funds held in the MRF were not registered with symbols and titles by the Department of Treasury (Treasury) in consultation with the Office of Management and Budget (OMB).   Further, the OIG found that the SBA allowed the FTA to hold basis point fees and other fees collected on behalf of SBA although these fees are due immediately to SBA.  This allowed the FTA to receive approximately 23 days of float interest per month on the fees, which were the compensation for providing the collection services.  An estimated $527,000 over two years was paid to the FTA.  This practice is an inappropriate augmentation to SBA’s appropriation since the SBA had the FTA use the float collected on the fees as compensation for collecting these fees.  The SBA should have had the FTA use the float toward paying the compensation from appropriated funds.

Additionally, the  SBA did not award, administer, and monitor the FTA contract in a manner that fully protected the interests of the Federal government.  Further, the SBA did not ensure that the government received the best services, for the least cost.  Specifically, (1) the FTA contract was improperly extended beyond five years; (2) the legality of “float” compensation payments to the FTA was unclear, and an unsound business practice; (3) accurate FTA contract costs were not tracked or maintained, (4) Federal regulations for administering the MRF do not exist, and (5) there were discrepancies in the terms and conditions for auditing the FTA by its IPA, including the need to meet FOIA requirements and conduct Statements on Auditing Standards (SAS) 70 reviews.

The OIG recommended that the SBA:

  • Report the financial results of MRF operations in the nature of a trust fund
  • Statistically reconcile the source and application of funds in the MRF to more properly identify the public funds from the MRF principal amounts
  • Work with the Department of Treasury and the OMB to establish Treasury titles and symbols for the MRF
  • Direct the FTA to submit basis point fees collected to the Federal government when the depository receipts total over $1,000 by the end of each business day
  • Negotiate for a fixed compensation rate for the FTA to collect basis point fees and compensate the FTA through SBA’s appropriation
  • Determine whether any other remedies are needed with regard to the inappropriate augmentation of SBA’s appropriation
  • Begin the process of initiating a new procurement action for FTA services
  • Eliminate float interest compensation to the FTA for both the front-end and back-end float compensation periods in all future contracts with an FTA
  • Review FTA activities and identify contract costs of providing services, and establish a fee structure sufficient to cover the costs of such services
  • Ensure that contract provisions for audits performed by Independent Public Accounting firms working for the FTA include access rights to audit reports and working papers by the OIG and the General Accounting Office
  • Ensure that future audits of the Fiscal Transfer Agent by Independent Public Accounting firms include a Statement on Auditing Standards (SAS) 70 Review of Iinternal Controls,and computerized system controls
  • Develop and publish regulations and SBA procedures governing the operation and functioning of the MRF
  • Instruct SBA contracting officers to obtain OGC review for legal sufficiency and not to extend contracts beyond five years in the future
  • Move the Contracting Officers Technical Representative (COTR) duties for the current and future FTA contracts to the Office of Chief Financial Officer and maintain a Technical Point of Contact (TPOC) within the Office of Financial Assistance
  • Provide a legal opinion as to whether float interest compensation is legal and allowable in FTA contracts
  • Determine whether any other remedies are needed concerning the use of float interest compensation to the FTA

The Chief Financial Officer generally agreed with the recommendations addressed to that office.  The Associate Deputy Administrator for Capital Access, Acting Assistant Administrator for Administration, and General Counsel did not state whether they agreed or disagreed with the recommendations or actions addressed to them.