Robert A. (Bob) Westbrooks was appointed Deputy Inspector General in July 2013. He previously served as Deputy Assistant Inspector General for Investigations at the U.S. Department of...
Audit Report 8-8-F-003-019: Audit of New Jersey District Office 7(a) Loans
On September 30, 1998, the OIG issued Audit Report 8-8-F-003-019, Audit of New Jersey District Office 7(a) Loans. The audit was part of a nationwide review to determine whether 7(a) loans were processed, disbursed, and used in accordance with Small Business Administration (SBA) requirements. The SBA’s procedures for lenders and loan officers are intended to reduce risk. Failure to follow these procedures increases the chance that ineligible or risky loans will be approved. The New Jersey District Office was assigned 1,402 loans valued at $416 million from March 1, 1996, to June 30,1997. The loans, made to small business concerns within the state of New Jersey, were processed by the District Office and the Preferred Lender Program (PLP). The OIG reviewed lenders' compliance with 22 such procedures. In the period audited, the OIG determined that for 11 of the 30 loans, lenders did not follow at least one procedure. For the 11 loans, the non-compliance issues consisted of the following:
- Cash injections were not verified prior to disbursement for four loans. Without the required cash injections, borrowers may have insufficient working capital and less commitment to the business. For one of the loans, the borrower did not inject $13,000 as required by the loan agreement, and the required injections for the other three loans were verified after disbursement. There was no evidence that business financial information was verified with the IRS prior to disbursement for four loans. Without verified business financial data, loan decisions could be based on financial data that is not credible. For two loans totaling $715,000 with guarantees of $536,250, lenders did not verify business financial information with the IRS for the three- year period required by the loan agreement. The required verifications for two other loans were not fully completed until after disbursement. The use of loan proceeds was not verified for two loans totaling $203,000, as required by the loan agreement or settlement sheets. Without verifying the use of loan proceeds borrowers could use loan proceeds for unauthorized purposes. A subsequent review disclosed that the loan proceeds were used appropriately.
- A standby agreement was not obtained prior to disbursement for one loan. Standby agreements may be necessary to improve a company's equity position or to assure repayment of SBA's loan. An updated financial statement and credit report were not obtained although one loan was disbursed more than one year after the approval date. Current financial statements and credit reports are needed to ensure that no adverse changes have occurred in the borrower's financial and credit condition. By reviewing financial statements and credit reports for another loan that was made to the borrower around the time of disbursement, we determined no adverse changes had occurred.
The OIG also identified two loans with errors involving the lack of timely disbursement. The two loans —with guarantees totaling $455,000— were not disbursed by the time specified in the loan authorizations. As a result of this audit, both lenders canceled their requests for the guarantees. Of the 30 sampled loans, 23 were current, 4 were canceled, 1 was in a deferred status, 1 was undisbursed, and 1 was paid off as of March 31, 1998. Lender responses regarding the loans were varied and suggested that while some deficiencies were due to unintentional errors and loan officers' lack of knowledge of SBA requirements, other deficiencies could not be explained. The OIG made six recommendations:
- Take appropriate steps to protect SBA's interests by ensuring that the lender verifies borrower or seller financial data with the IRS, obtaining guarantee releases, or obtaining indemnification agreements to reflect the lack of an IRS verification.
- Re-emphasize to lenders their responsibility to verify financial data with the IRS prior to disbursement, to retain a documented summary and IRS data in the loan file, and to obtain updated financial statements and credit reports when loan disbursement deadlines are extended.
- Re-emphasize to lenders in writing their responsibility to ensure that required cash injections are made and properly documented and required standby agreements are obtained.
- Re-emphasize to lenders in writing their responsibility to verify use of loan proceeds in the event joint payee checks are not used for non-working capital expenditures.
- Re-emphasize to lenders the need to request cancellation of guarantees when the disbursement deadline expires or to document any disbursement extension in the loan file.
- Take appropriate steps to protect SBA's interests by obtaining a verification of the cash injection from the lender, reducing the guarantee percentage, or obtaining an indemnification agreement to reflect the lack of a $13,000 injection