ROM 11-06– Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of Questioned Costs

This was the second in a series of reports resulting from our ongoing audit of purchased 7(a) Recovery Act loans. The report identified five early-defaulted loans that resulted in questioned costs of $2.7 million and warrant immediate attention by the SBA. These loans are part of a judgmental sample of 25 Recovery Act loans, approved for $500,000 or more, that were purchased as of September 30, 2010. The audit found that lenders and the SBA did not originate and close the five 7(a) Recovery Act loans in accordance with the SBA’s rules and regulations, and commercially prudent lending standards. Furthermore, SBA loan officers did not identify the deficiencies in three of the loans during their purchase reviews. Deficiencies identified in the five loans included (1) inadequate assurance of repayment ability, (2) ineligible use of proceeds, (3) questionable eligibility, and (4) improper guaranty amount. Of the total $2.7 million questioned in this report, we recommended recovery of approximately $1 million, while the remaining $1.7 million cannot be recovered due to deficiencies in the SBA’s origination of these loans. We also made recommendations to improve the SBA’s analyses of loans involving affiliated businesses and Recovery Act loans with reduced guaranty