Report 11-16 - Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating Huntington Learning Center Franchise Loans

This report presents the results of our audit of Banco Popular's assessment of borrower repayment ability when originating Huntington Learning Center (HLC) franchise loans. We conducted the audit between March 2010 and April 2011 in response to a complaint alleging that lenders improperly originated Small Business Administration (SBA) guaranteed loans made to HLCs. The complaint, which identified potential violations of 7( a) loan program rules, alleged in part that lenders approved the loans based on inflated gross revenue projections submitted by loan brokers in SBA loan applications. Accordingly, our audit objective was to determine whether the complainant's lender, Banco Popular, adequately assessed borrower repayment ability when originating HLC franchise loans. During the course of the audit, we also noted that SBA's Loan Accounting System did not accurately reflect franchise loans. We have documented this condition in the Other Matters section of the report.