High Risk 7(a) Loan Review Program

This is the first in a series of advisories for 7(a) loans we reviewed in fiscal year 2018. The objectives of our evaluation were to determine whether (1) high‐dollar/early‐defaulted 7(a) loans were originated and closed in accordance with the Small Business Administration’s (SBA’s) rules, regulations, policies, and procedures and (2) material deficiencies exist that warrant recovery of guaranteed payments to lenders.

Our review of these two high-dollar / early-defaulted 7(a) loans identified material lender origination and closing deficiencies. We found that the lenders for both loans did not provide sufficient evidence to support that they originated and closed the loans in accordance with SBA’s requirements. Specifically, the lenders did not provide adequate documentation to substantiate financial projections, terms for debt being refinanced, a borrower’s inability to obtain credit elsewhere on reasonable terms, and that a franchise agreement was executed prior to the first disbursement.

As a result, the lenders’ material noncompliance with SBA requirements while originating and closing the loans resulted in a combined potential loss to SBA of approximately $1.4 million. We recommended that SBA require the lenders to bring the two loans into compliance or seek recovery of approximately $1.4 million. SBA agreed with the recommendations and has contacted the lenders to obtain additional information to bring the loan into compliance and stated they will send the loans to headquarters for the denial review process if the lenders cannot overcome the issues identified.