Report 8-08 – UPS Capital Business Credit’s Compliance with Selected 7(A) Lending Requirements

This report presents the results of our audit of UPSC's compliance with selected Small Business Administration (SBA) lending requirements. We initiated the audit as a result of deficiencies identified by SBA personnel during their reviews of defaulted loans originated by UPSC. SBA guarantees portions of loans made by participating lenders and purchases the guarantees upon loan default. Lenders are required to comply with SBA' s program regulations when originating, servicing, and liquidating the loans. When a loan defaults, the lender submits a request that SBA honor the guaranty along with relevant documentation. SBA reviews the documentation to evaluate the lender's compliance. Reviews of7(a) loans (excluding SBA Express and Community Express loans) are centralized at SBA's National Guaranty Purchase Center in Herndon, Virginia.

The objective of the audit was to determine whether UPSC materially complied with SBA's requirements for documenting: borrower equity injection, use of loan proceeds and qualifications for debt refinancing. We had also planned to assess UPSC's compliance with SBA' s requirement for reporting liquidation expenses. However, after initiating the audit, the Herndon Center began a review of the lender's liquidation expenses. Therefore, we excluded this component from the scope of our audit.

To answer the audit objective, we statistically sampled 36 of 103 loans that SBA purchased for $11.9 million between October 1, 2003, and March 31, 2007. A listing of the sampled loans is presented in Appendix I, and our sampling methodology is provided in Appendix II. The sampled loans comprise more than one-third of the $30.8 million SBA paid for the 103 loans. As of March 31, 2007, the outstanding SBA guaranty balance for the 36 loans had been reduced to about $7.3 million based on recoveries from liquidation actions. We reviewed SBA' s files for 35 of the 36 loans to determine if the required documents had been submitted by the lender and requested documents from the lender for those items not found in SBA's files. SBA personnel could not locate one file. Additionally, we interviewed personnel at the Herndon Center and analyzed the results of preand post-purchase reviews the Center completed on 22 of the 35 loans. There was no evidence in the files of pre-or post purchase reviews for the remaining 13 loans. We conducted our audit between May and November 2007 in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States.