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The transcript of the video follows below for further review.
In fiscal year 2014, the Office of Inspector General (OIG) established the High Risk 7(a) Loan Review Program to minimize losses on Small Business Administration (SBA) guaranteed loans, help SBA improve the effectiveness and integrity of its 7(a) Program, and protect program dollars.
The OIG reviewed eight (8) early-defaulted loans and consequently identified material lender origination and closing deficiencies that justified denial of the SBA guaranty for three (3) loans totaling $3.2 million.
To facilitate SBA’s timely review and recovery of these payments, the OIG formally issued separate reports on each loan that included detailed descriptions of the identified material deficiencies. The OIG also identified suspicious activity on two (2) purchased loans totaling $1.4 million, resulting in formal referrals to the Investigations Division.
In the OIG’s judgment, change of ownership transactions continued to be an area of high risk for the SBA. Further, three out of the five loans that were either formally reported on, or referred due to potentially fraudulent activity, were included in SBA’s FY 2015 review of improper payments. SBA did not identify the improper payments on these loans. In a previous audit, the OIG determined that SBA’s limited reviews of the original lender’s underwriting guidelines resulted in improper payments.
Some of the key reviews detailed in the OIG report are highlighted below:
Change of Ownership Transactions
The OIG indicated that 8 of the 15 loans that were reviewed had financed change of ownership transactions. Additionally, 4 of these 8 loans, purchased for a total of $2.8 million, either had material lender deficiencies or indications of suspicious activity. The OIG believes that change of ownership transactions has been one of the riskiest transactions financed by SBA. Prior audits have identified the following deficiencies in change of ownership transactions:
Further, the Investigations Division has identified significant fraud in change of ownership transactions. In FY 2009, the OIG issued an information notice that recommended lenders and other program participants perform a higher level of due diligence in reviewing change of ownership transactions.
Identifying Improper Payments
While the OIG noted improvement in SBA’s 7(a) purchase review process, it remains concerned about the effectiveness of SBA’s efforts to prevent improper payments. Specifically, four loans the OIG formally reported on or referred to the Investigations Division were included in either SBA’s FY 2014 or FY 2015 reviews for improper payments. During its improper payments reviews, SBA examines loan files to determine if lenders complied with the 7(a) Loan Program requirements.
SBA did not identify or report the improper payments totaling $4.5 million associated to these loans. Upon receiving these reports, SBA substantially concurred with the OIG findings on the loans and confirmed them as improper payments.
A complete copy of the OIG’s Report to Congress can be found here: The OIG High Risk SBA 7(a) Loan Review Report
If you are facing an SBA loan default, contact us today for a consultation with an experienced SBA workout attorney at 888-756-9969
We analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise for your SBA loan default.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients borrowed and personally guaranteed an SBA 7(a) loan. Clients defaulted on the SBA loan and were sued in federal district court for breach of contract. The SBA lender demanded the Client pledge several personal real estate properties as collateral to reinstate and secure the defaulted SBA loan. We were subsequently hired to intervene and aggressively defend the lawsuit. After several months of litigation, our attorneys negotiated a reinstatement of the SBA loan and a structured workout that did not involve any liens against the Client's personal real estate holdings.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
Our firm successfully resolved an SBA COVID-19 Economic Injury Disaster Loan (EIDL) default in the amount of $150,000 on behalf of Illinois-based client. After the business permanently closed due to the economic impacts of the pandemic, the owners faced potential personal liability if the business collateral was not liquidated properly under the SBA Security Agreement.
We guided the client through the SBA’s Business Closure Review process, prepared a comprehensive financial submission, and negotiated directly with the SBA to release the collateral securing the loan. The borrower satisfied their collateral obligations with a payment of $2,075, resolving the SBA’s security interest.
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