SBA OIG Report: Recommends $3.2m in SBA 7a Guarantee Recoveries

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:

• Ineligible structures: partial change of ownership, seller retained control of the
  
  business;
• Inadequate support for equity injection: no evidence that the injection occurred,
  
  evidence provided supported an injection into a different business;
• Lack of repayment ability: unverified seller’s financial statements, all liabilities not considered, impact of affiliates not considered, unsupported projected sales; and
• Inadequate business valuation: business valuations not obtained as required.

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

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