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SBA Office of Inspector General Investigate Small Business Lenders
The Small Business Administration's Office of Inspector General have issued several reports criticizing SBA oversight of banks and lenders and calling for tighter controls on their activities. These reports come as the OIG is aggressively working with the Department of Justice and US Attorney’s Office to pursue civil and criminal cases against lenders, their employees, and their brokers. In the past, SBA OIG referrals have resulted in 96 indictments, 71 convictions, and $25 million in recoveries and fines
In its most recent report, the OIG identified deficiencies "so egregious" that it called for a full denial of the SBA loan guarantee on six loans originated by six different lenders. The "material lender noncompliance" alleged by the OIG included inadequate evidence of equity injection, inadequate evidence of IRS tax verifications, inadequate appraisals, and failure to disclose environmentally contaminated property – all of which occurred during the loan origination process. Because of these errors, the OIG called on the SBA to seek recovery of the full guarantee amount plus interest, despite the fact that the SBA conducted two comprehensive reviews of these loans before charging off their outstanding balances. The SBA is seeking responses from the cited lenders, but has noted that three of the repurchases occurred over six years ago, meaning that the statute of limitations may bar SBA recovery.
The OIG report follows two other audits criticizing SBA oversight of five other lenders:
- In 2008, the OIG issued an audit titled Oversight of SBA Supervised Lenders. The audit reviewed the lending practices of four lenders considered "high-risk" because they had loan purchase rates higher than other large lenders; were cited for recurring compliance issues during onsite examinations; and failed to meet SBA performance benchmarks. The report concluded that the SBA had failed to take sufficient enforcement actions to mitigate the risk, leading to $329 million in losses to the agency. To limit these risks, the OIG recommended more prompt, thorough guarantee repurchase reviews; more probing onsite audits; and progressively stricter enforcement actions.
- In 2008, the OIG issued an audit titled UPS Capital Business Credit's (UPSC) Compliance with Selected 7(a) Lending Requirements. The audit claimed that 44 percent of the reviewed loans did not have adequate documentation to show how borrowers used loan proceeds. The OIG recommended that the SBA require the lender to provide appropriate documentation; that the SBA demand a repair on one loan; and that the SBA establish a corrective action plan for the lender.
In other audits, the OIG has claimed that the SBA failed to address performance and compliance issues or protect government funds once deficiencies were identified, and called on the SBA to develop guidelines under which it will suspend or revoke a lender's status in the Preferred Lender Program. The OIG also argued that the SBA has made tens of millions of dollars in erroneous payments to lenders that did not provide the information necessary to prove that they had originated and serviced loans in compliance with SBA regulations
Legal Developments: Potential Adverse Consequences for Failure to Identify and Correct Risks Common to SBA Lending
In this climate of enhanced oversight, there is a wide variety of administrative, civil and criminal tools available to the government for pursuing claims against lenders, their employees and their brokers for allegedly improper lending practices:
- Administrative Actions The SBA may seek to repair or deny a loan guarantee; suspend or revoke a lender's PLP authority; or debar a lender from government-guaranteed lending programs.
- Civil Claims The SBA may seek to recover losses on defaulted loans through contract claims, the False Claims Act (31 U.S.C. § 3729), the Program Fraud Civil Remedies Act (31 U.S.C. §§ 3801-3802), or under FIRREA (12 U.S.C. § 1833a).
- Criminal Actions The government may seek to prosecute lenders, their employees, or their brokers for conduct related to their lending practices, including under 18 U.S.C. § 1001 (general false statements statute), 15 U.S.C. § 645(a) (false statements to the SBA), 18 U.S.C. § 1014 (false statement to influence SBA or Farm Credit Administration), 18 U.S.C. § 371 (conspiracy to defraud the United States), and 18 U.S.C. § 287 (criminal false claims).
These legal risks are particularly profound for lenders participating in the SBA's Preferred Lenders Program, under which the SBA delegates loan decisions regarding eligibility to the lender. The vast majority of credit determinations are left to PLP lenders, and the SBA conducts only a cursory review of a limited set of documents before approving the loan guarantee. After its payment of a guarantee on a defaulted loan, the SBA then conducts a full-fledged review of the lender's loan documents to determine whether deficiencies in underwriting, closing, or servicing contributed to the failure of loan.
What Can SBA Borrowers and Personal Guarantors Do?
If you have been deemed responsible for an SBA debt – either as a direct Borrower, Obligor and/or Personal Guarantor, you need to hire qualified counsel and practitioners who can review your case, including your original loan documents, payments, performance, etc. to find out if any regulatory deficiencies or fraud may exist.
Some of these potential issues are frequently discovered in post-SBA guarantee payment forensic audits by the Government. However, the main problem for SBA debtors is that several years have already passed before the Government could even consider conducting an audit of the loan portfolios where SBA guarantees were paid out to the lenders and banks that transacted the original loan. In the meantime, debtors who have been held liable on the SBA debt (either because of the original personal guarantee signed during the origination of the SBA loan) have been forced to pay the Government back – when, if they would have been more proactive in resolving this liability – could have avoided the situation by pointing out the regulatory mishaps and fraud by the respective lenders and bank – and petition the Government to seek recovery of the SBA Guaranty monies that had been paid out to the culpable parties.
We can help by conducting a comprehensive SBA loan audit to determine if any regulatory deficiencies, fraud or other SOP violations may have occurred. Once the investigation and audit has been performed and we are able to find regulatory mishaps, we would then petition the SBA or the DOT (whichever federal agency has the debt) to terminate any and all collection action against you based on the findings.
The goal, if possible, would be to resolve the SBA loan default by showing that the SBA debt against you should not be "legally enforceable" and that the Government should seek recovery from the offending lender or bank that originated the loan and fraudulently convinced the Government to honor or purchase the SBA Guaranty or Debenture.
Needless to say, this is a viable option in defending against SBA debts, Treasury Dept. collection action or DOJ collateral liquidation and/or litigation.
If you are struggling with circumstances that involve SBA loan default or Treasury collection, you deserve professional help! Our attorneys know how to win SBA & DOT cases. If you contact us, we will help you settle SBA debt once and for all.
After you schedule an appointment, you confer with a dedicated SBA Workout Attorney & DOT Practitioner who can help you through your administrative legal battle. After your claim is resolved, you never again have to worry about your SBA loan default problem haunting you. Our team of lawyers has assisted many clients through the years. Now it is your turn!You truly cansettle SBA debt for good!