Report 12-14: The Small Business Administration Did Not Maximize Recovery for $171.1. Million in Delinquent Disaster Loans in Liquidation

This advisory memorandum presents issues identified while assessing the Liquidation of Disaster Loans at the National Disaster Loan Resolution Center (NDLRC).  Specifically, this memorandum addresses the SBA's non-compliance with the Debt Collection Improvement Act of 1996 (DCIA).  The overall audit objective was to assess the NDLRC’s effectiveness in managing disaster loans in liquidation to maximize debt recovery and minimize losses.  One specific audit objective was to assess whether the NDLRC complied with the DCIA for disaster loans in liquidation status.  This memorandum contains the OIG’s findings relative to loans in liquidation status as of December 31, 2011.  The provisions of the DCIA and other laws and regulations are included in guidance provided by the Department of the Treasury Managing Federal Receivables Guide, which states, “an agency must refer any eligible debt more than 180 days delinquent to Treasury Financial Management Service for cross servicing.” 

The audit determined that the National Disaster Loan Resolution Center (NDLRC) was not complying with the Debt Collection Improvement Act (DCIA) of 1996, which requires all Federal agencies to transfer debts delinquent over 180 days to Treasury for cross servicing and offset.  The audit results indicated the NDLRC had not transferred 1,553 of 3,958 disaster loans, or approximately 39%— in liquidation status as of December 31, 2011— to Treasury, as required.  The principal balances for these loans totaled approximately $171.1 million.  The loans were not in litigation, foreclosure, active repayment workout, or otherwise exempt from transfer.  Since the loans did not meet the Treasury criteria exempting them from transfer, the NDLRC should have charged off the loans so that the SBA could transfer them to Treasury to initiate collection action against the delinquent borrowers. 

The OIG recommended that the SBA immediately charge off all disaster loans in liquidation status delinquent over 180 days and not secured by collateral, or specifically exempt from referral to Treasury, update the SOPs, train staff on the guidelines of the DCIA, and evaluate disaster loans in liquidation status over 180 days.  This evaluation should aim to determine if foreclosure if feasible, and if so, initiate such proceedings, or charge off loans for which foreclosure is not feasible. Management agreed to immediately charge off the loans that were delinquent over 180 days which were not secured by collateral, to update its SOP and include guidance from the Treasury Managing Federal Receivables Guide, and to train all NDLRC staff regarding the requirements of the Debt Collection Improvement Act of 1996 and the Treasury Managing Federal Receivables Guide.