Audit Report 14-06: Two Economic Injury Disaster Loans Defaulted After the SBA Made Approval Decisions Totaling $1.4 Million without Mitigating the Reasons for Prior Denials

On December 20, 2013, the OIG issued Audit Report 14-06, Two Economic Injury Disaster Loans Defaulted after the SBA Made Approval Decisions Totaling $1.4 Million without Mitigating the Reasons for Prior Denials.  This report is the first of two reports resulting from the OIG’s ongoing audit of the Economic Injury Disaster Loan (EIDL) Program.  The overall audit objective was to determine whether the SBA had sufficient controls to ensure working capital loans under the EIDL Program were approved to eligible borrowers for the correct amount.  During the audit, the auditors identified three large defaulted EIDLs that involved inquiries by elected officials and loan reconsiderations.  As a result, the OIG reviewed these loans to determine if SBA Processing and Disbursement Center (PDC) staff adequately addressed or mitigated prior loan denial factors when it approved the loans.  This report addresses SBA’s approval decisions on two of the large defaulted EIDLs.

The OIG determined that the PDC made two EIDL approval decisions that, in effect, reversed previous denial decisions.  Further, the OIG found that the PDC did not adequately address or mitigate the prior denial factors or obtain supporting documentation to overcome deficiencies.  The decisions involved a $736,300 working capital disaster loan and a $671,900 loan increase to separate businesses, totaling approximately $1.4 million.  One of the businesses appeared to be ineligible for working capital disaster funds because it lacked repayment ability and the applicant intended to use the funds to relocate, not for working capital.  The other business also appeared to be ineligible for a loan increase because it had already recovered from the losses it incurred due to the disaster.

While reviewing the loan files, the OIG observed that the SBA had received multiple inquiries from elected officials on behalf of the two applicants. The OIG found no evidence that the loan decisions were the result of the external contacts, but auditors could not confirm this because the loan files were incomplete and did not explain how the prior denial factors were addressed or mitigated.  The SBA’s management disagreed with the OIG’s findings, but concurred with the recommendation to implement new procedures that require justification and supporting documentation to address all prior denial factors when a previous denial decision on a loan is overturned.