Audit Report 14 -20: Controls Governing Economic Injury Disaster Loan Approval Need Improvement

On September 29, 2014, the Office of Inspector General (OIG) issued Audit Report 14 -20, Controls Governing Economic Injury Disaster Loan Approval Need Improvement.  This report is the second of two reports resulting from our audit of the Economic Injury Disaster Loan (EIDL) Program.  The first report, Two Economic Injury Disaster Loans Defaulted after the SBA Made Approval Decisions totaling $1.4 Million without Mitigating the Reasons for Prior Denials, was issued on December 20, 2013.  This second report addresses our findings on the Small Business Administration’s (SBA) processing and approval of loans in the EIDL Program.

Our audit objective was to determine whether the SBA had sufficient controls to ensure working capital loans under the EIDL Program were approved for eligible borrowers in the correct amount.  The OIG found that the SBA approved a total of nearly $1 million more than it should have for 11 of the 22 loans in our sample—over half of the total $1.8 million that SBA approved for these 11 loans.  The SBA approved 1 loan to an ineligible borrower, 2 loans with incomplete analyses, and 8 loans that contained errors in the SBA’s calculations to determine an applicant’s economic injury or did not have supporting documentation needed to justify  the  loan amount.  All of these loans were recommended for approval by the loan officers processing the applications and were approved by a separate supervisory loan officer.  Thus the OIG concluded that internal controls governing the EIDL approval process need to be improved to ensure that loans are approved only to eligible borrowers and for the correct amount.

The OIG recommended that the agency develop a checklist for key requirements such as applicant eligibility, and to ensure that all required supporting documentation is included in the electronic loan file prior to approving the loan.  Additional training should also be provided to the loan officers and supervisory loan officers for the identified noncompliance with the standard operating procedures.  The Office of Disaster Assistance (ODA) generally agreed that improvement was needed and fully agreed with the second recommendation to provide training, since it reported it had recently revised training which covers these issues.  However, ODA only partially agreed with the first recommendation to develop a checklist.  Because ODA had revised its training within the past year and felt that it could continue to rely on its electronic loan filing system, ODA did not believe that the recommended checklist was needed.  However, the OIG believes that training alone will not suffice—and that ODA still needs the recommended checklist.  The two recommendations will continue to remain open until supporting documentation is submitted by ODA for further verification.