Audit Report 15-05: SBA’s Evaluation of Principal’s Repayment Ability for Hurricane Sandy Business Loans

On February 24, 2015, the Office of Inspector General (OIG) issued Audit Report 15-05, SBA’s Evaluation of Principal’s Repayment Ability for Hurricane Sandy Business Loans. Our review focused upon the principal’s contribution to the loan repayment ability. We used the fixed debt method to perform our own evaluation of the principal’s contribution to the business borrower’s repayment ability. Our methodology also included reviewing loan officer comments associated with each loan. Additionally, we interviewed Agency officials at SBA headquarters in Washington, D.C.

The OIG found that loan officers did not have guidance for performing the financial analysis to determine whether Hurricane Sandy business loan applicants had repayment ability.  SBA Standard Operating Procedures (SOP) 50 30 7 states, “For business loans, we determine repayment ability by the results of the financial analysis performed on the business.”  However, the SOP provided no additional guidance regarding how to perform the financial analysis.  Because there was no guidance, loan officers used inconsistent methodologies when evaluating Hurricane Sandy business loans for repayment ability.  We estimate that SBA approved at least 537 Hurricane Sandy disaster business loans, totaling at least $17.9 million, without sufficiently considering principals’ living expenses when determining repayment ability.  Therefore, we believe that for these loans, SBA did not have reasonable assurance that the borrowers had repayment ability, and these loans are at a higher risk of default.

According to a senior ODA management official, the SOP 50 30 7 criteria that applied specifically to evaluating the repayment ability of home owners was used in assessing the principal’s contribution to the borrower’s disaster business loan repayment ability.  However, management at the Processing and Disbursement Center, where the loans were evaluated for repayment ability and approval, stated that loan officers used training materials as their guidance for evaluating and approving business loans.

The OIG recommend that SBA establish and implement clear, written policies and procedures for analyzing the repayment ability of disaster business loan applicants, including business loan principals and guarantors.  Additionally, SBA should ensure that these procedures, whether included in the SOP or other written guidance, are reviewed and officially approved by the headquarters management responsible for administering the disaster loan program.   SBA management generally agreed with our finding and recommendation.  However, management did not agree with our projection that borrowers of at least $17.9 million in Hurricane Sandy disaster business loans did not have repayment ability.

The Agency plans to establish and implement clear written policies and procedures for analyzing repayment ability of disaster business loan applications.  These procedures will be incorporated into the next update of the SOP, which is officially approved by headquarters management responsible for administering the disaster loan program. The Agency also noted that the target implementation date is June 30, 2015.