Accuracy of the FY 2015 7(a) Loan Guaranty Purchase Improper Payment Rate

This report presents the results of our audit on the accuracy of the fiscal year (FY) 2015 improper payments rate for the 7(a) Loan Program purchases.  The Small Business Administration (SBA) did not detect all improper payments when conducting improper payment reviews to estimate its FY 2015 rate for 7(a) guaranty purchases.  As a result, it understated the FY 2015 improper payments rate for the 7(a) Loan Program purchases.  SBA reported improper payments of $7.91 million, or 0.9 percent, of the $880.2 million in guaranty purchases during the year.  In contrast, the Office of Inspector General (OIG) statistically estimated the improper payment rate to be approximately four times the reported rate at 3.61 percent, or $31.8 million.  Office of Management and Budget Circular A-123 Appendix C, which defines improper payments, includes disbursements that were made based on incomplete information in addition to disbursements to ineligible recipients.  Based upon this definition of improper payments, we concluded that 11 of the 32 loan guaranty purchases we reviewed included improper payments.

OIG identified eight loan guaranty purchases as improper that SBA’s Quality Control team did not identify as improper payments.  We believe these differences resulted from SBA loans not being reviewed with the scrutiny required to identify improper payments, the SBA guaranty purchase centers basing decisions on internal documentation that is not consistent with the standard operating procedures, and SBA’s review process guides not specifically requiring loan specialists to recalculate and verify lenders’ calculations.  As a result, SBA was not able to accurately report and assess the risk of improper payments related to 7(a) loan guaranty purchases, and therefore, did not establish appropriate reduction targets and implement commensurate corrective actions to reduce improper payments, enhance program integrity, and ensure the 7(a) loan guaranty purchase process is operating as intended.

OIG made nine recommendations to the Director of the Office of Financial Program Operations to improve SBA’s accuracy in reporting the estimated improper payments rate for the 7(a) Loan Program purchases.  SBA management agreed with the nine recommendations.  SBA management’s proposed actions resolve all nine of our recommendations.