OIG High Risk 7(a) Loan Review Program

This is the second in a series of advisories for 7(a) loans we reviewed in fiscal year (FY) 2018 and one loan identified in a previous review. We presented two loans in our first advisory. The objectives of our evaluation were to determine whether (1) high‐dollar/early‐defaulted 7(a) loans were originated and closed in accordance with the Small Business Administration’s (SBA’s) rules, regulations, policies, and procedures and (2) material deficiencies existed that warrant recovery of guaranteed payments to lenders.

Our review of these two high-dollar/early-defaulted 7(a) loans identified that lenders for both loans did not provide sufficient evidence to support that they originated and closed the loans in accordance with SBA’s requirements. Specifically, the lenders did not provide adequate documentation to substantiate reasonable assurance that the borrowers met requirements for repayment ability, size eligibility, and equity injection.

As a result, the lenders’ material noncompliance with SBA requirements while originating and closing the loans resulted in a combined potential loss to SBA of approximately $1.3 million. We recommended that SBA require the lenders to bring the two loans into compliance or seek recovery of approximately $1.3 million. SBA agreed with the recommendations and has contacted the lenders to obtain additional information to bring the loan into compliance and stated that if the issues are not overcome, recovery will be sought from the lenders.