Report 8-10 – Annual Credit Reviews for Gulf Coast Hurricane Disaster Loan Disbursements

This report summarizes the results of our audit of annual credit reviews for Gulf Coast Hurricane disaster loan disbursements. We initiated the audit in response to the increasing number of defaulted Gulf Coast disaster loans processed by the Small Business Administration (SBA). The audit objective was to determine the adequacy of SBA’s monitoring efforts to ensure that the financial status of borrowers had not deteriorated to levels that would adversely impact their loan repayment ability. Specifically, we determined whether (1) the credit reviews were conducted before disbursements were made, (2) all required financial documents were obtained, and (3) SBA took appropriate measures to cancel loans when there were adverse changes in the financial condition of borrowers.

As of September 30, 2007, we identified 11,217 loans totaling $1.1 billion in disbursements for which one or more disbursements occurred over a year after loan approval. Based on review requirements that were in effect at the time of disbursement (ODA changed the 1-year requirement to 18 months and then to 24 months), we determined that 1,117 of these loans required a credit review, using the applicable timeframe for an updated credit/financial review. We reviewed a statistical sample of 159 of these loans. We examined entries in SBA’s Disaster Credit Management System (DCMS) for each of the sampled loans to determine the timing of the credit reviews, whether all required financial documents were obtained, and whether SBA took action to address adverse changes in the financial status of borrowers. We also interviewed officials working in SBA’s Office of Disaster Assistance (ODA) Processing and Disbursement Center (PDC) in Fort Worth, Texas to determine what, if any, controls were in place to prevent the PDC from disbursing funds when the required reviews were not performed.

We conducted the audit from October 2007 to January 2008 in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States.