Report 9-11 – SBA-Serviced Liquidation of Certified Development Company Loans

This report presents the results of our audit of the liquidation process of Certified Development Company (CDC) loans by the Small Business Administration (SBA). CDC loans are placed into liquidation when SBA purchases the debentures that guarantee these loans. Currently SBA does most of the liquidations, but some are done by Premier Certified Lenders (PCL) and Authorized CDC Liquidators (ACL). In February 2007, SBA centralized CDC liquidations by shifting liquidation responsibilities from the district offices to the two commercial loan service centers in Fresno, California and Little Rock, Arkansas.

The audit objectives were to determine (1) whether SBA’s liquidation efforts maximized recoveries of outstanding balances on purchased CDC loans, and (2) whether centralization improved the liquidation process. To address the audit objectives, we reviewed a sample of 95 of 1,427 loans in liquidation as of July 29, 2007 that had recorded purchase dates. Another 2,458 loans were in liquidation, but because their purchase dates could not be determined, they were excluded from our sample. The 95 sampled loans had an outstanding loan balance of $29.3 million and consisted of 54 that were in the process of being liquidated, 22 that had been charged off, 18 that had been paid-in-full, and 1 that became current after purchase. Of the 95 loans, 52 had been purchased before centralization and 43 were purchased after centralization. A listing of the sampled loans is presented in Appendix I, and our sampling methodology is provided in Appendix II.

To determine whether SBA maximized recoveries on loans in liquidation, we compared actions taken on the sampled loans to requirements established in the Agency’s standard operating procedure (SOP) 50 51(2). Our analysis focused on whether SBA pursued all collateral and other available assets, made reasonable compromise decisions, and properly charged off loans and referred them to the United States Treasury Department.

To determine whether centralization had improved liquidation efforts, we compared the timeliness and completeness of liquidation actions taken on loans processed by the

district offices with those of the service centers. We reviewed SBA loan files, interviewed SBA and CDC personnel, and analyzed related financial and chronological postings from SBA’s databases. We conducted our audit between October 2007 and October 2008, in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States.