MATERIAL DEFICIENCIES IDENTIFIED IN FOUR 7(A) RECOVERY
ACT LOANS RESULTED IN $3.2 MILLION OF QUESTIONED COSTS
Report Number: ROM 11-05
Date Issued: June 29, 2011
Prepared by the
Office of Inspector General
U. S. Small Business Administration
u.s. Small Business Administration
Office of Inspector General
To:
Memorandum
Grady Hedgespeth
Director, Office of Financial Assistance
Date:
June 29,2011
John A. Miller
Director, Office of Financial Program Operations
lSI original signed
From:
Subject:
John K. Needham
Assistant Inspector General for Auditing
Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of
Questioned Costs
ROM 11-05
This report identifies four early-defaulted loans that we believe warrant
immediate attention by the Small Business Administration (SBA) in order to
recover approximately $3.2 million. We reviewed these loans as part of our
ongoing audit of purchased 7(a) Recovery Act 1 loans. The objective of the audit
is to determine whether purchased 7(a) Recovery Act loans were originated,
closed, and purchased in accordance with the SBA's rules and regulations, and
commercially prudent lending standards. These four loans are part of a
judgmental sample of Recovery Act loans approved for $500,000 or more that
had been purchased as of September 30,2010.
Early-defaulted loans are those loans that default within 18 months of initial loan
disbursement. An early default can be an indication of material loan origination
deficiencies and as a result, the SBA requires the highest degree of scrutiny to be
imposed during the pre and post purchase reviews of these loans.
To assess the internal controls relevant to our audit objective, we reviewed the
SBA's policies and procedures regarding loan origination, closing and
purchasing. To answer the objective, we reviewed all origination, closing and
purchase actions as documented in SBA and lender loan files. We conducted the
audit of these four loans from November 2010 to January 2011 in accordance
with Government Auditing Standards prescribed by the Comptroller General of
the United States.
1
American Recovery and Reinvestment Act of2009, Public Law 111-5
2
The SBA is authorized under Section 7(a) of the Small Business Act to provide
financial assistance to small businesses in the form of government-guaranteed
loans. These loans are made by participating lenders under an agreement with the
SBA to originate, service, and liquidate loans in accordance with the SBA's
regulations, policies, and procedures. If a lender fails to comply materially with
the SBA's regulations, the loan agreement, or does not make, close, service, or
liquidate a loan in a prudent manner, the SBA has exclusive discretion to release
itself, in whole, or in part, from liability on the loan guaranty.
The Recovery Act provided the SBA with $730 million to expand the agency's
lending and investment programs, and create new programs to stimulate lending
to small businesses. Under the provisions of the Recovery Act, the SBA
temporarily eliminated the upfront guaranty fees and increased the maximum
guaranty percentage to 90 percent for most 7(a) loans. 2
As of May 31,2011, the SBA had improperly honored its guaranty on three of the
four loans identified in this report when full denial of the guaranty should have
been pursued due to material noncompliance 3 with SBA requirements. The
remaining loan was purchased from the secondary market on August 31, 2010,
and on May 24,2011, the SBA completed its post purchase review and sent a
letter to the lender requesting additional mitigating information or full
reimbursement of the guaranty. Subsequent reports will be issued to address
deficiencies identified on other loans in our sample.
The deficiencies identified in the four loans, as fully described in the appendices
of this report, included:
•
•
•
•
•
Inadequate verification of equity injection;
Inadequate verification of financial information;
Inadequate business valuation;
Questionable repayment ability; and/or
Inappropriate change of ownership.
CONCLUSION
The audit found that the lenders did not originate and close the four 7(a) Recovery
Act loans in accordance with the SBA's rules and regulations, and commercially
prudent lending standards. Furthermore, SBA loan officers did not identify the
deficiencies in three of the loans during their purchase reviews. The SBA
purchased its guaranty on these four loans, which resulted in approximately
$3.2 million of questioned costs. As a result, we recommended that the SBA seek
recovery of approximately $3.2 million. A draft of this report was provided to the
2
3
Under the Recovery Act, the maximum guaranty for SBAExpress loans remained at 50 percent.
For purposes of this report, noncompliance which resulted in or may result in improper payments is considered material.
3
SBA for comment. The SBA agreed with all of the recommendations and
proposed actions that were responsive.
RECOMMENDATIONS
We recommend the Director, Office of Financial Program Operations:
1. Seek recovery of $37,696, plus interest, from U niBank on the guaranty paid
by the SBA for the loan to [FOIA Ex._ 4]
2. Seek recovery of$373,532, plus interest, from Chetco Federal Credit Union
on the guaranty paid by the SBA for the loan to [FOIA Ex. 4]
3. Seek recovery of$I,445,021, plus interest, from Excel National Bank on the
guaranty paid by the SBA for the loan to [FOIA Ex. 4]
4. Seek recovery of$I,376,641, plus interest, from Excel National Bank on the
guaranty paid by the SBA for the loan to [FOIA Ex. 4]
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL RESPONSE
On April 21, 2011, we provided a draft of the report to the SBA for comment. On
May 26, 2011, the SBA provided written comments, which are contained in their entirety
in Appendix V. The SBA agreed with all of the recommendations and proposed actions
that were responsive.
Recommendation 1
Subsequent to the issuance of our draft audit report, the SBA received liquidation
recoveries that reduced its exposure from $561,721 to $37,696. 4 Our report was modified
accordingly to reflect this reduction. The SBA also completed its post-purchase review
of this loan subsequent to the issuance of our draft report and concurred with our findings
regarding inadequate verification of financial information and questionable business
valuation. The SBA stated it will send a letter to the lender by June 3, 2011 requesting
additional information. If no mitigating information is provided, the SBA will request
full recovery from the lender by June 30, 2011. If the lender refuses to pay, the loan will
be forwarded to SBA headquarters for further action by July 15,2011. The SBA's
proposed actions are responsive to recommendation 1.
4
Although the SBA cited an outstanding SBA share of $31,413 in its response to our draft report, we determined the outstanding
balance was actually $37,696. It appears the SBA used a 75 percent guaranty to arrive at the $31,413 figure rather than the 90
percent guaranty that was authorized for this loan.
4
Recommendation 2
The SBA explained that it has twice reached out to the lender for supplemental
information, but the information provided in both instances was not sufficient to
overcome the denial. As a result, the SBA stated it will request full repayment of the
loan by June 30,2011. The SBA's proposed actions are responsive to
recommendation 2.
Recommendation 3
Subsequent to the issuance of our draft audit report, the SBA received recoveries that
reduced its exposure from $1,473,996 to $1,445,021. Our report was modified
accordingly to reflect this reduction. The SBA stated it will insist upon full repayment by
June 30, 2011 unless sufficient mitigating documentation is received from the lender.
If the lender refuses to pay, the loan will be forwarded to SBA headquarters for further
action by July 15,2011. The SBA's proposed actions are responsive to
recommendation 3.
Recommendation 4
Subsequent to the issuance of our draft audit report, the SBA received recoveries that
reduced its exposure from $1,403,891 to $1,376,641. Our report was modified
accordingly to reflect this reduction. The SBA stated it will insist upon full repayment by
June 30, 2011 unless sufficient mitigating documentation is received from the lender.
If the lender refuses to pay, the loan will be forwarded to SBA headquarters for further
action by July 15,2011. The SBA's proposed actions are responsive to
recommendation 4.
ACTIONS REQUIRED
Please provide your management response for each recommendation on SBA Forms
1824, Recommendation Action Sheet, within 30 days from the date of this report. Your
responses should identify the specific actions taken or planned to fully address each
recommendation and the target dates for completion.
We appreciate the courtesies and cooperation of the Office of Capital Access
during this audit. If you have any questions concerning this report, please call me
at 202-205-7390 or Terry Settle, Director, Credit Programs Group
at 703-487-9940.
5
APPENDIX I.
[FOIAEx.4]
The deficiencies on this loan will result in a $37,696 improper payment if it is not
recovered as a result of the post purchase review by the SBA. During our
ongoing audit of purchased 7(a) Recovery Act loans, we identified a problematic
loan [FOIA Ex. 4] made by UniBank (lender) to
[F_OIA Ex. 4]
(borrower).
BACKGROUND
Unibank was authorized by the SBA to make guaranteed loans under the
Preferred Lender Program (PLP). As a PLP lender, Unibank was permitted to
process, close, service, and liquidate SBA loans with limited documentation and
review by the SBA.
On March 3,2009, the borrower entered into an agreement to purchase the
[FOIA Ex. 4]
to be funded by a $632,000 SBA
existing business known as
loan, $200,000 of equity injection, and $200,000 of seller take back financing for
a total project cost of$1,032,000. The first loan disbursement was made on
May 14, 2009 and the borrower defaulted approximately nine months later on
March 1, 2010. Therefore, this loan is considered an early default loan in
accordance with SBA policy. On August 31, 2010, the SBA purchased the
principal guaranty for $561,721 from the secondary market. On May 24,2011,
the SBA completed its post purchase review and sent a letter to the lender
requesting additional mitigating information or full reimbursement of the
guaranty. As of May 31,2011, the SBA's share of the loan balance was $37,696,
which reflected liquidation recoveries received after purchase.
RESULTS
Inadequate Verification of Financial Information
The lender did not properly obtain complete tax transcripts to verify the accuracy
of the seller's financial information as required in a change of ownership
transaction. According to Standard Operating Procedures (SOP) 50 10 5(A), for a
change of ownership the lender must verify the seller's business tax returns or a
sole proprietor's Schedule C. Tax transcripts for the seller's personal tax returns
were received from the IRS; however, the file did not include the Schedule C
transcript information as required. Without proper verification, financial
information provided by the seller could not be relied upon in determining the
value of the business or the borrower's repayment ability. The loan defaulted in
nine months due to a significant decrease in revenues from what was reported for
this business prior to its sale. The lender informed the OIG that it believes the
financial information provided by the seller included multiple businesses and did
not represent the financial condition of the business being purchased.
6
Inadequate Business Valuation
The project lacked feasibility because the borrower paid more for the business
than it was worth. An accurate business valuation was required for this change of
ownership transaction per SOP 50 10 5(A). The SOP states that determining the
value of a business is the key component to the analysis of any loan application
for a change of ownership. A business valuation assists the lender and the buyer
in determining that the seller's asking price is supported by historic operations.
For this loan, the lender obtained a combined real estate appraisal and business
valuation performed by an independent state certified appraiser who valued the
land at $775,000 and the business at $160,000. Given the total project cost
of$1,032,000, this appraisal/business valuation indicates that the borrower
paid $97,000 more for the business and land than it was worth.
The lender, however, ignored the independent business valuation claiming that the
appraiser's approach was too conservative, and instead, assigned its own business
value of $384,729 to support loan approval. Two days after loan approval, the
executive vice president of the bank reviewed and accepted the independent
appraisal/valuation, indicating that the in-house valuation was overstated. It is
unknown why the executive vice president accepted this appraisal/valuation after
the loan was approved. As a result, we question the loan officer's basis for using
an internal business valuation rather than the independent, professionally prepared
valuation. Furthermore, any valuation prepared using the financial information of
the seller is questionable given the fact that a proper IRS verification was not
performed. As a result, there is no assurance the $160,000 independent valuation
of the business was reliable and the borrower may have paid even more than the
$97,000 in excess that is described above.
CONCLUSION
Based on the above identified deficiencies, this loan will result in a $37,696
improper payment if it is not recovered as a result of the post purchase review by
the SBA.
7
APPENDIX II.
[FOIAEx.4]
The deficiency on this loan resulted in a $373,532 improper payment that should
be recovered. During our ongoing audit of purchased 7(a) Recovery Act loans,
we identified a problematic loan [FOIA Ex. 4] made by Chetco Federal Credit
(borrower).
Union (lender) to
[FOIA Ex. 4]
BACKGROUND
Chetco Federal Credit Union made this loan under the Patriot Express Pilot Loan
Initiative. Under the Patriot Express Program, Chetco Federal Credit Union was
permitted to process, close, service, and liquidate Patriot Express loans with
limited documentation and review by the SBA. On March 3,2009, the lender
approved a $500,000 line of credit to the borrower. The line of credit financed
the purchase of inventory and provided working capital. The first loan
disbursement was made on March 20,2009. The borrower defaulted
approximately nine months later on January 1, 2010. Therefore, this loan is
considered an early default loan in accordance with SBA policy. A purchase
review was completed by the SBA and on May 20,2010, the SBA honored its
principal guaranty for $373,532.
RESULTS
Questionable Repayment Ability
[FOIA Ex. 4] was established in November 2006 and had net losses and
negative debt service coverage in 2007,2008, and the first two months of2009.
As a result, repayment ability was based on projections. The projections,
however, were unreasonable and suggested that sales would increase from
$125,686 in 2008 to $5.4 million, or by 4,196 percent for the first year following
loan disbursement. Second and third year sales were projected to increase to
$12.5 million and $17.9 million, respectively. Although the projections were
supported by detailed explanations for how the borrower planned to increase
sales, there was no explanation for how the business would be able to increase its
production capacity to meet this demand. Furthermore, total operating expenses
for 2008 were 97.5 percent of sales while first year projected total operating
expenses were only 11 percent of sales. Given the aggressiveness of the
projections, we performed a break-even analysis and determined the borrower
would need to reach sales of at least $1. 3 million to demonstrate repayment
ability. There was no assurance the business would be able to reach this level of
sales since it represents a 934 percent increase over 2008 sales. Furthermore,
given the questionable projected operating expenses, it is likely that an even
higher level of sales would be required to break even.
According to SOP 50 10 5(A) the lender's credit analysis must demonstrate that
there is a reasonable assurance of repayment and the lender is required to use
8
appropriate, prudent, and generally accepted industry credit analysis processes
and procedures which are generally consistent with those used for its similarly
sized non-SBA guaranteed commercial loans. For the reasons discussed above,
the lender's credit analysis did not demonstrate a reasonable assurance of
repayment and therefore, this loan should not have been made.
CONCLUSION
Based on the above identified deficiency, this loan resulted in a $373,532
improper payment that should be recovered.
9
APPENDIX III. [FOIAEx.4]
The deficiencies on this loan resulted in a $1,445,021 improper payment that
should be recovered. During our ongoing audit of purchased 7(a) Recovery Act
loans, we identified a problematic loan [FOIA Ex. 4] made by Excel National
Bank (lender) to
[FOI~ Ex. 4]
(borrower).
BACKGROUND
Excel National Bank was authorized by the SBA to make guaranteed loans under
the Preferred Lender Program (PLP). As a PLP lender, Excel National Bank was
permitted to process, close, service, and liquidate SBA loans with limited
documentation and review by the SBA. On August 18,2009, using PLP
procedures, the lender approved a $1,782,000 loan to the borrower to purchase an
existing [F9IA Ex. 4] located in Vicksburg, MS. The first loan disbursement
was made on September 1, 2009 and the borrower defaulted four months later on
January 1, 2010. Therefore, this loan is considered an early default loan in
accordance with SBA policy. On April 26, 2010, the SBA purchased the
principal guaranty for $1,496,880 from the secondary market and on June 7,2010,
completed its post purchase review fully honoring its loan guaranty. As of
May 31,2011, the SBA's share of the loan balance was $1,445,021, which
reflected recoveries received after purchase.
RESULTS
Questionable Loan Transaction
The loan authorization required the borrower to inject $212,500 into the business.
The loan file indicated the equity injection actually totaled $224,900 and was
comprised of payments of three promissory notes to the borrower totaling
$110,000, a wire transfer from a checking account of another motel owned by the
borrower for $100,000, and two checks from the borrower totaling $14,900.
In accordance with SOP 50 10 5(A), lenders are expected to use reasonable and
prudent efforts to verify that equity is injected and used as intended, and failure to
do so may warrant a repair or partial/full denial. In accordance with
SOP 50 51 2(e), the lender was also required to verify and document the source
of the injection if the injection exceeds, as in this case, $200,000 or 1/3 of the loan
amount, whichever is less. Nevertheless, the lender did not adequately verify the
source of $164,900 of equity allegedly injected into the business, and our review
did not show that the lender investigated or took action to resolve questionable
circumstances surrounding the two promissory notes constituting the remaining
$60,000 of the borrower's injection.
One of the promissory notes was for $50,000 and appeared to be from a relative
of the borrower. Our audit found that payment of this note, however, was not the
actual source of the $50,000 of equity injection as indicated by the lender.
10
Documentation in the file showed the $50,000 actually came from a loan advance
to the borrower in relation to another motel he owned, which should have raised
concerns to the lender about whether these funds would truly be used as intended
and not redirected back to the other business.
The source of the $100,000 wire could not be verified because there was a large
unexplained deposit made into the checking account approximately three months
prior to the wire. Furthermore, as these funds were also provided from the other
motel owned by the borrower, there was also no assurance these funds would be
used as intended and not redirected back to the other business.
Lastly, the two checks totaling $14,900 were written from the borrower's business
account, but since there were no statements provided for this account, there was
no evidence for the source of funds. Given the suspicious transfer of funds
between the borrower's businesses as described above, we question the source of
funds for these checks.
Furthermore, although the loan file included checks made payable to the closing
attorney and two promissory notes to support the remaining $60,000 of the equity
injection, the legitimacy of these two promissory notes is questionable because
they were dated November 10, 2008, just before the borrower entered into the
purchase-sale agreement on November 18, 2008. One of these promissory notes
appeared to be from a family member of the borrower who also may have been an
owner of the selling business based on a common last name. The remaining
promissory note appeared to be from the 25 percent owner of the selling
corporation. Additionally, documentation in the loan file showed that the
25 percent owner of the selling corporation was also a manager of the buying
company.
According to SOP 50 10 5(A), loan proceeds are prohibited from being used for a
change of ownership transaction if the seller is remaining as an officer, director,
stockholder, or employee of the business. The same SOP also requires lenders to
analyze each application in a commercially reasonable manner, consistent with
prudent lending standards. Based on the relationships described above, the lender
should have verified that the loan amount was appropriate given the potential
transfer of funds from the seller to the borrower and the continued involvement by
an owner of the selling corporation.
CONCLUSION
Based on the above identified deficiencies, this loan should not have been made
and resulted in a $1,445,021 improper payment that should be recovered.
11
APPENDIX IV.
[FOIAEx.4]
The deficiency on this loan resulted in a $1,376,641 improper payment that
should be recovered. During our ongoing audit of purchased 7(a) Recovery Act
loans, we identified a problematic loan [FOIA Ex. 4] made by Excel National
(borrower).
Bank (lender) to
[FOIA Ex. 4]
BACKGROUND
Excel National Bank was authorized by the SBA to make guaranteed loans under
the Preferred Lender Program (PLP). As a PLP lender, Excel National Bank was
permitted to process, close, service, and liquidate SBA loans with limited
documentation and review by the SBA. On October 22,2009, using PLP
procedures, the lender approved a $1,700,000 loan to the borrower to purchase
two new hotels located in Corsicana, TX. The first loan disbursement was made
on November 13, 2009 and the borrower defaulted approximately seven months
later on June 1,2010. Therefore, this loan is considered an early default loan in
accordance with SBA policy. On August 13,2010, the SBA purchased the
principal guaranty for $1,499,910 from the secondary market and on
April 1, 2011, completed its post purchase review fully honoring its loan
guaranty. As of May 31,2011, the SBA's share of the loan balance was
$1,376,641, which reflected recoveries received after purchase.
RESULTS
Inadequate Evidence of Equity Injection
The lender did not adequately verify and document the source for the $1 million
of required equity injection. According to SOP 50 51 2(C), lenders are required
to verify and document the source of any cash injection that is greater than 1/3 of
the loan amount or $200,000, whichever is less. The SOP states that lenders are
expected to use reasonable and prudent efforts to verify that equity is injected and
used as intended, and failure to do so may warrant a repair or partial/full denial.
Verification of a cash inj ection requires documentation, such as a copy of a check
along with evidence, such as a bank statement dated before, but close to,
disbursement showing that the funds were deposited into the borrower's account
(emphasis added). A promissory note, gift letter, or financial statement alone is
not generally sufficient evidence of cash injection.
The loan file showed the equity injection totaled $1,020,000 and was comprised
of checks and wires from the owners totaling $316,000, gifts totaling $679,000,
and a wire from an owner's wife totaling $25,000. Our audit found, however, that
$878,000 of the alleged equity injection, including $210,000 of the checks and
wires from the owners, $643,000 of the gifts, and the $25,000 wire from the
owner's wife, were all injected into the business 11 to 17 months prior to loan
disbursement and therefore, did not meet the SBA's equity injection verification
12
requirements. Furthermore, we found evidence that some of these funds may
have been for the borrower's purchase of a different hotel in 2008. For example,
two of the checks from the owners were written to [FOIA Ex. 4]
but were
identified on an Equity Injection Summary Sheet in the loan file as checks to the
seller. [FOIA Ex. 4] was not the seller of the hotel being purchased in this loan
transaction. We also found that the wire from the owner's wife was provided in
August 2008 to acquire land in an area that was over 150 miles from the property
being purchased in the SBA loan transaction. Additionally, we question why the
gift letters were dated shortly before loan approval, but the funds were injected
into the business back in 2008. The source of funds for many of these deposits
was also questionable due to missing bank account statements or large
unexplained deposits in the providers' accounts.
We also questioned the validity of a $90,000 transfer of funds from the borrower
to the seller in the form of an "official check receipt" dated April 6, 2009.
There was no other support for the source of these funds besides a November 4,
2009 letter from an individual who appeared to be the seller, stating he recently
repaid a loan to one of the borrowers for funds he borrowed several years earlier.
Without a cancelled check and bank statements to evidence the repayment of this
loan, the source of these funds is unknown and questionable. Further, we
questioned the source of a $36,000 gift and $16,000 in checks from the borrowers
due to missing bank account statements. As a result, we are questioning the entire
alleged equity injection amount of$I,020,000.
CONCLUSION
Based on the above identified deficiency, this loan should not have been made
and resulted in a $1,376,641 improper payment that should be recovered.
13
APPENDIX V. AGENCY COMMENTS
u.s. SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C.
20416
MEMORANDUM
May 26,2011
To:
Peter L. McClintock
Deputy Inspector General
lSI original signed
From:
John A. Miller
Director, Office of Financial Program Operations
Subject:
Response to Draft Report on the"Audit of Purchased 7(a) Recovery Act Loans",
Project No. 10508
Thank you for the opportunity to review the draft report. We appreciate the role the Office of
Inspector General (OIG) plays in assisting management in ensuring that these programs are
effectively managed.
On February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of2009 (the "Recovery Act") (P.L. 111-5). Section 501 of the Recovery Act
authorized SBA to reduce or eliminate certain fees on 7(a) and 504 loans. Section 502 of the
Recovery Act authorized SBA to guarantee up to 90 percent of a 7(a) loan except for SBA
Express. The loans in this report were made under sections 501 and 502.
The report identifies four loans that OIG believes warrant immediate attention by the agency in
order to recover approximately $4 million of improper payments.
• One loan was purchased from the secondary market in August 2010, but a post purchase
review had not been completed by SBA when the draft audit was prepared. A review has
since been conducted, as described further below;
• Two loans were purchased from the secondary market and SBA conducted the post
purchase reviews; and
• One loan received a pre-purchase review.
Deficiencies identified in the four loans included:
• Inadequate verification of equity injection;
14
•
•
•
•
Inadequate verification of financial information;
Inadequate business valuation;
Questionable repayment ability; and/or
Inappropriate change of ownership.
OFPO has been in frequent communication with OIG during this process.
With that introduction, OFPO Management's response to the recommendations in the draft
report is noted as follows:
1.
Seek recovery of $561,721, plus interest, from UniBank on the guaranty paid by SBA
for the loan to
[FOIA Ex. 4]
OFPO concurs with this recommendation. This is the case mentioned above where a post
purchase review had not been conducted prior to the draft report being issued. Since that time
the OFPO's Herndon National Guaranty Purchase Center (NGPC) completed its review of the
case and received an update on the disposition of the loan collateral from the lender. Subsequent
to the draft audit, the lender notified SBA that collateral had been liquidated substantially
reducing SBA's exposure on this loan to $31,413. Nonetheless, the major IG findings regarding
inadequate verification of financial information and questionable business valuations remain
outstanding. OFPO will send a letter to the lender by June 3, 2011 requesting additional
information. If no mitigating information is provided, OFPO will request full recovery of
$31,413 from the lender by June 30,2011. If the lender refuses to pay, the loan will be
forwarded to HQ for further action by July 15, 2011. OFPO expects full recovery.
2.
Seek recovery of $373,532, plus interest, from Chetco Federal Credit Union on the
[FOIA Ex. 4]
guaranty paid by SBA for the loan to
OFPO concurs with this recommendation. The Fresno Commercial Loan Service Center
reviewed the additional documents the lender provided in early May, and determined the lender
should be billed for the guaranteed funds honored by SBA. This determination is based on the
confirmation that the lender did not perform an adequate credit analysis. This loan should have
been declined based on the borrower's questionable repayment ability (unrealistic projection of
income). OFPO has twice reached out to the lender for supplemental information, but the
information provided in both instances was not sufficient to overcome the denial. OFPO will
notify the lender of our findings that the information submitted was insufficient to overcome the
full denial and will request full repayment of the loan by June 30, 2011 requesting additional
information. OFPO expects full recovery.
3.
Seek recovery of $1,473,996, plus interest, from Excel National Bank on the guaranty
paid by SBAfor the loan to [FOIA Ex. 4]
OFPO concurs with this recommendation. The major issues regarding this case included
improper source of the equity injection and that a seller remained as an employee/associate of the
business. After a thorough review of the case by the Herndon NGPC staff, OFPO concurs that
15
the Post Purchase Review should be adjusted to account for this material deficiency. OFPO
formally notified the lender during the week of May 16 that a full denial is in order; however,
subsequent discussions between the lender and OFPO indicate that mitigating information and
documentation may be forthcoming by June 3, 2011. Absent sufficient mitigating
documentation from the lender, OFPO will insist upon full repayment by June 30, 2011. If the
lender refuses to pay, the loan will be forwarded to HQ for further action by July 15, 2011.
4.
Seek recovery of $1,403,891, plus interest, from Excel National Bank on the guaranty
paid by SBA for the loan to
[FOIA Ex. 4]
OFPO concurs with this recommendation. The major issues involving this loan included the
inadequate evidence of equity injection, validity of monies transferred between seller and the
borrower, questionable equity injection made to a [FOIA Ex. 4] and equity injections that were
paid directly from the sources of the equity injections to the seller vs. the borrower's operating
account. After a thorough review of the case by Herndon NGPC staff, OFPO concurs that the
Post Purchase Review should be adjusted to account for this material deficiency. OFPO
formally notified the lender during the week of May 16 that a full denial is in order; however,
subsequent discussions between the lender and OFPO indicate that mitigating information and
documentation may be forthcoming by June 3, 2011. Absent sufficient mitigating
documentation from the lender, OFPO will insist upon full repayment by June 30, 2011. If the
lender refuses to pay, the loan will be forwarded to HQ for further action by July 15, 2011.
Again, thank you for the opportunity to review the draft report. Please let us know if you need
additional information or have any questions regarding our response.
