October 7, 2015

Best Practices: Program Integrity and Loan Agents

by Jennifer E. Borra

SBA lenders have a responsibility to ensure that they maintain the integrity of the SBA loan programs throughout their institutions. 13 CFR §120.140(f) prohibits SBA lenders from engaging “in conduct reflecting a lack of business integrity or honesty”; and the SBA monitors the lending practices of its participant lenders to assure compliance.

The SBA’s Office of Credit Risk Management manages not only credit risk, but oversees lender performance in order to assure that program requirements are met. Similarly, the Office of Inspector General provides independent, objective oversight to improve the integrity, accountability and performance within the SBA loan programs. Indeed, the September 25, 2015 OIG Audit Report, SBA Needs To Improve Its Oversight Of Loan Agents, expressed the need for the SBA to improve its oversight of loans originated by referral agents, noting that loans involving such referral agents “defaulted at a rate 28 percent higher than loans where no referral fee was reported.” In its report, the OIG also identified over $327 million of SBA 7a loans that involved loan agent fraud. Other OIG reports have focused on lenders’ responsibility to not only monitor agents but establish internal controls so that their employees adhere to required SBA standards.

The consequences for failing to follow Loan Program Requirements to ensure program integrity can be severe. On September 25, 2015, a former bank official entered a guilty plea to conspiring with senior bank executives to issue hundreds of millions of dollars of fraudulent SBA loans to unqualified or ineligible borrowers. Several of the bank’s executives have gone to jail and the bank has been closed by its regulators.

The temptation to underwrite bad loans or circumvent SBA rules or regulations must be resisted for SBA loan programs to thrive and for small businesses to succeed. If your institution is not monitoring its agents, its employees or otherwise devoting its efforts to establishing internal controls to avoid loan agent fraud, the federal government may utilize its vast resources and enforcement authority to investigate and prosecute offending institutions for such transgressions. Accordingly, smart SBA lenders will adopt best practices to ensure that they proactively minimize the potential risks of loan agent fraud.

For more information regarding SBA lender oversight and program integrity, please contact Jen at 267-470-1206 or at