On November 12, 2019, the SBA’s Office of the Inspector General (OIG) published a report on its Audit of SBA’s Oversight of High-Risk Lenders (Report). While the Report is directed principally at reviewing the actions of the Office of Credit Risk Management (OCRM) in meeting its mission of maximizing the efficiency of SBA’s lending programs, the recommendations in the Report will impact lenders participating in SBA guaranteed lending and identifies areas of continued concern to the program’s stakeholders. It should come as no surprise that the OIG continues to focus on patterns of deficiencies in program integrity areas such as eligibility, credit elsewhere analysis, loan structure as well as inappropriate fees charged to borrowers.
Among the weaknesses identified by the OIG of interest to lenders is OCRM’s failure to recommend adequate and consistent risk mitigation actions to the lenders it assessed. According to the OIG, 28 of 33 loans files reviewed by OCRM did not contain adequate recommendations to the lenders reviewed. To remedy inadequate or inconsistent recommendations, an updated SOP 50 53, due no later than September 19, 2020, will incorporate policies and procedures aimed at providing analysts who conduct lender review and oversight functions with recommended appropriate and consistent corrective and enforcement actions. It will be incumbent on 7(a) lenders to become familiar with the new SOP 50 53 and revise their internal policies accordingly.
Another outcome of interest to lenders is the OIG’s finding that OCRM did not adequately communicate loan deficiencies they noted during lender reviews to other SBA loan centers. In a review of 32 of 76 purchased loans, the OIG found deficiencies in 21 defaulted loans the SBA had purchased totaling $13.3 million. The deficiencies included, among others: (i) insufficient credit elsewhere analysis; (ii) no evidence of adequate insurance; (iii) inappropriate agent fees; (iv) lack of assignments of lease and landlord waivers; and (v) no copies of applicable stand-by notes. To address this recommendation, OCRM has agreed to reach out to the lenders identified by the OIG to determine whether the lenders took the necessary corrective action to remedy the deficiencies. If the issues still exist and cannot be remedied, OCRM will initiate enforcement actions to seek recovery on those paid guarantees not later than September 19, 2020. Additionally, lenders should be aware OCRM will begin sharing systemic lender issues and material loan deficiencies with other divisions within the SBA, in particular loan and purchase centers, to mitigate the risk of improper guaranty purchases.
The OIG reaffirmed that lenders put in jeopardy their SBA loan guarantees for: (i) failure to comply with SBA 7(a) loan program requirements; (ii) failure to make, close, service or liquidate a loan in a prudent manner; or (iii) taking improper action that places the SBA at risk. In addition, the OIG cautioned lenders that the following grounds may trigger enforcement actions seeking recovery from them on already paid guarantees: (i) failure to maintain eligibility requirements for specific SBA programs and delegated authority; (ii) failure to comply materially with any requirement imposed by loan program requirements; (iii) not performing underwriting, closing, disbursing, servicing, liquidation, litigations, or other actions in a commercially reasonable and prudent manner; and (iv) repeated failure to correct continuing deficiencies.
The OIG’s findings will have ramifications for SBA lenders. Compliance with program requirements and implementation of OCRM’s PARRiS review recommendations have never been more important. In 2020, we expect OCRM to heighten oversight of its lending partners by initiating new enforcement actions, which may include monetary fines, loss of PLP status and, in the most serious cases, debarments and suspensions.
For more information on SBA lender oversight issues, contact the attorneys at Starfield & Smith at (215) 542-7070 or visit us at www.starfieldsmith.com.