Best Practices: Duty to report wrongdoing to the SBA Office of Inspector General under SOP 50 57 3

As we continue highlighting updates to SBA loan programs, we now focus on Chapter 26 of SOP 50 57 3.  This chapter covers the duty to report suspected irregularities involving SBA loan programs to the SBA Office of the Inspector General (OIG) for investigation and possible prosecution.  The duty to report instances where fraud may have occurred to the OIG was formalized by the SBA on April 12, 2007, with the adoption of 13 CFR §120.197.  Similar guidance had previously been provided to the industry but only in the form of program operating procedures.  The formal rulemaking was justified at that time by the increase in loan activity by lenders under the delegated authority process prompting the SBA to shift accountability for ensuring program integrity to program participants.  Federal Register, Vol. 72, No. 70, Page 18351.

Under the revised SOP, the duty to report any known or suspected irregularities involving SBA loan programs to the OIG extends beyond SBA officials, Lenders, and contractors, to now include Borrowers as well as other individuals who orchestrate or facilitate illegal acts committed by a Borrower.  This clarification aligns the SOP with the federal regulation.  Consequently, “[a]ll SBA officials, Lender, Borrowers contractors and others must report any known or suspected irregularities involving SBA Loan programs, program participants, or personnel to the SBA Office of the Inspector General.”  SOP 50 57 3, Chapter 26

Instances of irregularities which must be referred to the OIG include (but are not limited to): (i) fraud, (ii) misuse of loan proceeds, (iii) conversion of collateral, (iv) misconduct on the part of SBA employees, and (v) lender misconduct.  In the case of fraud, the SOP identifies the loan application and closing process as instances where irregularities can occur.  Examples of this type of fraud on the part of loan applicants include overstating income, failing to disclose criminal records, making false statements regarding citizenship, misrepresenting the true ownership of a business, submitting altered tax returns, using false Social Security numbers, or otherwise submitting false documents to meet loan closing requirements.  The actions of others who orchestrate, facilitate, or support these types of conduct also constitute fraud.

Post-closing actions such as misuse of loan proceeds, conversion, concealment, vandalism, or unauthorized disposal of collateral are also cause for referral to the OIG.  Similarly, misconduct by an SBA official, or a close relative of an SBA official, or by a lender, or an associate or employee of the lender or a close relative of the employee, are likewise subject to referral.  By way of illustration, such misconduct could include soliciting or accepting bribes in connection with making, closing, servicing, or liquidating an SBA loan.

Referrals to the OIG can be made by a variety of methods including telephone, mail or online.  However, online referrals through the OIG website are preferred.  To that end, the SBA has created a detailed form to be completed when making a referral.  The form solicits basic information about the suspected activity and the opportunity to include relevant documentation when appropriate.  While the form provides an option to report the activity anonymously, after the referral, the person who made the referral must not disclose or discuss the existence of the OIG referral to any person.

Program integrity and accountability on the part of SBA loan program participants is of paramount importance to the SBA, as well as Congress and taxpayers, and it places a legal duty on program participants to report wrongdoing.  For more information regarding referrals to the SBA Office of Inspector General, contact the attorneys at Starfield & Smith at 215.542.7070.