oversight

The Small Business Administration: Loan Origination and Debt Collection Processes

Published by the Government Accountability Office on 1999-11-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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United States General Accounting                      Office                               Accounting and Information
Washington,  DC 20648                                                                              Management  Division



                    B-284134


                    November 30,1999

                    The Honorable Stephen Horn
                    Chairman, Subcommittee on Government
                     Management, Information and Technology
                    Committee on Government Reform
                    House of Representatives

                        The Honorable Christopher Bond
                        Chairman
                        Committee on Small Business
                        United States Senate

                        Subject:          The Small Business Administration:   Loan Origination and Debt Collection
                                          Processes

                        This letter summarizes the information provided during October 14 and October 18,
                        1999, briefings to your offices. You had asked us to determine the extent to which the
                        Small Business Administration (SBA) has established (1) adequate loan origination
                        procedures and consistently obtains the required documents and data necessary for
                        determining whether loan applicants comply with the program’s statutory, regulatory,
                        and eligibility requirements and have any outstanding, delinquent federal debt and
                        (2) a systematic process for identifying and collecting delinquent debts, including a
                        prompt referral of delinquent debts to the Department of the Treasury for offset and
                        cross-servicing programs.

                        As agreed, we reviewed three of SBA’s loan programs: the 7(a) Loan Guaranty
                        Program, the Disaster Home Loan Program, and the Disaster Business Loan Program.
                        The 7(a) Loan Guaranty Program, one of SBA’s primary programs, serves small
                        business borrowers who lenders believe otherwise would not be able to secure
                        financing on reasonable terms. Private sector lenders are given authority to
                        determine eligibility and to approve loans without prior SBA review for over 70
                        percent of 7(a) loans. Under the program, SBA provides guarantees of up to 80
                        percent on loans made by participating lenders. The Disbter Home Loan Program
                        provides disaster assistance through direct loans to victims of federally declared
                        disasters, while the Disaster Business Loan Program provides such assistance to
                        qualified businesses affectedby federally declared disasters. Together, these three
                        programs comprise about 73 percent of SBA’s direct and guaranteed      loan portfolio as
                        of July 31, 1999.


                                                                    GAO/A.IMD-0045R Small Business Administration
B-284134

loan applicants. In our June 1998 report: we identified problems with lender
oversight of the 7(a) Loan Guaranty Program. According to SBA officials, since that
work was conducted, SBA has implemented an oversight program for preferred
lenders and has developed and begun to implement oversight for other 7(a) Loan
Guaranty Program delivery methods. Lender reviews for these other loan delivery
methods were scheduled to begin during the first quarter of fiscal year 2000.

In our work on debt collection for the Disaster Home Loan Program and our review
of a recent SBA Office of Inspector General report on debt collection for the 7(a)
Loan Guaranty and Disaster Business Loan programs, we found that SBA has
established procedures to guide its in-house collection of disaster and 7(a)
guaranteed loans that are consistent with DCL4 requirements. These procedures
include periodically sending notices of delinquency, periodically contacting
borrowers, and providing opportunities for loan restructuring. Referral to Treasury
for offset and cross-servicing are two methods that are to be used when others fail.

With the exception of referral to Treasury for offset and cross-servicing, SBA’s
internal procedures for collecting delinquent disaster loans and 7(a) guaranteed loans
were consistently applied. However, limited use was made of referral to Treasury for
administrative offset, and delays existed in transferring delinquent loans to Treasury
for cross-servicing. For example, for delinquent Disaster Home loans we examined,
we found loans that were between 260 and 1,163 days delinquent that had not been
transferred to Treasury for cross-servicing.

According to SBA officials, delays in the referral of delinquent debt to Treasury for
 administrative offset occurred with the Disaster Home Loan Program because SBA’s
automated systems were not properly identifying loans eligible for offset, and those
that were identified could not be processed at Treasury because the SBA and
Treasury computer systems were not compatible. With regard to the 7(a) Loan
 Guaranty and Disaster Business Loan programs, SBA officials stated that referrals for
administrative offset were not occurring because SBA did not have an automatic
process for identifying eligible loans. Rather, loan officers were referring individual
cases as they came to their attention. SBA off&&      told us that they (1) worked with
Treasury to correct the compatibility problems for the Disaster Home Loan Program,
(2) corrected the problems that were causing the Disaster Home Loan Program’s
automated system to not properly identify loans eligible for offset, and (3) have fully
implemented an automated offset referral system for the 7(a) Loan Guaranty and
Disaster Business Loan programs. SBA officials told us they have not yet tested these
systems to ensure that they are working effectively.

With regard to transferring delinquent loans to Treasury for cross-servicing, SBA
officials stated they have an understanding with Treasury that SBA will not transfer
loans more than 180 days delinquent for cross-servicing if SBA is still actively
pursuing collection. h~ a letter dated March 26,1999, SBA formally requested from

‘Small Business Administration: Few Reviews of Guaranteed     Lenders Have Been
Conducted (GAOIGGD-9885, June 1998.).


Page 3                             GAO/AIMD-00-45R Small Business Administration
 Es-284134

We conducted our work from April 1999 through October 1999 in accordance with
generally accepted government auditing standards. We requested comments on a
draft of our briefing slides from SBA officials, who generally agreed with the
information and the recommendations in the slides. We incorporated their comments
as appropriate.



We are sending copies of this letter to the Honorable Jim Turner, Ranking Minority
Member, Subcommittee on Government Management, Information and Technology,
House Committee on Government Reform; the Honorable John F. Kerry, Ranking
Minority Member, Senate Committee on Small Business; the Honorable Aida Alvarez,
the Administrator of the Small Business Admin&ration; the Honorable Lawrence H.
Summers, the Secretary of Treasury; and the Honorable Jacob J. Lew, the Director of
the Office of Management and Budget. Copies will also be made available to others
upon request.

If you have any questions about this letter or the briefings, please contact me at (202)
512-9508 or Shirley Abel, Assistant Director, at (202) 512-9516. Key contributors to
this assignment were Carol Browder and Julia Duquette.




Linda M. Calbom
Director, Resources, Community,
 and Economic Development, Accounting
 and Financial Management Issues
Enclosure




(913877)


Page 5                              GAO~AIMD-OO-45RSmall Business Administration
GAO Accounting and Information
     Management Division
      Briefings to the Subcommittee on Government
      Management, Information, and Technology, house
      Committee on Government Reform
      and the Senate Committee on Small Business

      The Small Business Administration’s
      Loan Origination and Debt Collection
      Processes

      October 14, 1999
      and October 18,1999
                                    T    Accountability   * Integrity   * Reliability



1
GAo Contents

        l   Objectives
        l   Background
     l      Overview of Applicable Debt Collection
            Improvement Act (DCIA) Requirements
    l       Scope and Methodology
    l       Findings
             l Loan Origination
             l Delinquent Debt Collection
    l       Recommendations


2
GAo Objectives

      To determine the extent to which SBA has
      established:

      (1)   adequate loan origination procedures
            and consistently obtains the required
            documents and data necessary for
            determining whether loan applicants comply
            with the program’s statutory, regulatory, and
            eligibility requirements and have any
            outstanding, delinquent federal debt and




3
GAo Objectives

       (2)   a systematic process for identifying and
             collecting delinquent debts, including a
             prompt referral of delinquent debts to
             Treasury for cross-servicing and offset
             programs.




4
GAo Background

    l   7(a) Loan Guaranty Program

        l       Is one of SBA’s primary programs, with
                182,646 loans totaling $22.5 ‘billion outstanding
                as of July 31, 1999.

        l       Provides loans to small businesses unable to
                secure financing in the commercial
                marketplace without SBA’s guarantee.

            l   Uses a variety of loan delivery methods.


5
GAo Background

      l   Has delegated loan approval authority to the
          lenders for over 70 percent of 7(a) loan
          approvals.

      l   Uses lender oversight as the primary internal
          control.




6
GAo Background

      l   Disaster Assistance Program - Homes and
          Personal Property

          l   204,455 loans totaling $3.3 billion
              outstanding as of July 31, 1999.

          l   Provides disaster assistance through direct
              loans to victims of federally declared
              disasters.

          l   Proceeds may be used to restore primary
              residences or repair or replace clothing,
              furniture, cars, etc.
7
GAo Background

      l   Disaster Assistance Program - Businesses

          l   69,784 loans totaling $3.6 billion outstanding
              as of July 31, 199%

          l   Provides     disaster assistance through direct
              loans to    qualified businesses that suffer
              physical    or economic injury resulting from
              federally    declared disasters.




8
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GAo Overview of Applicable DCIA
    Requirements
     l   The DCIA was enacted in April 1996 to facilitate
         collection of delinquent non-tax debt owed to the
         federal government. DCIA provides that:

         l   An entity with outstanding debt with any federal
             agency (other than IRS) in a delinquent status
             generally cannot obtain federal financial
             assistance in the form of a loan. Disaster
             programs are exempt from this requirement.

         l   Agencies shall take appropriate steps to collect
             delinquent debt.

10
GAO Overview of Applicable DCIA
    Reauirements
       l       Agencies shall notify Treasury of debt that is
               more than 180 days delinquent for
               administrative offset.

       l       Agencies shall transfer debt that is more than
               180 days delinquent to Treasury for cross-
               servicing.

           l   Certain debts are exempt from referral to
               Treasury.



11
GAO Scope and Methodology

     l   Loan Origination

         l   Focused on 7(a) loans guaranteed between
             October 1, 1998 and March 31, 1999.

         l   Reviewed applicable   SBA policies and
             procedures.

         l   Discussed lender oversight with SBA officials.




12
GAO Scope and Methodology

       l   Selected and reviewed a nationwide statistical
           sample of 99 loans to determine if
           documentation in the SBA loan files supported
           applicant eligibility.

       l   Did not go to lender locations to review lender
           files or reperform the lenders’ underwriting
           procedures.




13
GAo Scope and Methodology

     l   Delinquent Debt Collection

         l   Disaster Home Loan Program

             l   Reviewed disaster home loans that were
                 more than 180 days delinquent as of
                 March 31, 1999.

             l   Reviewed applicable SBA policies and
                 procedures.

             0   Discussed delinquent loan collection
                 procedures with SBA officials.
14
GAo Scope and Methodology

         l   Selected and reviewed a nationwide statistical
             Sample of 99 delinquent   loans to deterniine
             whether SBA:

              l   took appropriate steps to recover
                  delinquent debt,

              l   referred debt delinquent more than   180

                  days to Treasury for offset, and

              l   transferred debt delinquent more than 180
                  days to Treasury for cross-servicing.
15
GAo Scope and Methodology

     l   Delinquent Debt Collection

         l   7(a) and Disaster Business Loan Programs
             l   Relied on the SBA OIG’s July 1999 audit that
                 included a statistical sample of 88 loans.

             l   Reviewed the SBA OIG’s audit workpapers
                 and determined that we could rely on the
                 results of the audit.




16
GAo Scope and Methodology

     l   Obtained and incorporated   agency comments   as
         appropriate.

     l   Conducted review in accordance with generally
         accepted government auditing standards between
         April and October 1999.




17
GAo Findings--Loan Origination

     l   SBA has established adequate internal
         procedures and consistently documents those
         procedures to determine whether loan applicants
         comply with eligibility requirements and have any
         outstanding, delinquent federal debt.
         l   Depending on type of loan delivery system,
             these procedures require SBA to marntain
             different types of documentation. For example,
             l   Loans that are approved by SBA district
                 offices require extensive documentation.
             l   Low documentation loans that are approved
                 by lenders require only a one-page
                 application.
GAO Findings--Loan          Origination

     l   Required documentation was available in SBA’s
         loan files in 97 of 99 cases.

         l   In 1 case, a low documentation loan was
             approved even though the borrower had a
             1989 bankruptc Ycounter to SBA policy for low
             documentation roans.
         l   In 1 case, the borrowers were married and
             although the husband’s criminal history
             statement was signed, the wife’s was not.




19
GAo Findings--Loan Origination

     l   SBA and lenders consistently screened loan
         applicants for any outstanding delinquent federal
         debt using credit reports, but did not use the
         required Credit Alert Interactive Voice Response
         System (CAIVRS). 7

          l   Use of CAIVRS to screen for outstanding
              delinquent federal debt is required by OMB ’
              Circular A-l 29.




20   JCAIVRS is an automated database, maintained by the Department of Housing and Urban
     Development (HUD), that identifies individuals who are delinquent on federal debts.
GAo Findings--Loan Origination

       l   According to SBA officials, SBA does not use
           CAIVRS because its computer link with ’
           CAIVRS has never worked properly and
           obtaining CAIVRS information for each loan by
           telephone is too time-consuming.      As a result,
           loan officers rely on credit reports.

           l   The law requires federal agencies to report
               delinquent debt to credit reporting bureaus
               before discharging the delinquent debt.



21
GAo Findings--Loan                         Origination

      l   Since the lender, not SBA, makes the decision on
          creditworthiness in most cases, lender oversight
          by SBA is essential to ensure adequate screening
          of loan applicants.

           l   In our June 1998 report,’ we identified
               problems with 7(a) lender oversight and
               recommended that SBA establish a mechanism
               for ensuring that regular periodic reviews of
               lender compliance are conducted.



22   lSmall Business Administration:    Few Reviews of Guaranteed
      Lenders Have Been Conducted      (GAO/GGD-98-85).
GAo Finding&-Loan          Origination

       l   According to SBA officials since that work was
           conducted, SBA has implemented an oversight
           program for preferred lenders and has
           developed and begun to implement an
           oversight program for other loan delivery
           methods, including policies and procedures.
           Lender reviews for the other loan delivery
           methods will begin in the first quarter of fiscal
           year 2000.




23
GAo Findings--Debt Collection

     l   Disaster Home Loan Program

         l   SBA has established internal procedures to
             guide its in-house collection activities that are
             consistent with DCIA requirements.

              l   Delinquent -borrowers are to receive periodic
                  notices of delinquency and telephone calls.

              l   Delinquent borrowers are to be given
                  opportunities to restructure loans and defer
                  payments as necessary.


24
GAo Findings--Debt Collection

         l   Foreclosure, litigation, wage garnishment,
             and referral to Treasury for cross-servicing
             and offset are to be used when other
             methods fail.




25
GAo Findings--Debt Collection

       l   With the exception of referral to Treasury for
           offset and cross-servicing, SBA’s internal
           collection procedures were consistently applied
           in 95 of 99 cases.

           l   In 2 cases, borrowers   received only initial
               delinquency notices.

           l   In 2 cases, internal procedures were initially
               applied, but no follow-up efforts had been
               made in approximately 1 year.



26
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GAo Findings--Debt Collection

         l   According to SBA officials, SBA’s automated
             systems-which should identify loans eligible
             for offset and refer them to Treasury-were
             not working properly. Also, SBA officials
             stated that compatibility issues existed
             between SBA’s and Treasury’s computer
             systems and that SBA has actively worked
             with Treasury to address and correct these
             problems.




28
GAO Findings--Debt Collection

          l   Serious delays existed in transferring delinquent
              loans to Treasury for cross-servicing.

                l   Of the 56 loans in our sample that were eligible
                    for cross-servicing, the transfer process had
                    not been initiated for 21.

                      l   These 21 loans were between 260 and
                          1 ,163 days delinquent.3




29   3The average   number of days delinquent   was 545.
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GAO Findings--Debt Collection

     l   According to SBA officials, SBA has an
         understanding with Treasury that it will not transfer
         loans more than 180 days delinquent for cross-
         servicing if SBA is still actively pursuing collection.

     l   SBA has formally requested from Treasury an
         exemption from transfer for cross-servicing of SBA
         loans more than 180 days delinquent that are not
         otherwise specifically exempted from transfer.
         The request is still pending.



31
GAo Findings--Debt Collection

       l   Once SBA identifies a loan as uncollectible,   the
           required charge-off processes may take
           several months before the loan can be
           transferred to Treasury for cross-servicing.

           l   Charge-off procedures include determining
               the borrower’s financial condition,
               documenting collection efforts, including
               efforts to compromise the debt, and
               performing an asset search. SBA must also
               ensure that the debt is still legally
               enforceable.

32
GAo Findings--Debt Collection

         l   $BA sends a 60-day “due process” notice     to


             the borrower stating that the loan may be
             transferred to Treasury if not paid. The loan
             is transferred to Treasury after this 60-day
             period.




33
GAo Findings--Debt          Collection

     0 7(a) and Disaster Business Loan Programs.

       l   SBA OIG had similar findings:

           * With the exception of referral to Treasury for
             offset and cross-servicing, SBA’s internal
             collection procedures were consistently
             applied in 81 of 88 sample cases.

           l   Of the 88 loans in the OIG’s sample, 22
               were eligible but had not been referred for
               offset or cross-servicing.

34
GAO Findings--Debt        Collection

          l   In its response to the SBA OIG’s findings,
              SBA officials stated that 14 of the 22 cases
              had either been referred to Treasury or
              were exempt from referral subsequent to
              the OIG’s review. The remaining 8 should
              have been referred but were not.
          l   According to SBA officials, the 7(a) and
              Disaster Business Loan systems did not
              automatically identify loans eligible for
              offset and refer them to Treasury. Loan
              officers were manually identifying and
              referring individual cases as they came to
              their attention.
35

                          --
GAo Findings--Debt         Collection

       l   According to SBA officials, during August 1999,
           SBA fully implemented an automated
           administrative offset referral system for its 7(a)
           and Disaster Business Loan programs.




36
GAo Recommendations

     l   In order to comply with DCIA requirements, we
         recommend that SBA :

         l   test SBA’s systems to verify they are working
             effectively to identify and refer eligible Disaster
             Home, Disaster Business, and 7(a) loans to
             Treasury for administrative offset as soon as
             they become more than 180 days delinquent.




37
GAo Recommendations

    l   Develop procedures that will allow uncollectible
        loans to be identified and transferred to Treasury
        for cross-servicing within the required time frames
        or for those loans on which they are still actively
        pursuing collection at the 180.day mark, promptly
        after suspending collection efforts.




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