The 7(a) Program is one of the most popular programs of SBA loan guarantees for small businesses that are unable to obtain loans from banks. The 7(a) program lets you get loan amounts (up to $5 million) to fund startup costs, buy equipment and more. Here’s what else you can do with 7(a) funds:
Purchase new land (including construction costs)
Repair existing capital
Purchase or expand an existing business
Refinance existing debt
Purchase machinery, furniture, fixtures, supplies or materials
However, recently the SBA’s Office of Inspector General published its management advisory that presents the evaluation results of two 7(a) loans as part of our ongoing High Risk 7(a) Loan Review Program. The management advisory is Report 18-23. The objectives of its evaluation were to determine whether (1) high-dollar/early-defaulted 7(a) loans were originated and closed in accordance with the Small Business Administration’s (SBA’s) rules, regulations, policies, and procedures and (2) material deficiencies existed that warrant recovery of guaranteed payments to lenders.
The review of two high-dollar/early-defaulted 7(a) loans identified that lenders for both loans did not provide sufficient evidence to support that they originated and closed the loans in accordance with SBA’s requirements. Specifically, the lenders did not provide adequate documentation to substantiate reasonable assurance that the borrowers met requirements for repayment ability, size eligibility, and equity injection.
As a result, the lenders’ material noncompliance with SBA requirements while originating and closing the loans resulted in a combined potential loss to SBA of approximately $1.3 million. The report recommended that SBA require the lenders to bring the two loans into compliance or seek recovery of approximately $1.3 million. That could mean the loan will be called on the borrower. While this report addresses the responsibility of the lenders to document loans in accordance with SBA requirements, if the bank’s solution is to seek recovery of the loan proceeds, the ultimate consequence will ultimately fall upon the borrower.
John P. McGeehan
VSB #9160
McGeehan Pascale PLC
Purchase new land (including construction costs)
Repair existing capital
Purchase or expand an existing business
Refinance existing debt
Purchase machinery, furniture, fixtures, supplies or materials
However, recently the SBA’s Office of Inspector General published its management advisory that presents the evaluation results of two 7(a) loans as part of our ongoing High Risk 7(a) Loan Review Program. The management advisory is Report 18-23. The objectives of its evaluation were to determine whether (1) high-dollar/early-defaulted 7(a) loans were originated and closed in accordance with the Small Business Administration’s (SBA’s) rules, regulations, policies, and procedures and (2) material deficiencies existed that warrant recovery of guaranteed payments to lenders.
The review of two high-dollar/early-defaulted 7(a) loans identified that lenders for both loans did not provide sufficient evidence to support that they originated and closed the loans in accordance with SBA’s requirements. Specifically, the lenders did not provide adequate documentation to substantiate reasonable assurance that the borrowers met requirements for repayment ability, size eligibility, and equity injection.
As a result, the lenders’ material noncompliance with SBA requirements while originating and closing the loans resulted in a combined potential loss to SBA of approximately $1.3 million. The report recommended that SBA require the lenders to bring the two loans into compliance or seek recovery of approximately $1.3 million. That could mean the loan will be called on the borrower. While this report addresses the responsibility of the lenders to document loans in accordance with SBA requirements, if the bank’s solution is to seek recovery of the loan proceeds, the ultimate consequence will ultimately fall upon the borrower.
John P. McGeehan
VSB #9160
McGeehan Pascale PLC
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