As part of Congress' ongoing pursuit to reduce the federal deficit and generate savings for the government and tax payers, Congress passed the Improper Payments Information Act of 2002 ("IPIA") which required government agencies to identify government programs susceptible to significant improper payments, report the amount and causes of improper payments to the President and Congress, and develop plans for reducing improper payments.

Improper payments are defined as payments that should not have been made or that were made in an incorrect amount (both overpayments and underpayments). Improper payments include payments made to an ineligible recipient, duplicate payments, payments for a good or service not received, and payments that do not account for credit for applicable discounts.

In 2010, Congress passed the Improper Payments Elimination and Recovery Act of 2010 ("IPERA"), which amended portions of the IPIA by providing alternative improper payments measures, expanding the requirements for corrective action plans and increasing the scope of recapture audits for all payments and program activities in excess of $1 million.

IPERA recapture audits are not audits in the traditional sense - they are a review process designed to identify improper payments. In the world of SBA, IPERA audits are effectively audits performed by SBA of SBA officials and programs to determine if SBA officials are approving eligible loans, applying the regulations correctly, identifying and reporting improper payments and to ensure that SBA employees, loan applicants and program participants possess and maintain a high level of integrity. Below are examples of information and questions that might be covered in an IPERA audit:

• 7(a) and 504 loan disbursements - Were all payments and disbursements adequately documented?
• 7(a) loan guaranty approvals - Was the loan eligible? Was the applicant's repayment ability justified in the file? Did SBA and/or an approved lender provide sufficient documentation to justify the approval? Did the lender take all available collateral?
• 7(a) loan guaranty purchases - Did the lender comply materially with SBA loan program requirements and approve, close, service and liquidate the loan in a prudent manner? Did the applicant have sufficient repayment ability? Did the lender verify tax returns, if required under the Code of Federal Regulations and Standard Operating Procedures?
• 504 loan guaranty approvals - Was the loan eligible? Did the applicant have sufficient repayment ability?
• Disaster Assistance loan disbursements (Disaster Assistance Loans are particularly vulnerable to fraud and unnecessary losses because loan transactions are expedited in order to provide quick relief to disaster victims) - Were all payments and disbursements adequately documented?

Although IPERA audits are intended to be an audit of SBA and its measures to reduce improper payments, lenders are often left wondering how an IPERA audit will affect them. For instance, if the SBA determines in an IPERA audit that a PLP lender made an ineligible loan or did not take all available collateral, does this affect the lender's SBA guaranty even if the loan is performing?  How would loans sold on the secondary market be affected?  Will lenders be permitted an opportunity to cure deficiencies noted?  How will the SBA use the results of an IPERA audit in determining repairs and/or denials of the guaranty and will it be used as a factor in determining a lender's risk rating?  The answers to these questions are unclear at this time.  We are working with SBA to determine the answers to these questions and others and will provide more insight and guidance in upcoming articles.