The Office of Inspector General of the Small Business Administration ("OIG") wields significant influence in the SBA lending community in meeting its objective of providing independent oversight of the performance of the SBA and its programs.  Each year the OIG makes a written submission to Congress justifying its budget request for the next fiscal year.  This is the OIG's opportunity to tell Congress about its accomplishments during the prior fiscal year and to describe its goals and objectives for the coming fiscal year.  The report focuses on the risks facing the SBA, and how the OIG intends to address those risks.  A review of the OIG's Congressional Budget Justification for the fiscal year 2015, and the OIG's Report on the Most Serious Management and Performance Challenges Facing the SBA, which is cited in the OIG's Congressional Budget Justification, provides insight into the OIG's thinking regarding those areas where it believes significant attention is needed that will impact SBA lenders.

During the fiscal years 2012 and 2013, the OIG reports that the SBA paid guaranty claims totaling $3.8 Billion for defaulted 7(a) loans and 504 debentures.  The OIG ascribes many of these losses to lender errors and fraud schemes.  Of importance to the SBA lending community is the OIG's criticism and skepticism of the SBA's reliance on outside financial institutions to approve these loans, and what the OIG believes is a lack of adequate oversight.  The OIG is critical of the SBA's expedited loan processing initiatives favored by SBA lenders.  The OIG apparently believes that lenders are not motivated to use sound underwriting practices for SBA loans because the SBA assumes most of the risk on the loan, and not the lender.  Among other things, the OIG points to the results achieved from the use of a new analytical tool developed to identify improper payments on 7(a) loans.  The OIG used this tool to analyze early defaulted Recovery Act loans.  As a result, every loan identified by the analytical tool was either recommended by the OIG to the SBA for recovery, or referred for additional investigation.   The OIG is seeking many millions in recoveries for improper payments on just these loans.  The OIG is also very critical of the number of instances where the lender failed to take steps to assure the adequate and proper injection of equity into the venture being funded.  In seeking approval of an increase in its budget for year 2015, the OIG tells Congress that it will develop more analytical tools to assist it in identifying and recovering improper guarantee purchases, and otherwise reducing losses in SBA programs.  The OIG is very serious in helping the SBA continue to develop meaningful SOPs, and helping the SBA make sure that these SOPs are being followed.

The OIG is also charged with eliminating fraud, waste and abuse in SBA loan programs.  The OIG continues to promote its hotline, and protections for whistleblowers.  It seems like everywhere you turn, both the OIG and the SBA are encouraging the anonymous, protected reporting of fraud waste and abuse.  Among the statistics provided by the OIG to Congress as evidence of its performance in fiscal 2013 are the $348,187,215 of "Dollar Accomplishments" (mostly direct recoveries), 64 indictments, 50 new investigations opened, and more than 65 recommendations for suspension or debarment.

Most important to the SBA lending community are the tools that the OIG has at its disposal to identify and eliminate what it perceives as fraud, waste and abuse.  The OIG has the power to conduct its own independent investigations with the power to subpoena documents and witnesses.  The OIG makes enforcement recommendations to the SBA which cover the gamut from improper payment recovery, to false claims act suits, to suspensions or debarment from government programs, to criminal prosecution.  However, the OIG is beginning to recognize that although the criminal prosecutions garner the greatest publicity, it is the lax underwriting of loans that is the biggest factor in the $3.8 Billion loss in fys 2012 and 2013.  And the OIG is more than willing to use all the tools at its disposal to insure that all SBA lenders follow all the rules.

For more information on the SBA OIG, please contact Norman at 215-390-1025 or at ngreenspan@starfieldsmith.com.