Evaluation of CARES Act Debt Relief to 7(A) Borrowers Report Number 21-03 December 1, 200

Summary

SBA Office of Inspector General Evaluation of CARES Act Debt Relief to 7(a) Borrowers, Report Number 21-03, dated December 1, 2020, with a transmittal from Inspector General Hannibal "Mike" Ware to Administrator Jovita Carranza. The report states that SBA effectively ensured that more than 224,000 borrowers of 7(a) loans received $2.6 billion in debt relief within the first 3 months of the CARES Act, and that $43 million in subsidy payments went to borrowers that may have been ineligible. It recommends that the Office of Capital Access and the Chief Financial Officer add verification procedures before approving subsidy payments and that SBA establish post-payment audit procedures. The Agency Response states that SBA management partially agreed with recommendation 1 and agreed with recommendation 2.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Full text

S B A  I n s p e c t o r  G e n e r a l  E v a l u a t i o n  R e p o rt
EVALUATION OF CARES ACT DEBT RELIEF TO 7(A)
BORROWERS
REPORT NUMBER 21-03 | DECEMBER 1, 2020

Executive SummaryExecutive SummaryExecutive SummaryExecutive Summary

EVALUATION OF CARES ACT DEBT RELIEF TO
7(A) BORROWERS
Report
No. 21-03
December 1, 2020
What OIG Reviewed
This evaluation examines SBA’s implementation of
debt relief for borrowers in the 7(a) Program,
SBA’s flagship loan guarantee program. Section
1112 of the Coronavirus Aid, Relief and Economic
Security (CARES) Act provided $17 billion in debt
relief to borrowers in the 7(a), 504, and Microloan
programs. Section 1112 does not include the
Paycheck Protection Program. The Act was enacted
on March 27, 2020 to alleviate the severe economic
hardships and public health threat created by the
Coronavirus Disease 2019 (COVID-19) pandemic.
Our objective was to determine whether SBA has
effective internal controls to provide debt relief to
7(a) borrowers in accordance with CARES Act
Section 1112 and internal policies and procedures.
What OIG Found
We found that SBA effectively ensured that more
than 224,000 borrowers of 7(a) loans received $2.6
billion in debt relief within the first 3 months of the
CARES Act. By June 2020, SBA had verified that
nearly all reported eligible 7(a) borrowers had
received subsidy payments. This debt relief helped
alleviate some of the economic hardship caused by
COVID-19 on qualified small businesses.
Although we found that SBA accurately made
payments on behalf of borrowers according to the
data reported by lenders, we also found that
opportunities exist to improve payment controls to
ensure only eligible borrowers receive subsidy
payments.
We identified issues with lender reported
information that increased the risk of either
making payments to ineligible borrowers or
making excessive payments. We found $43 million
in subsidy payments went to borrowers that may
have been ineligible.
Because of the urgency to issue the subsidy
payments quickly, SBA relied heavily on lenders
self-certifying the loan status and payment amount
with limited verification procedures. Continuing to
strengthen internal controls and oversight of the
subsidy payments will help ensure that SBA
provides debt relief only to eligible borrowers.
Office of Capital Access officials told us SBA
maintains the right to demand return of any
overpayments. The agency will establish policies
and procedures, including using third-party
payment auditing, to review certain payments.
SBA’s
planned
actions
for
post-transaction
payment reviews represent a strong control to
identify and remedy possible improper payments.
Additional controls will be needed to improve the
payment approval process.
OIG Recommendations
We recommended the Office of Capital Access and
the
Chief
Financial
Officer
collaborate
to
incorporate additional verification procedures
before approving subsidy payments. We also
recommended that SBA establish post-payment
audit procedures using a risk-based approach and
recover any overpayments identified during the
post-payment audit.
Agency Response
SBA
management
partially
agreed
with
recommendation
1
and

agreed
with
recommendation 2. SBA management plans to
institute additional verification procedures before
approving subsidy payments, including validating
the total payment amount requested. Management
has also contracted with an auditing firm to
conduct a risk-based audit of all subsidy payments
made to lenders. Management’s planned actions
resolved both recommendations.

Office of Inspector General

U. S. Small Business Administration

 Final Report Transmittal
Report Number: 21-03
DATE:
December 1, 2020

TO:

Jovita Carranza
Administrator

FROM:
Hannibal “Mike” Ware
Inspector General

SUBJECT:
Evaluation of CARES Act Debt Relief to 7(a) Borrowers

This report presents the results of our evaluation of CARES Act debt relief to 7(a) borrowers. We
considered management comments on the draft of this report when preparing the final report.
Management agreed with recommendation 2 and partially agreed to address recommendation 1.

We appreciate the courtesies and cooperation extended to us during this evaluation. If you have any
questions, please contact me or Andrea Deadwyler, Assistant Inspector General for Audits, at (202)
205-6586.

cc:
William Manger, Chief of Staff and Associate Administrator, Office of Capital Access
Christopher Gray, Deputy Chief of Staff
Stephen Kong, Acting Chief Operating Officer
Patricia Gibson, Senior Advisor
Brittany Biles, General Counsel
Tami Perriello, Chief Financial Officer
John Miller, Deputy Associate Administrator, Office of Capital Access
Martin Conrey, Attorney Advisor, Legislation and Appropriation
Tonia Butler, Director, Office of Internal Controls
Rafaela Monchek, Director, Office of Continuous Operations and Risk Management

Table of Contents

Introduction ............................................................................................................................................................................... 2
SBA 7(a) Loan Program .................................................................................................................................................... 2
7(a) Loan Reporting Process ......................................................................................................................................... 2
CARES Act Debt Relief ....................................................................................................................................................... 2
Prior Work ............................................................................................................................................................................. 3
Objective ................................................................................................................................................................................. 3
Finding 1: SBA Provided Debt Relief to Nearly All Reported Eligible 7(a) Borrowers ............................... 4
Debt Relief to Borrowers ................................................................................................................................................. 4
Figure 1. Timeline of CARES Act Section 1112 Program ............................................................................... 4
Table 1. 7(a) Loan Subsidy Payment Information............................................................................................ 5
Finding 2: Opportunities Exist to Improve Subsidy Payment Controls ............................................................ 6
Risk of Payments to Ineligible Borrowers ................................................................................................................ 6
7(a) Loans in Liquidation ........................................................................................................................................... 6
7(a) Loans that Should Have Been in Liquidation ............................................................................................ 7
7(a) Loans in Deferred Status ................................................................................................................................... 7
Table 2. Payments with Risk Factors for Improper Payment ...................................................................... 7
Irregular Subsidy Loan Payments ................................................................................................................................ 7
Accuracy of Reported Status .......................................................................................................................................... 8
Planned Actions ................................................................................................................................................................... 8
Conclusion ............................................................................................................................................................................. 8
Recommendations .............................................................................................................................................................. 9
Analysis of Agency Response ............................................................................................................................................ 10
Summary of Actions Necessary to Close the Recommendations .................................................................. 10
Recommendation 1 ..................................................................................................................................................... 10
Recommendation 2 ..................................................................................................................................................... 10
Appendix I: Objective, Scope, and Methodology ....................................................................................................... 11
Use of Computer-Processed Data ............................................................................................................................... 11
Appendix II: Management Comments ........................................................................................................................... 12

 2
Introduction
The President signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law on
March 27, 2020 to alleviate the severe economic hardships created by the Coronavirus Disease
2019 (COVID-19) pandemic. The CARES Act includes emergency assistance for small businesses
through SBA lending programs.
Section 1112 of the CARES Act provided up to $17 billion in debt relief to borrowers in the 7(a),
504, and Microloan programs. This debt relief was separate from the Paycheck Protection Program,
but still reached hundreds of thousands of small businesses. Part of this provision requires SBA to
pay the principal, interest, and associated fees owed on covered loans to lenders for a 6-month
period.
This debt relief represents the first time SBA has made direct payments on behalf of borrowers for
loans in SBA’s $143.5 billion outstanding small business loan portfolio. This review focuses on
implementation of this debt relief for borrowers in SBA’s 7(a) Program.
SBA 7(a) Loan Program
The 7(a) Program is SBA’s flagship loan program with more than $95 billion of outstanding debt,
representing two-thirds of SBA’s loan guarantee portfolio. SBA is authorized under the Small
Business Act to provide financial assistance to small businesses in the form of government-
guaranteed loans. SBA’s loan guarantee programs require personal guarantees from borrowers and
share the risk of default with lenders by making the loan guarantee less than 100 percent. SBA
offers loan guarantees to encourage lenders to provide loans to small businesses that cannot obtain
credit elsewhere.
The 7(a) loan is the most flexible of SBA’s guaranteed loans. Borrowers can use 7(a) loan proceeds
for a variety of general business purposes including working capital, machinery, equipment,
furniture, fixtures, land, building, and debt refinancing. Loan maturity is generally up to 10 years for
working capital and equipment but can be up to 25 years for purchasing land and buildings.
7(a) Loan Reporting Process
SBA requires lenders to report the monthly status of all loans in their active 7(a) portfolio through a
contracted fiscal transfer agent. The fiscal transfer agent acts as a connection between lenders and
SBA. Lenders submit status changes and pay any guarantee fees through the website the fiscal
transfer agent provides. SBA relies on the internal policies of lenders to determine how to handle
troubled loans, when to place a loan in default, and when to begin the liquidation process.
If a borrower makes regular loan payments on a 7(a) loan that a lender has fully disbursed, the loan
is reported as in “regular servicing status.” When it becomes clear to a prudent lender that a
borrower has defaulted and cannot, or will not, continue making payments, then the 7(a) loan goes
into liquidation status. SBA encourages lenders to make a good faith effort to help troubled
borrowers avoid liquidation. For temporary relief, lenders can defer, or delay, payments if the
lender determines that the borrower is able to recover from short-term problems.
CARES Act Debt Relief
To provide debt relief to 7(a) borrowers affected by COVID-19, lenders submit payment requests
through the fiscal transfer agent. All borrowers with 7(a) loans that were in regular servicing status
and were not considered uncollectable before the pandemic are eligible for debt relief. The fiscal
transfer agent works with SBA’s Office of Capital Access to verify that lender certified 7(a) loans are
reported in regular servicing status before submitting the consolidated payment information to

 3
SBA. The SBA Office of the Chief Financial Officer then verifies the payment routing information
before generating payment files to be paid out by the U.S. Department of the Treasury.
Prior Work
SBA OIG Report 20-11, White Paper: Risk Awareness and Lessons Learned from Prior Audits of
Economic Stimulus Loans (April 3, 2020). Earlier this year, we published a white paper on
lessons learned from previous audits of economic stimulus loans for SBA’s consideration when
establishing new programs to provide economic relief to those affected by the COVID-19 pandemic.
We identified three significant areas of risk: (1) promptly publishing regulations, (2) requiring
supporting documentation, and (3) establishing proper controls. The white paper listed key
considerations that addressed these risks to ensure program integrity and reduce the risk of
financial loss.
SBA OIG Report 12-08, SBA’s Lender Loan Reporting Process Has Systemic Reporting Issues
and Data Control Weaknesses (February 23, 2012). In 2012, we reported on systemic reporting
issues and data control weaknesses in SBA’s process for reporting 7(a) loan status and balance. In
response, SBA made significant changes to improve lender compliance with loan reporting
requirements. These changes included daily updates of submitted status reports, using error
reports to address corrective action needs, and factoring status report submission rates into the
overall risk ratings of lenders.
Objective
Our objective was to determine whether SBA has effective internal controls to provide debt relief to
7(a) borrowers in accordance with CARES Act Section 1112 and internal policies and procedures.

 4
Finding 1: SBA Provided Debt Relief to Nearly All Reported Eligible 7(a)
Borrowers
SBA effectively ensured that eligible 7(a) loan borrowers received $2.6 billion in subsidy payments
within the first three months after the CARES Act took effect. SBA officials from multiple offices
collaborated and used systems already in place to identify eligible 7(a) loans. As a result, by June
2020, nearly 100 percent of reported eligible 7(a) borrowers received timely debt relief.
Debt Relief to Borrowers
On March 31, 2020, SBA sent the fiscal transfer agent and SBA district offices an initial email to
notify lenders not to collect April payments from borrowers because of the upcoming subsidy
payments. Within a month of the CARES Act enactment at the end of March, SBA issued guidance for
loan payment data submission, received loan payment information, and submitted its first Section
1112 loan data to Treasury for payment.
Figure 1. Timeline of CARES Act Section 1112 Program
Source: OIG analysis
SBA issued guidance to instruct lenders how to request payments for 7(a) loans that met the CARES
Act criteria and explain the subsidy is restricted to 6 months of installments. SBA directed the fiscal
transfer agent to report how many lenders had not submitted payment requests for eligible 7(a)
borrowers. In the first month, SBA identified nearly 3,000 7(a) borrowers that had not received the
initial subsidy payment, and the agency then contacted lenders that had not requested payment. As
of the end of June 2020, SBA made payments for more than 224,000 borrowers totaling more than
$2.6 billion for 7(a) loan payments and identified only 348 eligible 7(a) borrowers that had not
received the subsidy payment (see Table 1). Since then, SBA has continued its outreach efforts to
notify these lenders of the subsidy payments.

 5
Table 1. 7(a) Loan Subsidy Payment Information
April 2020
May 2020
June 2020
7(a) Borrowers Receiving Subsidy
 197,952
 216,695
 224,032
Amount of Section 1112 Debt Relief to
Borrowers
$ 803,313,040
$ 906,552,618
$ 878,959,250
Number of Loans from Lenders Who Did
Not Request Debt Relief*
2,948
415
348
Source: SBA Capital Access Financial System Database and information provided by the Office of the Chief Financial
Officer. Total loan numbers by date provided by SBA Office of Capital Access
The fiscal transfer agent reported the number of unpaid 7(a) loans by counting the number of loans
from lenders that did not make any payment requests. This method is reasonable because each loan
has unique terms and conditions, including different payment schedules. For lenders that submitted
any payment request, the fiscal transfer agent reported all loans from the lender to have been
properly considered for the Section 1112 debt relief.
To ensure all eligible borrowers received subsidy payments, on July 28, 2020, SBA issued a
procedural notice informing all lenders that SBA can deny lenders the guaranteed portion of 7(a)
loans should borrowers default because they did not receive subsidy payments. Additionally, on
September 18, 2020, SBA notified all remaining 7(a) lenders that had not submitted for borrower
subsidy payments that lenders must submit the subsidy payment request for borrowers and the
potential consequences to the lender for not doing so.

 6
Finding 2: Opportunities Exist to Improve Subsidy Payment Controls
Overall, SBA successfully and accurately made payments for 7(a) borrowers according to the data
reported by lenders. However, SBA could implement additional controls to ensure only eligible
borrowers receive subsidy payments. We found inconsistencies with the lender reported
information that could have led to payments to ineligible borrowers or making excessive loan
payments. For example, we found payments that may be improper, based on certain risk factors.
The total value of the payments in the first 3 months of 7(a) debt relief that we identified for
additional review is more than $43 million.
To provide immediate debt relief to small businesses affected by COVID-19, SBA relied on lenders
to certify their own reported data. SBA performed limited testing of the lender reported loan
information, which decreased the likelihood that SBA would be able to identify lender reporting
errors before approving payments. For example, we identified instances of lenders not accurately
updating the status of 7(a) loans, a requirement for receiving subsidy payments.
Strengthening the verification procedures of lender reported loan information and using a risk
based approach to identify improper payments will help ensure SBA provides debt relief only to
qualified borrowers and reduce the risk of funds being used for ineligible loan payments.
Risk of Payments to Ineligible Borrowers
SBA quickly implemented an effective payment process to relieve the economic distress of small
businesses in the pandemic. As part of that process, SBA required lenders to ensure that borrowers
did not have 7(a) loans that were uncollectable before the pandemic. Now that the initial
emergency has passed, SBA has the opportunity to improve controls to reduce the risk of payments
to ineligible borrowers.
SBA relied on the fiscal transfer agent to ensure that all subsidized 7(a) loans were reported in
regular servicing status and perform other verification testing. Lenders could submit up to a total of
six payment requests for each 7(a) loan in their portfolio reported in regular servicing status.
Lenders also were required to certify with every payment request that the 7(a) loan was in regular
servicing status.
7(a) Loans in Liquidation
We found SBA’s controls effectively prevented lenders from submitting payment requests for
borrowers with 7(a) loans reported in liquidation status. Although lenders did submit payment
requests for 100 7(a) loans totaling $384,182 that were later placed in liquidation status in the
same month they were paid, the payments represented only a fraction of a percent of the total
payments to 7(a) borrowers (See Table 2).
If lenders believed the reported 7(a) loan status was not accurate, lenders could change the status
and request a subsidy payment, increasing the risk that ineligible borrowers already undergoing
liquidation proceedings before the pandemic could receive payments. We identified 660 7(a) loans
reported in liquidation in February and placed back into regular servicing status between March
and June. SBA had a policy requiring lenders to submit supporting documentation for the loans.
However, the Office of Capital Access officials did not receive the required documentation for most
of the 7(a) loans and no control was in place to require justification before approving subsidy
payments. Consequently, we found SBA made payments totaling nearly $4.9 million for borrowers
that were already in liquidation in February 2020, before the pandemic (See Table 2).

 7
7(a) Loans that Should Have Been in Liquidation
Lenders were required to certify that no 7(a) loan they were requesting subsidy payment for
should have been placed in liquidation status. This control was intended to prevent SBA payments
on loans that were uncollectable but not reported accurately before impacted by COVID-19.
However, SBA did not establish specific criteria for lenders to determine which loans should have
been moved into liquidation because the 7(a) Program delegates this responsibility to the lenders
themselves when they create the loan.
SBA did recommend generally that loans already 120 days past due should not be in regular
servicing status, but the agency did not do any pre-payment checks based on this recommendation.
As a result, we found that lenders received 1,890 payments for 931 borrowers already 120 days
past due at the end of February. These payments represent more than $10.5 million of funds going
to loans that likely should have been liquidated before the pandemic and, therefore, at risk for being
ineligible for CARES Act debt relief (See Table 2).
7(a) Loans in Deferred Status
We found that lenders received nearly $27.2 million in subsidy payments for 4,502 7(a) borrowers
reported in deferred status (See Table 2). Before the CARES Act, SBA recommended lenders defer
loan payments for borrowers adversely affected by the COVID-19 pandemic. SBA guidance allowed
borrowers to elect whether they wanted to stay on deferment and receive payments later or end
deferment early and receive payments right away. Borrowers who remained in deferred status
were not eligible for subsidy payments until after the deferment period ended.
Even if lenders reported a borrower’s payments were deferred, they could still certify that their
7(a) loans were in regular servicing status and request payment. As a result, there were no controls
in place to prevent lenders from requesting and holding payments until the deferment period ends,
effectively giving the lender an interest free loan.
Table 2. Payments with Risk Factors for Improper Payment
Risk Factors for
Subsidized Loans
April 2020
May 2020
June 2020
Number
of Loans
Payment
Number
of Loans
Payment
Number
of Loans
Payment
In Liquidated Status
When Paid
9
$23,957
23
$69,251
69
$290,973
In Liquidation Status
in February and Now
in Regular Servicing
Status When Paid
189
$779,453
315
$1,755,631
427
$2,337,576
120 Days Past Due in
February, Never
Liquidated, and Paid
342
$1,698,115
692
$4,250,733
856
$4,598,701
In Deferment Status
When Paid
890
$6,444,393
1,253
$7,874,894
2,359
$12,870,912
Source: SBA Capital Access Financial System Database and information provided by Office of the Chief Financial Officer.
Irregular Subsidy Loan Payments
Of the 638,679 subsidy payments SBA made during the first 3 months of 7(a) debt relief, we
identified at least 1,635 payments that varied by thousands of dollars and were at least five times

 8
larger than other payment requests submitted for the same 7(a) loan. SBA allowed lenders to
include more than one monthly installment in a single payment request. SBA also allowed lenders
to request missed payments that were due prior to the CARES Act. To verify the accuracy of the
irregular loan payments, SBA would need detailed payment information to analyze payment trends.
Lenders submitted payment requests for borrowers to the fiscal transfer agent that included only
the gross loan payment amount, the month of payment, and the number of monthly installments
requested. However, the gross loan payment amounts requested did not show a breakdown of
principal, interest, and fees because SBA did not require it. Further, SBA did not require the fiscal
transfer agent to submit the number of monthly installments needed to identify which payment
requests covered more than one installment. Consequently, SBA was restricted in what could be
independently verified before approving subsidy payments.
Office of Capital Access officials told us they could not track whether payment amounts were
consistent when approving subsidy payments. They also said the control filters were meant to only
identify obvious outliers and that additional verification would come with later post-transaction
payment audits. Because of short time to meet the statutory deadline and the limited information
available, SBA officials did limited verification of the data provided by the fiscal transfer agent.
SBA did require lenders to certify all information submitted was true and correct with every
payment request to provide some assurance. SBA officials relied on lender self-verification and the
possibility of post-transaction payment audits to ensure the accuracy of subsidy payments. Without
additional controls on lender submitted data, there remains a significant risk of SBA making
excessive payments.
Accuracy of Reported Status
We found that lenders did not update the current status for 14,783 borrowers after they received
subsidy payments in the monthly loan status report. If a lender does not update the loan
information, the 7(a) loan may appear as past due or delinquent despite having all installments
paid to date. While the errors specifically identified would not affect a borrower’s eligibility, they do
raise questions about the reliability of lender reported information without independent
verification.
SBA relied on lender reported information to ensure the proper amount was paid to 7(a) loans only
in regular servicing status. Inaccurate loan status information may also be a cause of a number of
the payments we identified with risk factors. Without accurately reported loan data, SBA is at risk
of either making payments to unqualified loans or making excessive payments.
Planned Actions
Office of Capital Access officials told us SBA maintains the right to demand return of any
overpayments and will establish policies and procedures, including using third-party payment
auditing, to review certain payments after borrowers receive all 6 months of payments. The officials
said in September 2020, SBA plans to award a contract to a third-party company that will use 7(a)
loan origination data and compare previously reported data to identify total subsidy loan payments
that do not fall within an acceptable range for review.
Conclusion
SBA quickly provided debt relief to small businesses with 7(a) loans during the first 3 months of the
COVID-19 pandemic in accordance with CARES Act Section 1112. However, additional internal
controls are needed to ensure subsidy payments were accurately paid out to only eligible 7(a)
loans. Although lender certification added assurance that payment requests complied with the
CARES Act and SBA procedural notices, self-certification must be adequately reviewed using

 9
appropriate procedures. SBA’s planned actions for post-transaction payment reviews represent a
strong control to identify and remedy possible improper payments if effectively implemented.
Further controls could also be incorporated to improve the payment approval process.
Recommendations
We recommend the Administrator require the Associate Administrator for the Office of Capital
Access and the Chief Financial Officer to:
1.
Incorporate procedures to verify the accuracy and reasonableness of the loan status,
principal, interest, and any fees of loans before approving subsidy payments.
2.
Establish post-payment audit procedures, using a risk-based approach, to verify the
accuracy and completeness of all subsidy payments to lenders and include reviews of
payments made to loans that changed from liquidation status to regular servicing status,
and remedy improper payments in accordance with the Payment Integrity Act of 2019.

 10
Analysis of Agency Response
SBA management provided formal comments to the draft report (see Appendix II). SBA
management agreed with one recommendation and partially agreed with the other
recommendation. Management provided target dates for final action in follow-up correspondence.
However, we believe management’s proposed corrective actions resolved both recommendations.
Summary of Actions Necessary to Close the Recommendations
The following details the status of our recommendations and the actions necessary to close them.
Recommendation 1
Resolved. SBA management partially concurred with this recommendation. SBA management
agreed to institute additional procedures to verify the accuracy and reasonableness of loan status
and payment amount before approving subsidy payments. SBA management said requiring lenders
to report separate amounts for principal, interest, and fees instead of reporting gross payment
amount would create an unnecessary burden on lenders. SBA managers believe they can address
this recommendation by requiring additional steps to validate the gross payment amount based on
the terms of the loan. Management plans to complete final action on this recommendation by
January 31, 2021. This recommendation can be closed when management provides evidence that
they implemented additional procedures verifying the accuracy and reasonableness of loan status
and gross payment amount before approving subsidy payments.
Recommendation 2
Resolved. SBA management concurred with this recommendation and stated that SBA is in the
process of implementing post-payment audit procedures. SBA has contracted with an auditing
firm to conduct a risk-based audit of all subsidy payments made to lenders. SBA will focus audit
resources on loans that changed from liquidation status to regular servicing status just before or
during the period covered by Section 1112. Management plans to complete final action on this
recommendation by January 31, 2021. This recommendation can be closed when management
provides evidence that they implemented post-payment audit procedures.

 11
Appendix I: Objective, Scope, and Methodology
This report represents the results of our evaluation of CARES Act debt relief to 7(a) borrowers. Our
objective was to determine whether SBA has effective internal controls to provide debt relief to
7(a) borrowers in accordance with CARES Act Section 1112 and internal policies and procedures.
The scope of this evaluation included all active 7(a) loans reported between February and July 2020
that received SBA subsidies from April 30, 2020, through June 30, 2020.
To meet our objective, we reviewed the CARES Act, the Small Business Act, SBA procedural notices,
and SBA policies and procedures involving 7(a) loan servicing and status reporting. We interviewed
SBA officials and personnel in the Office of Capital Access and Office of Chief Financial Officer
involved in the CARES Act subsidy implementation and payment process. We also interviewed
National Association of Government Guaranteed Lenders officials and selected lenders to determine
if there were any widespread issues related to the Section 1112 subsidy payments.
In addition, we used data for all active 7(a) loans between February 1, 2020, and June 30, 2020, to
determine whether all subsidized loans were reported to be in regular status when paid. We
reviewed the loan status history for loans that received SBA subsidy payments. When considering
the previous past due or liquidation status of borrowers who received subsidies, we purposely did
not include status changes reported after February 2020 because of possible impact by COVID-19.
Finally, we met with the fiscal transfer agent official to determine the controls implemented, the
loan validation process, and any issues involved with implementation of the Section 1112 subsidy
payments. We also reviewed the methodology used by the fiscal transfer agent to determine the
number of eligible 7(a) loans that had not received the subsidy payment. We determined the
methodology reasonable based on the incentives of the lenders to receive payment and the controls
reiterated by SBA in their July 28 procedural notice. However, we were unable to independently
verify whether all eligible loans from responsive lenders were sufficiently subsidized because of
insufficient reported information.
Use of Computer-Processed Data
We relied on information from SBA’s loan accounting system to determine loan status and payment
history. Previous OIG work has verified that the information maintained in this system is
reasonably reliable. We used system extracts taken monthly for historical record purposes; the 7(a)
origination loan data remained consistent. As a result, we believe the information is reliable for the
purposes of this evaluation.
We also relied on payment information collected by the fiscal transfer agent. We compared this
payment information with accounting data reported by SBA and payment reports sent to SBA
monthly. The payment information was determined to be reasonably reliable for the purposes of
this evaluation.
We conducted this evaluation in accordance with the Council of the Inspectors General on Integrity
and Efficiency’s quality standards for inspection and evaluation. Those standards require that we
adequately plan and perform the evaluation to obtain sufficient and appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our objective. We believe that
the evidence we obtained provides a reasonable basis for our conclusions based on our objective.

 12
Appendix II: Management Comments
SBA RESPONSE TO EVALUATION REPORT

 U.S. SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C. 20416
TO:
Hannibal M. Ware, Inspector General
Office of Inspector General
THRU:
William M. Manger
Chief of Staff and Associate Administrator, Office of Capital Access
Tami Perriello
Chief Financial Officer, Office of Chief Financial Officer
FROM:
John A. Miller
Deputy Associate Administrator, Office of Capital Access
SUBJECT:
Response to Draft Report entitled “Evaluation of CARES Act Debt Relief to 7(a)
Borrowers”
DATE:
November 16, 2020
Thank you for providing the Office of Capital Access (OCA) the opportunity to respond to
OIG’s Draft Report entitled, “Evaluation of CARES Act Debt Relief to 7(a) Borrowers” (Project
Number 20016), dated October 16, 2019.  OIG’s audit objective for this report was to determine
whether SBA has effective internal controls to provide debt relief to 7(a) borrowers in
accordance with CARES Act Section 1112 and internal policies and procedures.
The Office of Capital Access (OCA) and the Office of Chief Financial Officer (OCFO) have the
following comments with respect to the recommendations:
Recommendation 1 – SBA Partially Agrees
Incorporate procedures to verify the accuracy and reasonableness of the loan status,
principal, interest, and any fees of loans before approving subsidy payments.
Although SBA agrees that additional procedures can be incorporated to verify the accuracy and
reasonableness of the loan status and payment amount before approving subsidy payments, SBA
does not agree that it is necessary to verify the accuracy of the amounts of principal, interest and
any fees, prior to approving subsidy payments for three reasons. First, this recommendation is
based on the IG finding that, of the 638,679 subsidy payments SBA made during the first 3
months of 7(a) debt relief, 1,635 payments varied by thousands of dollars and were at least five
times larger than other payment requests submitted for the same 7(a) loan. This finding
represents only .25% of all payments during this period, and SBA does not believe that the
additional administrative burden imposed by requiring Lenders to breakdown each monthly loan

payment into principal, interest and fee amounts is a cost effective approach to addressing the
finding.  SBA has thousands of 7(a) lending partners that monthly notify SBA of the required
subsidy payment amount and this amount covers both the guaranteed and non-guaranteed
portions of each 7(a) loan in their portfolio.  Requiring the lenders to retool their systems to split
out the exact amount of principal, interest and fees for a given payment, as opposed to the total
payment amount itself, would be unnecessarily burdensome.

Second, SBA would expect that in the early months of the Section 1112 program there would be
variations in the amount of the monthly payments because Lenders could include eligible past
due amounts in their request for payment.  As the program has progressed, SBA would expect
that variations in the payment amounts attributable to these past due amounts would have
decreased and that variations have become even a lower percentage of all payments. SBA would
also expect that there would be some variations in the amounts of the monthly payments because
Lenders were directed in SBA Procedural Notice 5000-20023 to adjust loan payment amounts in
a subsequent month to account for differences in any loan payments that they submitted that
were incorrect. The subsequent month’s section 1112 loan payments would be increased to cover
the amount of underpayments or decreased to credit the amount of the overpayments from a
previous month. Lenders must maintain a written explanation of the circumstances justifying the
correction in their loan files and, if a variation in the amount of the payments raises questions,
SBA may request it at any time.

Third, SBA loan payments are simple interest, that is, interest is collected to the date of receipt of
the payment, with the remaining amount of the payment applied to principal.  The payment due
date varies with each 7(a) loan, but the Lenders must submit the monthly Section 1112 report to
SBA by the 10th day of the month. SBA makes that month’s payment by the 25th day of each
month, but Lenders do not know the exact date that SBA will make the payment. Thus, Lenders
would not be able to provide the exact allocation of the payment that should be attributed to
principal and interest at the time they submit the monthly Section 1112 report.

SBA believes that it can proactively address this recommendation by instead focusing on taking
additional steps to validate the total payment amount requested by a 7(a) lender by comparing it
to the anticipated payment amount as calculated by the terms of the loan.  In addition, SBA’s
Office of Credit Risk Management will be reviewing lenders’ administration of Section 1112
when reviewing lenders during the normal course of business.  To the extent that these reviews
take place prior to payment of Section 1112 payments, this could be considered a review prior to
payment.  In any regard, whether pre- or post-subsidy payment, it is an important control SBA is
implementing.

Recommendation 2 – SBA Agrees

Establish post-payment audit procedures, using a risk-based approach, to verify the
accuracy and completeness of all subsidy payments to lenders and include reviews of
payments made to loans that changed from liquidation status to regular servicing status,
and remedy improper payments in accordance with the Payment Integrity Act of 2019.

SBA agrees with this recommendation and was already in the process of implementing it when
this report was issued.  SBA has contracted with an auditing firm to conduct a risk-based audit of
all subsidy payments made to lenders.  SBA will also focus audit resources on loans that changed
from liquidation status to regular servicing status just prior to or during the Section 1112 covered
period.

File and source

File

21-03-cares-act-debt-relief-7a-borrowers.pdf

Size

639,427 bytes

SHA-256

10a120a2feb1bad90715a8e4dcfeac815c8982822b3e5ba89d9c3179a948f0cb

Our copy

21-03-cares-act-debt-relief-7a-borrowers.pdf

Original

www.sba.gov