Small Business Administration OIG 22-18 (SBA’s Actions to Improve the Management of the 7(a) Loan Guaranty Approval Process)

Summary

SBA OIG Report 22-18, dated September 20, 2022, is a verification inspection of whether SBA carried out recommendation 1 of audit report 14-13 on the 7(a) loan guaranty approval process. The June 2014 audit found that Loan Guaranty Processing Center management emphasized quantity over quality for 7(a) loan reviews, and OIG made five recommendations. In FY 2021 the center's loan specialists approved approximately 4,100 7(a) loans exceeding $4 billion. The inspection found that SBA effectively implemented recommendation 1: enhanced production reports, last updated in 2018, now measure the quality and complexity of loan reviews, such as the loan dollar amount and number of principals and affiliates. The scope ran from June 2014 to March 31, 2022.

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“Small Business Administration OIG 22-18 (SBA’s Actions to Improve the Management of the 7(a) Loan Guaranty Approval Process).” Original at www.oversight.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/small-business-administration-oig-22-18-sba-s-actions-to-improve-the-m-7ab7b822c8/, SHA-256 7b01206127807190df4eb0ca8b396042b88949e3d67e4ba7127ec2c167a54ada.

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SBA INSPECTOR GENERAL INSPECTION REPORT

SBA’S ACTIONS TO IMPROVE THE MANAGEMENT OF
THE 7(A) LOAN GUARANTY APPROVAL PROCESS
Report Number 22-18 | September 20, 2022
Office of Inspector General
U.S. Small Business Administration

DATE: September 20, 2022
TO: Isabella Casillas Guzman
Administrator
FROM: Hannibal “Mike” Ware
Inspector General
SUBJECT: Verification Inspection of SBA’s Actions to Improve the Management of the
7(a) Loan Guaranty Approval Process
This report represents the results of our verification inspection SBA’s Actions to Improve
the Management of the 7(a) Loan Guaranty Approval Process. A verification inspection is a
short review that focuses on closed recommendations from prior OIG reports.
We appreciate the courtesies and cooperation extended to us during this verification
inspection. If you have any questions, please contact me or Andrea Deadwyler, Assistant
Inspector General for Audits, at (202) 205-6586.
cc: Patrick Kelley, Associate Administrator, Office of Capital Access
Arthur Plews, Chief of Staff
Therese Meers, Acting General Counsel, Office of General Counsel
John Miller, Deputy Associate Administrator, Office of Capital Access
Peter Meyers, Senior Advisor, Office of Capital Access
Michael A. Simmons, Attorney Advisor, Office of General Counsel
Katherine Aaby, Associate Administrator, Office of Performance Planning and Chief
Financial Officer, Office of Chief Financial Officer
Erica Gaddy, Deputy Chief Financial Officer, Office of Chief Financial Officer
Tonia Butler, Director, Internal Control, Office of Chief Financial Officer
Background
The U.S. Small Business Administration (SBA) is authorized under Section 7(a) of the Small
Business Act to provide financial assistance to small businesses in the form of government-
guaranteed loans. These loans are made by participating lenders under an agreement with
SBA to originate, service, and liquidate loans in accordance with SBA's rules, regulations,
policies, and procedures. Some 7(a) loans are made by lenders using delegated authority,
which undergo very limited review by SBA prior to loan disbursement. Others are subject
to more extensive underwriting and eligibility review and approval by SBA before the loan
is disbursed.
In December 2006, SBA established the Loan Guaranty Processing Center to centralize and
promote consistency in SBA loan program operations. The processing center is responsible
for approving or declining 7(a) loan guaranty applications submitted to SBA for review.
The processing center loan specialists determine borrower eligibility and credit risk, in
accordance with SBA’s requirements, based on information submitted by the lenders. If an
SBA-approved loan is ineligible or defaults because of poor underwriting decisions, SBA
may not have recourse against the lender to deny its guaranty as it does for loans approved
by lenders using delegated authority. In FY 2021, the processing center loan specialists
approved approximately 4,100 7(a) loans exceeding $4 billion.
In June 2014, the Office of Inspector General (OIG) conducted an audit of SBA’s 7(a) loan
guaranty approval process, performance audit report 14-13. The review determined
significant opportunities existed to improve the management of the 7(a) loan guaranty
approval process to mitigate its risk of loss and protect the integrity of the program.
Specifically, the audit found that processing center management emphasized quantity over
quality for 7(a) loan reviews, and processing center loan specialists were not provided
adequate guidance and training to conduct their 7(a) loan review activities.
OIG further identified that a decrease in the number of staff assigned to loan reviews,
increase in loan size and complexity, additional processing center responsibilities, and
inadequate supervision contributed to inappropriate loan decisions. OIG made and SBA
management agreed to five recommendations to ensure program compliance and reduce
the risk of loss.
This inspection focuses on recommendation 1, which recommended that SBA revise
management reports to measure quality against established targets, ensure production
credit is given for all loan review actions, and promote compliance with SBA requirements.
Our objective was to determine the effectiveness of corrective actions SBA implemented to
improve the 7(a) loan guaranty approval process.

Summary of Results
SBA effectively implemented recommendation 1 by revising its management reports to
include key factors for measuring the quality and complexity of loan reviews to promote
compliance with SBA requirements.

1
Report 14-13: Significant Opportunities Exist to Improve the
Management of the 7(a) Loan Guaranty Approval Process
The following table details the original finding, recommendation, and SBA’s corrective
action for recommendation 1.
OIG Finding OIG Recommendation SBA Corrective Action(s)
Processing center We recommended the We closed this
management emphasized Director of the Office of recommendation on
quantity over quality for Financial Program February 2, 2015 because
7(a) loan reviews. Operations revise the processing center
Management production management reports to implemented enhanced
reports provided a measure quality against production reports which
reasonable assessment of established targets, ensure included the establishment
the productivity and production credit is given of quality and complexity
timeliness of the for all loan review actions, measures to ensure loan
processing center but did and promote compliance review actions promote
not measure or with SBA requirements. compliance with SBA
communicate the quality requirements.
of loan reviews conducted
by loan specialists.
Additionally, the reports
did not consider the
complexity of loan
reviews or provide credit
for all loan review actions.

Inspection Result
We determined that the enhanced production reports used by the processing center
management to track loan approval actions effectively met the intent of recommendation 1.
The reports include factors to measure the quality and complexity of loan reviews. The
reports also provide staff a balanced rating system that focuses on both the quality and
quantity of actions completed. Specifically, the reports measure the quality of loan reviews
by factoring whether supervisory review of a loan found any deficiencies requiring
correction. The reports also include elements to measure the complexity of loan reviews,
such as the loan dollar amount and number of principals and affiliates.
The reports last updated in 2018 appear to provide management with an effective
oversight tool to improve the 7(a) loan guaranty approval process. Specifically, the updated
quality and complexity factors in reports mean results are not as production driven. Staff
are credited for the quality of reviews performed and the extra review time complex loans
can require. Processing center management believes this has resulted in a better loan
portfolio for SBA and a fairer system for management to evaluate the performance of staff.
The process for revising quality and complexity measures was thorough and included input
from staff. We consider this corrective action implemented.

2
Scope and Methodology
To answer our objective, we selected recommendation 1 because it is the primary
recommendation related to the key finding of audit report 14-13. SBA’s corrective actions
provided auditors with evidence to verify implementation for the entire scope period. Our
inspection scope covered the period from the issuance of report 14-13 (June 2014) to
March 31, 2022. Our work included reviewing management reports used to track loan
approval actions, reviewing how reports are generated in SBA’s web-based 7(a) Loan
Guaranty Processing System, and interviewing processing center management.
We conducted this inspection in accordance with the Council of the Inspectors General on
Integrity and Efficiency Quality Standards for Inspection and Evaluation. These standards
require that we adequately plan and perform the inspection 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 findings and conclusions based on our inspection objective.

Use of Computer-Processed Data
We relied on information from processing center activity reports generated by SBA’s web-
based 7(a) Loan Guaranty Processing System to verify quality and complexity measures
were included in management reports and considered key factors. The web-based
processing system was determined to be reliable during the prior OIG audit. To assess the
reliability of the activity reports, we observed the creation and functionality of the
generated reports and analyzed the underlying formulas used in the reports. As a result, we
believe the information is reliable for purposes of this inspection.

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Our copy: SBA-OIG-Report-22-18.pdf
Original: www.oversight.gov