Audit Report 

O

SMALL BUSINESS LENDING FUND 

Banks Inaccurately Reported Qualified Small Business Lending 

Gains 

May 25, 2016 

IG-16-045 

Office of 

Inspector General 

Department of the Treasury 

 

 

 

 

 

 

 

Contents 

Audit Report................................................................................................ 1 

Results in Brief ............................................................................................ 1 

 Background............................................................................................... . 2 

 Finding.................................................................................................... .. 4 

 Banks Inaccurately Reported Qualified Small Business Lending Gains....... 4 

 Recommendations ....................................................................................... 6 

Appendices

 Appendix 1: Objective, Scope, and Methodology ........................................ 8 

 Appendix 2 Management Response ......................................................... 10 

Appendix 3: Major Contributors to this Report...... ...................................... 11 

 Appendix 4: Report Distribution ................................................................ 12 

Abbreviations 

Act Small Business Jobs Act of 2010 

Call Reports Quarterly Financial Regulatory Reports 

ISR Initial Supplemental Report 

JAMES Joint Audit Management Enterprise System 

QSBL qualified small business lending 

QSR Quarterly Supplemental Report

 SBLF Small Business Lending Fund 

Treasury Department of the Treasury 

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Audit OIG Report 

The Department of the Treasury 

Office of Inspector General 

May 25, 2016 

Jessica Milano 

Deputy Assistant Secretary for Small Business, Community 

Development, and Housing 

This report presents the results of our audit of Small Business 

Lending Fund (SBLF) participants’ qualified small business lending 

(QSBL) reported for the quarter ended September 2013. The 

objective of this audit was to determine the accuracy of QSBL for 

the quarter ended September 30, 2013, reported by participants 

for the 1st quarter 2014 dividend rate adjustments. These adjusted 

rates were the fixed dividend rates owed by participants in effect 

prior to the automatic rate increases, which are further described in 

the Background section of this report. Appendix 1 provides more 

detail on our audit objective, scope, and methodology. 

In brief, we found that 71 percent of SBLF participants that we 

tested made errors in reporting QSBL for the quarter ended 

September 30, 2013. The net effect of these errors resulted in 

overreporting QSBL by approximately $14 million, but did not alter 

the fixed dividend rates for the participants in our sample. Although 

dividend payments were not affected by the QSBL errors, 

participants’ supplemental reports and the Department of the 

Treasury’s (Treasury) January 2014 Report on SBLF Participants’ 

Small Business Lending Growth (Lending Growth Report)1

 were not 

correct. 

Pursuant to Section 4106(3) of the Small Business Jobs Act (Pub. L. 111-240), the Secretary of the 

Treasury is required to submit to Congress a quarterly written report on how institutions participating 

in the SBLF program have used the funds they received under the program. The January 2014 

Lending Growth Report noted that all 307 institutions that remained in the SBLF program as of 

September 30, 2013, had increased small business lending by $11.2 billion, over a baseline of $35.1 

billion. 

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1 
We also noted that Treasury’s review of bank participants’ 

quarterly supplemental reports (QSRs), which provided the basis for 

the January 2014 Growth Lending Report, was not sufficiently 

designed to identify unqualified loans or ensure that QSBL was 

accurately reported. As such, we are recommending that Treasury 

management (1) ensure that QSBL errors identified in this report 

are disclosed in Treasury’s July 2016 Lending Growth Report; and 

(2) strengthen future reviews of SBLF bank participants’ QSRs to 

better identify unqualified loans and improve reporting of QSBL in 

the Lending Growth Reports. 

In a written response, management accepted our 

recommendations. The commitments made by Treasury as stated 

in the response meet the intent of our recommendations. With 

respect to the QSBL errors identified in this report, Treasury will 

disclose the errors in the July 2016 Lending Growth Report. 

Regarding future reviews of SBLF bank participants’ QSRs, 

Treasury will work with SBLF participants to improve the reporting 

of QSBL. However, the response lacked specificity of the planned 

corrective actions to be taken and timeframes for completing the 

actions. As such, management will need to identify specific actions 

and timeframes for completion in the Joint Audit Management 

Enterprise System (JAMES), Treasury’s audit recommendation 

tracking system. Management’s response is included as appendix 2 

of this report. 

Background 

The SBLF program was created by the Small Business Jobs Act of 

2010 (Act) to increase the availability of credit to small businesses. 

Section 4103(a) of the Act gave the Secretary of Treasury 

authority to make capital investments in eligible financial 

institutions in exchange for preferred shares of stock or other 

financial instruments through September 27, 2011. In return, 

institutions that received capital investments under the program are 

required to pay dividends or interest to Treasury. SBLF participants 

are banks or Community Development Loan Funds. 

For SBLF bank participants, the more an institution increased its 

small business lending over its baseline level, the lower the 

dividend rate it must pay to Treasury. As established in the Act, 

the baseline level for measuring changes in small business lending 

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is the average of the amounts reported for each of the 4 calendar 

quarters ended June 30, 2010. For the first 2.5 years into the 

program, dividend rates ranged between 1 percent and 5 percent 

for participants that are C corporations and 1.5 percent and 

7.7 percent for S corporations and Mutual Institutions.2

 After 

2.5 years, dividend rates for most SBLF banking institutions 

became fixed based on small business lending increases as of 

September 30, 2013.3

 After 4.5 years in the SBLF program, which 

for most bank participants was after the 1st quarter of 2016, 

dividend rates increase to 9 percent for C corporations and 

13.8 percent for S corporations and Mutual Institutions. 

To establish the baseline level and initial dividend rates, institutions 

submitted initial supplemental reports (ISR) to Treasury using small 

business lending data from their Quarterly Financial Regulatory 

Reports (Call Reports)4

 and loan records. To report subsequent 

QSBL, institutions submit QSRs to Treasury. An institution’s QSBL 

is determined by adding the loan balances reported in its Call 

Report in the categories of: (1) commercial and industrial loans; 

(2) loans secured by owner-occupied non-farm, non-residential 

properties; (3) loans to finance agricultural production and other 

loans to farmers; and (4) loans secured by farmland. This total is 

then adjusted to exclude loans with an original principal and 

commitment amount greater than $10 million, loans to businesses 

with more than $50 million in revenues, and the portions of loans 

guaranteed by the U.S. government or for which the risk is 

assumed by a third party. The QSBL total is further adjusted by 

adding net charge-offs back to the qualified lending volume. For 

participants that are holding companies, QSBL was determined by 

combining all of the qualified lending activity of the holding 

company’s insured depository institution subsidiaries. Each quarter, 

2	 C corporations are legal entities operating under state law whose profits are taxed to the corporation 

when earned, and taxed to the shareholders when distributed as dividends. S corporations are 

entities, as allowed by the Internal Revenue Code, which pass income, losses, deductions, and 

credits to their shareholders for Federal tax purposes. In so doing, the corporation avoids double 

taxation on corporate income. Mutual Institutions have no stockholders, and thus, are owned by 

depositors or policyholders and are generally thrifts and savings and loan associations 3	 The rates for four SBLF institutions became fixed based on small business lending increases as of 

June 30, 2013. 4	 These reports vary by type of institution and include Consolidated Reports of Condition and Income, 

Thrift Financial Reports, Y-9s, Uniform Bank Performance Reports, and Bank Holding Company 

Performance Reports. 

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SBLF institutions adjust their qualified lending baseline as 

appropriate to reflect any qualified loans acquired through 

acquisitions or mergers with other institutions. 

Finding Banks Inaccurately Reported Qualified Small 

Business Lending Gains 

We found that 71 percent of SBLF bank participants in our sample 

made errors in reporting their QSBL for the quarter ended 

September 30, 2013. Specifically, 10 of the 14 banks we tested 

made errors in baseline lending levels and/or lending reported for 

the 3rd quarter 2013. The net effect of these errors resulted in 

overreporting QSBL by approximately $14 million, but did not alter 

the fixed dividend rates for those participants in our sample. 

Nonetheless, participants’ supplemental reports and Treasury’s 

January 2014 Lending Growth Report, submitted to Congress, 

were not accurate based on the errors identified. The table below 

provides results of our testing. 

Table: QSBL Errors, QSBL Gains, Fixed Dividend Rates (in thousands) 

Bank 

Errors 

decreasing 

QSBL 

Errors 

increasing 

QSBL 

Net value 

of errors 

Banks’ 

Reported 

QSBL 

Percentage 

Gain 

Recalculated 

QSBL 

Percentage 

Gain Based 

on Net 

Errors 

Fixed 

dividend 

rate 

1 $0 $1,844 $1,844 12.18% 15.27% 1.0% 

2 $0 $4,223 $4,223 12.82% 13.11% 1.0% 

3 $(3,008) $0 $(3,008) 14.30% 12.80% 1.0% 

4 $0 $500 $500 12.67% 12.97% 1.5% 

5 $(1,457) $0 $(1,457) 11.77% 10.93% 1.0% 

6 $0 $0 $0 11.84% 11.84% 1.0% 

7 $0 $1,592 $1,592 10.79% 11.43% 1.0% 

8 $(27,242) $0 $(27,478) 14.24% 10.61% 1.0% 

9 $0 $0 $0 13.68% 13.68% 1.0% 

10 $0 $0 $0 13.10% 13.10% 1.0% 

11 $0 $9,742 $9,742 12.37% 17.44% 1.0% 

12* $(134) $0 $(134) 11.44% 10.96% 1.5% 

13* $(701) $211 $(490) 13.23% 12.96% 1.5% 

14* $0 $0 $0 11.09% 11.09% 1.9% 

Total $(32,542) $18,112 $(14,430) 

*Annotates that bank is an S Corporation 

(Source: OIG analysis of SBLF participants’ data) 

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Errors Decreasing/Increasing QSBL 

The total value of errors that decreased QSBL was approximately 

$32.5 million, which resulted from banks overstating qualified 

lending at September 30, 2013. Overstatement of qualified lending 

included (1) $27.6 million of loans with original principal and 

commitment amounts greater than $10 million; (2) $4.5 million of 

loans with an unqualified business purpose; and (3) $0.4 million of 

loans which were guaranteed by the U.S. government or for which 

the risk is assumed by a third party. 

Errors that increased banks’ QSBL totaled approximately 

$18.1 million and were the result of overstating baseline levels. 

Overstatements included loans for an unqualified business purpose 

and for owner-occupied real estate. 

Recalculated Percentage Gains and Dividend Rates 

We recalculated the percentage gain in QSBL based on the net 

value of errors for the 10 banks that made errors. Five of these 

banks had a net positive value of errors that resulted in a higher 

percentage gain in QSBL than originally reported (banks 1, 2, 4, 7, 

and 11). The remaining five banks had a net negative value of 

errors that resulted in a lower percentage gain in QSBL (banks 3, 5, 

8, 12, and 13). Because the recalculated percentage gains 

remained in the same percentage range associated with each 

institution’s reported dividend rate, these rates did not change for 

the 10 banks. 

Lending Growth Reports 

As of March 31, 2016, 45 banks remained in the SBLF program. 

Participants that remain in the SBLF program must continue to 

submit QSRs to Treasury, which form the basis in preparing the 

Lending Growth Reports submitted to Congress. To verify the 

accuracy of information submitted, Treasury reviews the QSRs 

each quarter for consistency with the Call Reports. As described in 

the background section of this report, banks complete QSRs using 

the same loan balances reported on their Call Reports in four 

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categories of lending. From those balances, institutions must 

deduct certain loans that do not qualify as QSBL and report them 

separately on their QSRs. Because these unqualified loans are not 

broken out separately on the Call Reports, Treasury’s current 

review process does not identify all instances of errors made in the 

reported deductions. As noted for 71 percent of banks in our 

sample, Treasury could not ensure that the aggregate QSBL was 

accurately reported by banks when preparing its Lending Growth 

Report to Congress. 

Thirteen (13) of the 14 banks in our sample, which include all 

those that made errors, have since redeemed their securities and 

exited the SBLF program as of March 31, 2016. Accordingly, the 

security purchase agreements expired and these banks are no 

longer obligated to report to Treasury. Nonetheless, Treasury must 

continue reporting to Congress on the lending activities of those 

banks remaining in the SBLF program. While it is expected that the 

remaining participants will exit the program in the near future, we 

believe it is prudent for management to strengthen its review 

process to improve its ongoing reporting as well as future reporting 

should the SBLF program or similar program be authorized at a later 

date. 

Recommendations 

We recommend that the Deputy Assistant Secretary for Small 

Business, Community Development, and Housing do the 

following: 

1. Ensure that QSBL errors identified in this report are disclosed 

in Treasury’s July 2016 Lending Growth Report. 

Management Response 

Treasury will disclose QSBL errors identified in this report in 

the July 2016 Lending Growth Report. 

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OIG Comment 

Management’s commitment meets the intent of our 

recommendation. 

2. Strengthen future reviews of SBLF bank participants’ QSRs 

to better identify unqualified loans and improve reporting of 

QSBL in the Lending Growth Reports. 

Management Response 

Treasury will work with SBLF participants to improve the 

reporting of QSBL going forward. 

OIG Comment 

We acknowledge management’s agreement with this 

recommendation, although the response lacks specificity as 

to the planned corrective actions to be taken and the 

timeframe for implementing them. Management will need to 

identify actions to be taken and establish timeframes for 

completion in JAMES. 

* * * * * 

We would like to extend our appreciation for the cooperation and 

courtesies extended to our staff during the audit. Major 

contributors to this report are listed in appendix 3. A distribution 

list for this report is provided as appendix 4. If you have any 

questions, please contact me at (202) 927-1011 or William Malloy, 

Auditor-in-Charge, at (202) 927-8114. 

/s/ 

Theresa A. Cameron 

Director, Office of Small Business Lending Fund Program Oversight 

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Appendix 1 

Objective, Scope, and Methodology 

Pursuant to Section 4107 of the Small Business Jobs Act, we 

initiated an audit of qualified small business lending (QSBL) for the 

quarter ended September 30, 2013. The objective of this audit was 

to determine the accuracy of QSBL for the quarter reported by 

participants for the 1st quarter 2014 dividend rate adjustments. 

These adjusted rates became the fixed dividend rates paid by 

participants until the automatic rate increases take effect after 

4.5 years in the Small Business Lending Fund (SBLF) program. 

To accomplish our objective, we conducted fieldwork between May 

2014 and October 2015, which comprised the following steps. 

	 We selected a sample of 14 SBLF bank participants using a 

risk-based approach that focused on reported percentage 

increases in QSBL closest to or above 10 percent. These 

institutions represented the greatest risk of dividend 

underpayments if significant errors were made in reported 

QSBL. As such, the results of our testing were not projected 

to the universe of all banks in the SBLF program at the time 

of our review. 

	 We further sampled and tested 1,028 loans from 

institutions’ initial supplemental reports (ISR) and September 

2013 quarterly supplemental reports (QSR) based on the 

largest dollar value of the loans in the populations. 

	 We obtained Call Reports, ISRs, QSRs, loan files, and other 

reports from the sampled institutions and performed a series 

of tests to determine the accuracy of reported QSBL. Three 

institutions did not provide all necessary records to perform 

all of the tests; however, we were still able to compare Call 

Report totals to ISRs and QSRs for those institutions. 

	 We reviewed applicable laws, regulations, and other relevant 

documents as follows: 

 Small Business Jobs Act of 2010 (Public Law 111-

240; September 27, 2010); 

 Treasury Directive 13-22, “Delegation of Authority for 

Small Business Lending Fund and State Small Business 

Credit Initiative Established by the Small Business 

Jobs Act of 2010” (May 16, 2011); 

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Appendix 1 

Objective, Scope, and Methodology 

 “Instructions for the Initial Supplemental Report for 

Bank Holding Companies Participating in the Small 

Business Lending Fund”; 

 “Instructions for the Quarterly Supplemental Report 

for Bank Holding Companies and Savings and Loan 

Holding Companies Participating in the Small Business 

Lending Fund”; and 

 “Community Bank Supervision,” (Comptroller’s 

Handbook, January 2010). 

	 We corresponded with key officials at the sampled 

institutions to obtain information and documentation. 

We conducted this performance audit in accordance with generally 

accepted government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

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Appendix 2 

Management Response 

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Appendix 3 

Major Contributors to this Report 

Regina Morrison, Audit Manager 

William Malloy, Auditor-in-Charge 

Anita Smith, Auditor 

Kevin Guishard, Referencer 

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Appendix 4 

Report Distribution 

Department of the Treasury 

Deputy Secretary 

Deputy Assistant Secretary for Small Business, Community

 Development, and Housing 

Office of Strategic Planning and Performance Management 

Office of the Deputy Chief Financial Officer, Risk and Control 

Group 

Office of Management and Budget 

OIG Budget Examiner 

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