1

0

 

ADVISORY MEMORANDUM

REPORT NO. 12-14

DATE: July 9, 2012

TO: John A. Miller

Director, Office of Financial Program Operations

SUBJECT: The Small Business Administration Did Not Maximize Recovery 

for $171.1 Million in Delinquent Disaster Loans in Liquidation 

This advisory memorandum is to inform you of issues identified while assessing the Liquidation of 

Disaster Loans at the National Disaster Loan Resolution Center (NDLRC). Specifically, this memorandum 

addresses SBA non-compliance with the Debt Collection Improvement Act of 1996 (DCIA). 

Our overall audit objective was to assess the NDLRC’s effectiveness in managing disaster loans in 

liquidation to maximize debt recovery and minimize losses. One specific audit objective was to assess 

whether the NDLRC complied with the DCIA for disaster loans in liquidation status. This memorandum 

contains our findings relative to loans in liquidation status as of December 31, 2011. The provisions of 

the DCIA and other laws and regulations are included in guidance provided by the Department of the 

Treasury Managing Federal Receivables Guide, which states, “an agency must refer any eligible debt 

more than 180 days delinquent to Treasury Financial Management Service for cross servicing.” We are 

bringing this issue to your attention so that management can take immediate action to fully comply with 

the DCIA.

We conducted this 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. The audit fieldwork necessary to test our other audit objectives is still in progress;

however, we conducted the audit work pertinent to the results presented here from October 2011 to 

April 2012.

Background

With the passage of the Debt Collection Improvement Act of 1996 (DCIA), Congress provided Federal 

agencies with new and enhanced delinquent debt collection tools. The DCIA centralized delinquent debt 

collection at the Department of the Treasury (Treasury), requiring Treasury to pursue delinquent debts 

that are not actively being collected by Federal creditor agencies, a program known as “cross servicing.” 

The DCIA also established a centralized offset process at Treasury, known as the “Treasury Offset 

Program, or TOP.” The TOP offsets government payments due to borrowers, such as income tax refunds 

and social security payments, and redirects them to Federal creditor agencies to which the borrower 

owes a delinquent debt.

U.S. SMALL BUSINESS ADMINISTRATION

OFFICE OF INSPECTOR GENERAL
2

The DCIA requires that related debt collection activities be consolidated within the government, to the 

extent possible, to minimize the government’s delinquent debt collection costs. To achieve this 

objective, the DCIA states that agencies must refer debts delinquent more than 180 days to Treasury 

Financial Management System (FMS) for cross servicing and offset. The DCIA does provide some

exceptions to this requirement. For example, the DCIA does not require agencies to transfer debts in 

litigation or foreclosure to Treasury, even if these debts are over 180 days delinquent. 

When Federal agencies refer delinquent debts to Treasury for cross servicing, the agencies relinquish all 

responsibility for servicing or collecting the debts, and Treasury fully assumes this responsibility. In 

order to effect referral of delinquent debts to Treasury for cross servicing, the SBA first charges off these 

debts. According to the Managing Federal Receivables Guide, it is an agency’s responsibility to liquidate 

any collateral, when appropriate, prior to referral of the debt to FMS for cross servicing. 

The SBA’s Birmingham and El Paso disaster loan servicing centers are responsible for charging off 

delinquent, secured disaster loans with balances of $25,000 or less and loans not secured by collateral. 

In April 2006, the Associate Deputy Administrator of Capital Access designated the Santa Ana Disaster 

Home Loan Servicing and Disaster Liquidation Office as the National Disaster Loan Resolution Center 

(NDLRC). The NDLRC is responsible for charging off all delinquent disaster loans with collateral and 

loans with balances over $25,000. In addition, the NDLRC manages all delinquent debts in litigation. 

The NDLRC can utilize a variety of debt collection strategies. When the NDLRC first receives a delinquent 

loan, the staff begins the process of evaluating any existing loan collateral to determine if the SBA can 

recover any portion of the delinquent debt through liquidation. Simultaneously, NDLRC staff make a 

final attempt to contact the borrowers and request they resume making regular payments. If a 

borrower is experiencing a hardship, the NDLRC can offer to work out special payment arrangements. 

However, if the borrower does not resume regular payments, the NDLRC has the ability to garnish wages 

or liquidate. Any delinquent debt collection strategies the agency adopts must take into account that all 

debts over 180 days delinquent must be referred to FMS for cross servicing and offset, unless the debt is 

specifically exempt.

On average, the NDLRC receives approximately 350 new delinquent disaster loans monthly, or 4,200 

loans per year. As of December 31, 2011, the NDLRC had 3,958 delinquent disaster loans with principal 

balances totaling approximately $420.3 million in inventory. During the five-year period beginning in 

June 2006 when SBA created the NDLRC, through June 2011, the NDLRC charged off 9,035 loans with 

principal balances totaling approximately $762.7 million. 

Results 

The SBA was not fully complying with the Debt Collection Improvement Act (DCIA) of 1996. Our analysis 

found that approximately 1,553 of 3,958 disaster loans (39 percent) in liquidation status as of December 

31, 2011, were delinquent over 180 days and not in active litigation status, foreclosure status, workout,

or otherwise exempt from transfer to Treasury FMS for cross servicing. The Santa Ana National Disaster 

Loan Resolution Center (NDLRC) should have charged off the debts after 180 days to transfer them to 

Treasury for cross servicing. As of December 31, 2011, the SBA had not referred disaster loan balances 

totaling approximately $171.1 million to Treasury for cross servicing when the loans were over 180 days 

delinquent. 
3

The DCIA states that agencies must refer debts delinquent more than 180 days to Treasury for cross 

servicing and offset, however, it does provide some exceptions to this requirement. The DCIA does not 

require that agencies transfer debts to Treasury within 180 days that are in litigation, foreclosure, or 

otherwise exempt by law or official action from Treasury. On January 3, 2000, Treasury provided the 

SBA with an exemption from mandatory transfer of disaster and regular business loans that are in active 

workout. On August 18, 2005, Treasury provided all creditor agencies with an exemption that applies to 

debts the agency collects through administrative wage garnishment (AWG). This exemption excludes 

debts from mandatory transfer if: (1) the Agency has received actual collections from AWG prior to the 

debt becoming eligible for mandatory cross servicing; and, (2) the Agency expects the debt to be 

collected through AWG within three years from the date of the first AWG collection.

The NDLRC did not charge off 736 of the 1,553 delinquent loans (47 percent) because the loans had 

collateral designated for potential foreclosure. However, the NDLRC had not yet initiated foreclosure. 

The NDLRC set these loans aside because the loans had collateral with value and the NDLRC could 

liquidate this collateral in the future, if desired. These loans ranged from 183 to 4,827 days delinquent 

and had principal balances totaling approximately $80.2 million. If the associated collateral had been in 

foreclosure through a court proceeding or non-judicially, the loans would have been exempt from

referral to Treasury for cross servicing. 

The Agency did not transfer these debts to Treasury for cross servicing as required by the DCIA because 

management interpreted a portion of the January 3, 2000 Treasury letter exempting loans in workout 

status to imply that if the loan had collateral, the debt was exempt from transfer to Treasury. However, 

we contacted Treasury to determine whether all loans with collateral were exempt from mandatory 

transfer for cross servicing. Treasury confirmed that the SBA was required to transfer all debts 

delinquent over 180 days for cross servicing, unless the loans met one of the criteria for exemption. 

According to Treasury, the exemption criteria did not include the existence of collateral. While there is 

no statute of limitations applicable to a foreclosure action by the government, the SBA could not obtain 

a judgment to collect any deficiency remaining on the delinquent loan, post-foreclosure, if the six-year 

statute of limitations for suit on the loan has passed.

The table below contains an aging schedule for the loans designated for foreclosure in the current

inventory on December 31, 2011: 

Table 1: Schedule for Loans Designated 4Close 

AGING SCHEDULE FOR LOANS DESIGNATED “4CLOSE”

Year Loan

Entered Liquidation

Number of Loans

Designated “4CLOSE”

Total Principal 

Balance

<2006 58 $7,530,210

 2006 14 1,875,228

 2007 30 3,041,676

 2008 155 15,003,592

 2009 154 13,954,504

 2010 210 26,553,767

 2011 115 12,228,437

Total 736 $80,187,413
4

In February 2011, in order to address the backlog of loans designated “4CLOSE,” 1the NDLRC director 

formed a team to evaluate the loan collateral and determine whether it had recoverable value. 

Beginning with the oldest loans, the Team screened the collateral to determine whether there was 

recoverable equity, and then issued a foreclosure letter to the borrower if the collateral had sufficient 

recoverable value. In January 2012, the NDLRC staff informed us that they had initiated foreclosure for 

approximately 20 of the loans; however, the staff was unable to provide documentation to support the 

filing of the foreclosures. In February 2012, the foreclosure team implemented a process to monitor 

and track the foreclosures initiated. These efforts have resulted in a number of borrowers making an 

initial “good faith” payment and committing to resume making regular payments to avoid foreclosure. 

According to the NDLRC director, the NDLRC foreclosure Team Lead will monitor the loans for six 

months to ensure that the borrowers continue to make regular payments. 

The NDLRC management believed that 216 of the 1,553 loans with principal balances totaling 

approximately $14.3 million were exempt from transfer for cross servicing because these loans were 

designated “AWG,” meaning that the NDLRC was garnishing the borrower’s wages. However, according 

to Treasury, the use of this collection strategy does not exempt the delinquent debt from transfer unless 

actual collections from AWG have been received prior to the debt becoming eligible for mandatory cross 

servicing and the Agency expects the debt to be collected through AWG within three years from the 

date of the first AWG collection. 

We analyzed the 216 loans in wage garnishment status in the NDLRC inventory as of December 31, 2011 

to determine if they met the Treasury criteria and, therefore, were exempt from transfer for cross 

servicing. We determined that 214 of the 216 loans were not exempt and should have been transferred 

to Treasury for cross servicing. The SBA was not receiving wage garnishments from the borrower’s for 

four loans designated “AWG,” therefore; these loans were not exempt from transfer to Treasury for 

cross servicing. Additionally, we determined that the SBA could not recover 210 loan balances via wage 

garnishment within three years based upon the amounts garnished from the borrower’s wages. 

Therefore, these loans also were not exempt from transfer to Treasury for cross servicing. One loan 

with a principal balance of $21,551 met the Treasury criteria and was exempt from transfer. One 

additional loan was exempt because the loan balance was paid in full in October 2011, although the loan 

was assigned to “AWG” and remained in inventory at the NDLRC on December 31, 2011.

The NDLRC did not transfer the remaining 601 (of the 1,553) loans delinquent over 180 days to Treasury 

as required because management believed that it complied with the DCIA by referring the debts to 

Treasury for offset. Referral for offset is not the same as referral for cross servicing. In addition, 

management believed they would comply with the DCIA by resolving or charging off debts delinquent 

over 270 days by the end of each fiscal year. Standard Operating Procedure (SOP) 50 51 2 provides 

guidance on SBA’s liquidation process, however, it does not address the DCIA requirements. 

Conclusion

As of December 31, 2011, the SBA had not referred disaster loan balances totaling approximately $171.1

million to Treasury for cross servicing when the loans were over 180 days delinquent, in accordance with 

the DCIA. As a result, the SBA did not maximize recovery on these delinquent disaster debts in 

liquidation status. 

 

1

“4CLOSE” is the designation the NDLRC gives to loans with potential recoverable real estate collateral value.
5

Recommendations

We recommend that the Director of the Office of Financial Program Operations direct the Santa Ana 

NDLRC to:

1. Take the following actions for disaster loans in liquidation status delinquent over 180 days

that are secured by collateral, but not specifically exempt from referral to Treasury:

Evaluate whether prompt foreclosure is feasible.

Initiate foreclosure proceedings promptly on loan collateral for which the NDLRC 

has determined that foreclosure is feasible.

Charge off loans for which the NDLRC has determined that foreclosure on the 

collateral is not feasible and ensure transfer of the debts to Treasury FMS for cross 

servicing.

2. Immediately charge off all disaster loans in liquidation status delinquent over 180 days and 

not secured by collateral, or specifically exempt from referral to Treasury. 

3. Update all pertinent SOPs to provide guidance to NDLRC management and staff regarding 

the requirements of the DCIA and the Treasury Managing Federal Receivables Guide to 

ensure that loans are transferred to Treasury, as required.

4. Train all Santa Ana staff to manage Federal receivables in accordance with the Debt 

Collection Improvement Act of 1996 and the Treasury Managing Federal Receivables Guide.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL RESPONSE

On May 10, 2012, we provided a draft of this report to the Director, Office of Financial Program 

Operations (OFPO). On June 20, 2012, the Director of OFPO submitted formal comments, which are 

included in their entirety in Appendix I. The director disagreed with the finding but generally agreed 

with three recommendations and disagreed with one. 

A summary of management’s comments and our response follows.

Agency Comments

Management disagreed with OIG’s finding that the National Disaster Loan Resolution Center was not 

complying with the Debt Collection Improvement Act. Their disagreement centers on a letter from 

Treasury dated January 3, 2000 that states 

I approve SBA’s request for an exemption from mandatory transfer of disaster and regular 

business loans over 180 days delinquent that are in active workout.... The exemption request 

was evaluated based on standards and factors described in FMS’ rule concerning the Transfer of 

Debts to Treasury for Collection, published in the Federal Register on April 28, 1999. Based on 

that evaluation, we determined that mandatory transfer of these debts would interfere with 

program goals, and, in the case of collateralized debt, would not be in the best interests of the 

United States.
6

The letter further states:

Once SBA determines that a workout is not feasible and, in the case of collateralized loans, 

completes its liquidation/foreclosure, any remaining delinquent debts remain subject to the 

DCIA’s mandatory transfer provisions. Additionally, all other debts over 180 days delinquent are 

subject to mandatory transfer to Treasury under the DCIA, unless a specific statutory or 

regulatory exemption applies.

Management interpreted that this letter granted the Agency an exemption from transferring any loans 

in workout status and any loans with collateral to Treasury for cross servicing. Thus, it is management’s 

opinion that SBA operates the NDLRC in compliance with the DCIA. 

To support this opinion, management stated that unsecured loans and secured loans under $25,000 are 

referred to Treasury offset and cross servicing within 180 days of delinquency. According to 

management, the servicing centers transfer all secured loans with balances over $25,000 to the NDLRC 

for liquidation and the NDLRC refers them for Treasury offset within 180 days of delinquency. Further 

once liens are liquidated, the remaining balance on the loan is transferred to Treasury for cross 

servicing, conforming to the Treasury exemption. Management believes that it is acting in compliance 

with provisions of the Treasury exemption letter, therefore, they disagree with OIG’s finding that the 

Agency does not comply with the requirements of the DCIA. 

Management also stated that the specific language of the Treasury letter could be subject to differing 

interpretations, and that any difference of opinion as to the meaning of the memorandum does not 

evidence a failure to comply with the DCIA. Management further stated that it is clear that the Treasury 

memorandum exempts SBA from the obligation to transfer all disaster loans more than 180 days 

delinquent to Treasury for cross servicing.

Management relies on a second letter from Treasury, dated August 18, 2005, regarding the obligation to 

refer loans to Treasury when SBA is pursuing recovery through administrative wage garnishment. That 

letter states

After careful consideration, we have decided to exempt from mandatory cross-servicing debts 

that are being collected at the creditor agency through the use of administrative wage 

garnishment (AWG) if the following conditions exist: (1) actual collections from AWG have been 

received prior to the debt becoming eligible for mandatory cross-servicing; and (2) if the creditor 

agency expects the debt to be collected through AWG within three years from the date of the 

first collection by AWG.

Based upon this Treasury letter, management believes all loans in wage garnishment status are exempt 

from mandatory transfer for cross servicing. The Agency further advised that it is currently in discussion 

with Treasury regarding the second requirement and the extended repayment period.

In summary, management believes it is exempt from transferring all loans in workout status, all loans 

with collateral, and all loans with wage garnishment collections to Treasury for cross servicing. 
7

OIG Response

We respectfully disagree with the Agency’s position that it is fully complying with the DCIA. We 

consulted with Treasury to determine if it had granted the SBA any exemptions to the mandatory 

transfer of debts 180 days delinquent. Treasury confirmed that only loans in active workout or wage 

garnishment meeting the conditions outlined above were exempt from transfer. Therefore, we believe 

that the Agency’s interpretation that it is exempt from transferring loans with collateral to Treasury for 

cross servicing is incorrect. 

At issue are the 1,553 loans delinquent in excess of 180 days that we identified in the NDLRC current 

inventory as of December 31, 2011. These loans did not appear to be in an “active workout” status. The 

736 loans designated for foreclosure in the current inventory include loans transferred to liquidation as 

early as 1999. These loans include 58 that were placed in liquidation prior to 2006, 14 placed in 

liquidation in 2006, 30 placed in liquidation in 2007, 155 placed in liquidation in 2008, 154 placed in 

liquidation in 2009, 210 placed in liquidation in 2010. When the SBA delays foreclosure, it could prevent 

the government from ultimately recovering amounts owed for the defaulted debts. While there is no 

statute of limitations applicable to a foreclosure action by the government, the government could not 

obtain a judgment to collect any deficiency remaining on the delinquent loan, post-foreclosure, if the 

six-year statute of limitations for suit on the loan has passed.

Further, we believe that management is broadly interpreting the Treasury AWG memorandum as 

allowing all debts with active AWG collection as being exempt from the referral requirement. However, 

it is our view that the exemption provided by Treasury for delinquent debts in AWG is actually much 

narrower because it only exempts SBA from the transfer requirement if both conditions specified in the 

memorandum are present: (1) that SBA has obtained a payment from AWG prior to the expiration of 

the 180-day limit; and (2) that there is an expectation that the complete debt can be recovered through 

AWG within three years. We found that SBA does not monitor or track collections received through 

wage garnishment. The NDLRC had no records to indicate that any of the loans currently in wage 

garnishment status had payments received prior to 180 days delinquent, or could be fully collected 

within three years.

Recommendation 1

Management Comments

The OFPO disagrees as the Treasury exemption letter states that transfer of collateralized debt would 

not be in the best interests of the government. OFPO has allocated resources and is actively managing 

the portfolio of collateralized debt through a foreclosure project, which must, of course, be subject to 

varying requirements of state law. 

OIG Response

Management’s comments are not responsive to the recommendation. The Treasury letter does not 

state that the transfer of all collateralized debt would not be in the best interests of the government. In 

fact, the Office of Inspector General believes that transfer of these debts to Treasury will lead to greater 

recoveries. The OFPO management is not acknowledging the existence of the problem, or taking 

corrective action so that the Agency will comply with the DCIA. The OIG is not recommending that SBA 
8

transfer collateralized debt to Treasury without first evaluating whether the Agency can recover the 

debt through foreclosure. The OIG is recommending that the NDLRC liquidate the collateral promptly 

and then transfer these debts to Treasury. As of December 31, 2011, the NDLRC had 621 loans 

designated “4CLOSE” that were placed in liquidation prior to 2011. Fifty-eight of these loans were

placed in liquidation prior to January 2006.

Recommendation 2

Management Comments

OFPO concurs with this recommendation and confirms that this is already the existing procedure. 

OIG Response

Management’s comments are responsive to the recommendation. 

Recommendation 3

Management Comments

OFPO concurs with this recommendation. However, the identified SOP 50 51 is undergoing revision with 

different parameters. The focus is now 7(a) loan servicing, workout and resolution. As a result, OFPO 

has already incorporated servicing, workout and resolution activities, including those mentioned in the 

recommendation, into the SOP 50 52 which is now titled, Disaster Loan Servicing and Resolution. The 

SOP 50 52 is in final draft. We expect issuance by the end of Fiscal Year 2012.

OIG Response

Management’s comments are responsive to the recommendation. 

Recommendation 4

Management Comments

OFPO concurs with this recommendation and has already taken the following actions:

Developed a Foreclosure Checklist required to be completed by the assigned Loan Specialist on 

every foreclosure case.

In addition, OFPO will complete the following actions by September 30, 2012:

Post updated SOP 50 52 and the Management Federal Receivables Guide to the disaster center 

intranet.

Conduct DCIA agency-specific refresher training from Treasury for applicable center personnel 

at the NDLRC and other appropriate OFPO center locations.
9

OIG Response

Management’s comments are responsive to the recommendation. 

 

We appreciate the courtesy and cooperation of the Small Business Administration during this audit. 

If you have any questions concerning this report, please call me at (202) 205-7390 or Craig Hickok, 

Director, Disaster Assistance Group at (817) 684-5341.

***

John K. Needham

Assistant Inspector General for Auditing
APPENDIX I. AGENCY RESPONSE

1

MEMORANDUM

June 19, 2012

To: John Needham 

Assistant Inspector General for Auditing

From: John A. Miller 

Director, Office of Financial Program Operations

Subject: Response to Draft Advisory Memorandum, Project No. 11802

Thank you for the opportunity to review the revised draft Advisory Memorandum and provide 

you with our comments. 

We wish to begin by noting that in a letter dated January 3, 2000, Treasury granted an exemption 

for cross-servicing of SBA debt over 180 days delinquent that is not otherwise specifically 

exempt from transfer. In that letter, Treasury’s Under Secretary for Domestic Finance stated 

“...I approve your request for exemption from mandatory transfer of disaster and regular 

business loans over 180 days delinquent that are in active workout. The exemption request was 

evaluated based on standards and factors described in Financial Management Service’s (FMS) 

rule concerning the Transfer of Debts to Treasury for Collection, published in the Federal 

Register on April 28, 1999. Based on that evaluation, we determined that mandatory transfer of 

these debts would interfere with program goals, and, in the case of collateralized debt, would not 

be in the best interests of the United States.” Additionally, the exemption letter states, “Once 

SBA determines that a workout is not feasible and, in the case of collateralized loans, completes 

its liquidation/foreclosure, any remaining delinquent debts remain subject to the DCIA’s 

mandatory transfer provisions. Additionally, all other debts over 180 days of delinquent are 

subject to mandatory transfer to Treasury under the DCIA, unless a specific statutory or 

regulatory exemption applies.” 

SBA operates the National Disaster Loan Resolution Center (NDLRC) in compliance with the 

Debt Collection Improvement Act (DCIA) and the Treasury exemption, so as to maximize 

recovery for the delinquent debts in the Disaster Loan Program.

An intra-agency compliance team for DCIA has been operational since FY2008. The team 

consists of members of the Office of Capital Access (OCA), Office of the Chief Financial 

Officer (OCFO), and Office of the Chief Information Officer (OCIO). The team meets biweekly 

to discuss and revaluate current system conditions to promote DCIA compliance. SBA also 

interacts frequently with Treasury, and coordinates directly with Treasury through the following 

communications: Agency Advisory Council meetings, Quarterly Creditor Agency/CrossServicing conference calls, Annual Debt Management Services (DMS) Conferences, Quarterly 

U.S. SMALL BUSINESS ADMINISTRATION

WASHINGTON, D.C. 20416
APPENDIX I. AGENCY RESPONSE

2

Treasury Report on Receivables (TROR) submissions, and email and telephone contact with 

Treasury liaisons and subject matter experts, as needed. SBA utilizes reports extracted from 

FedDebt, including, the Adhoc Financial Activity Report, Return to Agency Report, 

Reconciliation Report, and New Case Report. SBA also extracts information from the FMS 

website, such as a report titled Comparison of Federal Program Agency Net Collections from the 

Treasury Offset Program, technical bulletins for the Treasury Offset Program (TOP) and Crossservicing, the Managing Federal Receivables Guide, and Treasury’s FMS emails.

The NDLRC is responsible for post-default workout and resolutions of all disaster home and 

business loans over $25,000 secured by real estate or other form of collateral. The servicing and 

pre-default workout of all home and business loans is conducted by the Birmingham and El Paso 

Disaster Loan Servicing Centers. Unsecured loans and secured loans under $25,000 are referred 

to Treasury offset and cross-servicing within 180 days of delinquency. All secured loans over 

$25,000 are transferred to the NDLRC for post-default workout and resolution and referred to 

Treasury offset within 180 days of receipt to allow adequate time for workout and resolution. 

Once workout is concluded and collateral is liquidated/foreclosed, the remaining balance on the 

loan is transferred to Treasury for cross-servicing, conforming to the Treasury exemption letter 

previously referenced. As SBA acts in compliance with provisions of the Treasury exemption 

letter, we disagree with the Advisory Memorandum’s assertion that the Agency is not in 

compliance with the requirements of the DCIA. That statute specifically permits exemption by 

the Treasury for a specific class of debt, and, by its letter of January, 2000, Treasury extended 

such an exemption to SBA. While we understand that the specific language of the letter could 

give rise to questions regarding the meaning of particular phrases, we believe that any difference 

of opinion as to the letter’s appropriate interpretation does not evidence a failure to comply with 

the DCIA. Once again, it is clear that the Treasury letter exempts SBA from the obligation to 

transfer all disaster loans more than 180 days of delinquency to Treasury for cross-servicing. It 

is our understanding that Treasury granted this exemption specifically to SBA in order to avoid 

interference with program goals, including the maximization of recovery. 

On August 18, 2005, Treasury issued an exemption from mandatory transfer to cross-servicing if 

debts are being collected through AWG by the creditor agency. The exemption letter states, 

“After careful consideration, we have decided to exempt from mandatory cross-servicing debts 

that are being collected at the creditor agency through the use of administrative wage 

garnishment (AWG) if the following conditions exist: (1) actual collections from AWG have 

been received prior to the debt becoming eligible for mandatory cross-servicing; and (2) if the 

creditor agency expects the debt to be collected through AWG within three years from the date 

of the first collection by AWG.” We are currently in discussions with Treasury regarding the 

second requirement and the extended repayment period available in the case of SBA loans.

In light of the above, OFPO responds to the OIG recommendations as follows:
APPENDIX I. AGENCY RESPONSE

3

OIG RECOMMENDATION #1:

Take the following actions for disaster loans in liquidation status delinquent over 

180 days that are secured by collateral, but not specifically exempt from referral to 

Treasury:

Evaluate whether prompt foreclosure is feasible.

Initiate foreclosure proceedings promptly on loan collateral for which the 

NDLRC has determined that foreclosure is feasible.

Charge off loans for which the NDLRC has determined that foreclosure 

on the collateral is not feasible and ensure transfer of the debts to 

Treasury FMS for cross servicing. 

OFPO disagrees as the Treasury exemption letter states that transfer of collateralized debt would 

not be in the best interests of the government. Therefore, loans secured by collateral are currently 

exempt from transfer to cross servicing. OFPO has allocated resources and is actively managing 

the portfolio of collateralized debt through a foreclosure resolution project which must, of 

course, be subject to varying requirements of state law. As indicated in the above narrative, SBA 

operates the NDLRC in compliance with the DCIA and the Treasury exemption, so as to 

maximize recovery for the delinquent debts in the Disaster Loan Program.

OIG RECOMMENDATION #2:

Immediately charge off all disaster loans in liquidation status delinquent over 180 

days and not secured by collateral, or specifically exempt from referral to Treasury. 

OFPO concurs with this recommendation and confirms that this is already our existing 

procedures.

OIG RECOMMENDATION #3:

Update SOP 50 51 2 to provide guidance to NDLRC management and staff 

regarding the requirements of the DCIA and the Treasury Managing Federal Receivables 

Guide to ensure that loans are referred to Treasury, as required.

OFPO concurs with this recommendation. However, the identified SOP 50 51 is undergoing 

revision with different parameters. The focus is now 7(a) loan servicing, workout and 

resolution. As a result, OFPO has already incorporated servicing, workout and resolution 

activities, including those mentioned in the recommendation, into the SOP 50 52 which is now 

titled, Disaster Loan Servicing and Resolution. The SOP 50 52 is in final draft. We expect 

issuance by the end of Fiscal Year 2012.

OIG RECOMMENDATION #4:

Train all Santa Ana staff to manage Federal receivables in accordance with the Debt 

Collection Improvement Act of 1996 and the Treasury Managing Federal Receivables 

Guide.
APPENDIX I. AGENCY RESPONSE

4

OFPO concurs with this recommendation and has already taken the following actions:

Developed a Foreclosure Checklist required to be completed by the assigned Loan 

Specialist on every foreclosure case

In addition, OFPO will complete the following actions by September 30, 2012:

Post updated SOP 50 52 and the Managing Federal Receivables Guide to the disaster 

center intranet

Conduct DCIA agency-specific refresher training from Treasury for applicable center 

personnel at the NDLRC and other appropriate OFPO center locations 

Again, thank you for the opportunity to review the draft Advisory Memorandum. Please let us 

know if you need additional information or have any questions regarding our response.