DATE December 20, 2013 Final Report 14 -06

Final Report

For Official Use Only

Performance Audit 

Two Economic Injury Disaster Loans Defaulted 

After the SBA Made Approval Decisions Totaling $1.4 Million without 

Mitigating the Reasons for Prior Denials
U.S. Small Business Administration

Office of Inspector General

Washington, D.C. 20416

REPORT TRANSMITTAL

REPORT NO. 14-06

DATE: December 20, 2013

TO: James E. Rivera, Associate Administrator for Disaster Assistance

SUBJECT: Two Economic Injury Disaster Loans Defaulted After the SBA Made Approval Decisions 

Totaling $1.4 Million without Mitigating the Reasons for Prior Denials

This report is the first in a series of two reports resulting from our audit of the Economic Injury Disaster 

Loan (EIDL) Program. This report addresses SBA’s approval decisions on two defaulted Economic Injury 

Disaster Loans. The second report will address SBA’s controls to ensure working capital loans under the 

EIDL Program were approved for eligible borrowers in the correct amount.

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 objective. 

We appreciate the courtesies and cooperation of the SBA extended to the staff during this audit. 

Please direct any questions to me at (202) 205-6587 or Terry L. Settle, Director, Credit Programs Group 

at (703) 487-9940.

***

/s/

Robert A. Westbrooks

Deputy Inspector General
Executive Summary

Two Economic Injury Disaster Loans Defaulted After the SBA Made Approval Decisions Totaling $1.4 Million 

without Mitigating the Reasons for Prior Denials 

Audit Report 14-06

What the OIG Reviewed

The SBA is authorized to provide Economic Injury 

Disaster Loans by Section 7(b)(2) of the Small 

Business Act. These loans are intended to provide 

businesses with working capital to recover from an 

economic injury caused by a disaster. The SBA’s 

Standard Operating Procedure, (SOP) 50 30 6

designates loan approval authority levels for 

Economic Injury Disaster Loans based on loan 

complexity and dollar amount. It also provides loan 

eligibility, repayment ability, reconsideration or 

appeal, and documentation requirements for 

Economic Injury Disaster Loans.

Our audit objective was to determine whether the 

SBA had sufficient controls to ensure working capital 

loans under the Economic Injury Disaster Program 

were approved for eligible borrowers in the correct 

amount. During the audit, we reviewed a sample of 

65 economic injury disaster loans. From the sample,

we identified three large defaulted Economic Injury

Disaster Loans that involved inquiries by elected 

officials and loan reconsiderations. As a result, we 

reviewed these loans in the Disaster Credit 

Management System to determine if SBA’s 

Processing and Disbursement Center (PDC) staff 

adequately addressed or mitigated prior loan denial 

factors before it approved the loans. 

This report addresses SBA’s approval decisions on 

two large defaulted Economic Injury Disaster Loans. 

We did not identify reportable issues of concern 

related to the third defaulted economic injury 

disaster loan. We will issue a subsequent report 

addressing the overall audit objective.

What the OIG Found

During the audit, we found that the PDC made two 

Economic Injury Disaster Loan approval decisions 

that, in effect, reversed previous denial decisions. In 

doing so, the PDC did not adequately address or 

mitigate the prior denial factors or obtain supporting 

documentation to overcome deficiencies. 

The decisions involved a $736,300 working capital 

disaster loan and a $671,900 loan increase to 

separate businesses, totaling approximately $1.4 

million. Both loans involved repeated denials by the 

PDC staff, which were later overturned. 

In both cases, the loans rapidly defaulted. One 

borrower made 9 monthly payments, while the 

other made 11 payments.

The SBA loan files did not support that either 

business was eligible for the requested economic 

injury assistance. One of the businesses appeared to 

be ineligible for working capital disaster funds 

because it lacked repayment ability and the loan 

applicant indicated it intended to use the funds to 

relocate, not for working capital. The other business 

also appeared to be ineligible for a loan increase 

because the business had already recovered from 

the losses it incurred due to the disaster. 

In reviewing the loan files, we observed that the SBA 

had received multiple inquiries from elected officials 

on behalf of the two applicants. We recognize that 

elected officials routinely contact the SBA on behalf 

of constituents, and that constituent casework is an 

important part of our system of government. While 

some of the constituent letters were missing from 

the loan files, the letters that were documented in 

the files contained routine inquiry language.

The responsible loan officials told auditors that they 

were not influenced by these contacts, and that they 

based their reversal decisions on additional 

information provided by the borrowers. We found 

no evidence that the loan decisions were the result 

of the external contacts, but the loan files were 

incomplete and did not explain how the prior denial 

factors were addressed or mitigated. Therefore, we 

were unable to independently verify the loan 

officer’s assertions that the contacts had no impact 

on the loan decisions. It is in the best interest of SBA 

to fully document reversal decisions to respond to 

any potential allegations of external influence in 

lending decisions

 

OIG Recommendations

We recommended that the Associate Administrator 

for Disaster Assistance require an adequate approval 

justification and supporting documentation to 

address and resolve all prior denial factors when a 

previous denial decision on a loan is overturned. 

The approval justification and supporting

documentation should be retained in the Disaster 

Credit Management System.
1

Table of Contents

Introduction ..................................................................................................................................................2

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

Results...........................................................................................................................................................3

Finding 1: Two Approval Decisions Made without Mitigating Reasons for Prior Denials.....................3

$736,300 Ineligible Economic Injury Disaster Loan Approved by SBA’s Processing and Disbursement 

Center....................................................................................................................................................3

$671,900 Ineligible Economic Injury Disaster Loan Increase Approved by SBA’s Processing and 

Disbursement Center............................................................................................................................6

Conclusion.............................................................................................................................................7

Recommendation(s)..............................................................................................................................8

Appendix I: Scope and Methodology.........................................................................................................10

Appendix II: Summary of Events for Loan One ..........................................................................................11

Appendix III: Summary of Events for Loan Two .........................................................................................12

Appendix IV: Management Comments......................................................................................................13
2

Introduction

This report is the first in a series of two reports resulting from our ongoing audit of the Economic Injury 

Disaster Loan (EIDL) Program. Our overall audit objective was to determine whether the SBA had 

sufficient controls to ensure working capital loans under the EIDL Program were approved to eligible 

borrowers for the correct amount. During the audit, we identified three large defaulted EIDLs that 

involved inquiries by elected officials1and loan reconsiderations. As a result, we reviewed these loans 

to determine if SBA’s Processing and Disbursement Center (PDC) staff adequately addressed or 

mitigated prior loan denial factors when it approved the loans. We did not identify reportable issues of 

concern related to the third defaulted economic injury disaster loan. This report addresses SBA’s 

approval decisions on two of the large defaulted EIDLs. We will issue a subsequent report addressing 

the overall audit objective.

To accomplish our objective, we interviewed Agency officials at the SBA’s Processing and Disbursement 

Center in Fort Worth, Texas and at the Office of Disaster Assistance Headquarters (ODA) in Washington, 

D.C. We selected a random statistical sample of 65 loans from a universe of Economic Injury Disaster 

Loans (working capital loans) with a final disbursement date between January 1, 2008, and 

April 30, 2012. From the sample of 65 loans, we identified three large defaulted working capital loans

that involved inquiries by elected officials and loan reconsiderations. We also reviewed the agency’s 

electronic loan files maintained within the Disaster Credit Management System (DCMS).

We conducted this performance audit in Fort Worth, Texas, between April 2012 and November 2013, 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 objective.

Background

Section 7(b)(2) of the Small Business Act authorizes the SBA to provide Economic Injury Disaster Loans. 

These loans are intended to provide a business with working capital to recover from an economic injury 

caused by a disaster. The PDC in Fort Worth, Texas is the primary loan processing center for the disaster 

loan program. 

The SBA’s Standard Operating Procedure (SOP) 50 30 62designates loan approval authority levels for 

EIDLs based on loan complexity and dollar amount. It also provides loan eligibility, repayment ability, 

reconsideration or appeal, and documentation requirements for EIDLs. For loans greater than $750,000 

and up to $1 million, the approval of the PDC’s Center Director or the Assistant Director for Loan 

Processing, or designee for either position, is required. Loans exceeding $1 million require approval by 

the senior executive of the Disaster Loan Program, the Associate Administrator for Disaster Assistance

or designee, located in Washington, D.C.

The SOP states the Agency must have reasonable assurance that the borrower has the ability to repay 

any proposed loan. The SOP also addresses eligibility for EIDLs. To be eligible, loan proceeds for 

 

1

For purposes of this report, inquiries or contacts by elected officials include contacts by the officials themselves or by staff 

members on their behalf.

2

SOP 50 30 6 Disaster Assistance Program.
3

economic injury loans may only be used for working capital purposes.

3

 Repair of physical damage is not 

an eligible use of EIDL proceeds. Further, the SOP requires that when the applicant requests 

reconsideration or appeal of a declined loan application, the applicant must provide all information 

necessary to overcome the reasons for declining the loan. In addition, the SOP requires that all 

documents be scanned, so they can be stored electronically in the loan file. 

Nature of Limited or Omitted Information

No information was omitted due to confidentiality or sensitivity, nor were there limitations to

information on this audit.

Review of Internal Controls

Office of Management and Budget (OMB) Circular A-1234provides guidance to federal managers on 

improving the accountability and effectiveness of federal programs and operations by establishing, 

assessing, correcting, and reporting on internal controls. 

We will include our assessment of the internal controls for approval of economic injury disaster loans in 

a forthcoming audit report addressing the remainder of our findings.

Results

Finding 1: Two Approval Decisions Made without Mitigating Reasons for 

Prior Denials

During the audit, we found that the PDC made two EIDL approval decisions that, in effect, reversed 

previous denial decisions. In doing so, the PDC did not adequately address or mitigate the prior denial 

factors or obtain supporting documentation to overcome deficiencies. The decisions involved a 

$736,300 working capital disaster loan and a $671,900 loan increase to separate businesses, totaling 

approximately $1.4 million. Both loans involved repeated denials by the PDC staff that were later 

overturned. In both cases, the loans rapidly defaulted. One borrower made 9 monthly payments, while 

the other borrower made 11 payments. One of the businesses appeared to be ineligible for working 

capital disaster funds because it lacked repayment ability and the loan applicant indicated it intended to 

use the funds to relocate, not for working capital. The other business also appeared to be ineligible for a 

loan increase because it had already recovered from the losses it incurred due to the disaster.

A timeline of events for each loan is provided in Appendices II and III.

$736,300 Ineligible Economic Injury Disaster Loan Approved by SBA’s Processing and 

Disbursement Center

The PDC approved a $736,300 Economic Injury Disaster Loan for working capital on February 15, 2008,

without addressing or mitigating prior denial factors or obtaining supporting documentation to 

overcome deficiencies. 

 

3

Federal Regulation 13 CFR 123.303(a) Disaster Loan Program also contains the same restriction.

4

OMB Circular A-123, Management’s Responsibility for Internal Control, December 21, 2004.
4

The applicant operated a marina on a lake impacted by a U.S. Army Corps of Engineers’ decision to 

reduce the lake water level for dam repairs. The initial loan application was automatically declined due 

to unsatisfactory credit on July 17, 2007. However, on August 22, 2007, the loan officer received an 

inquiry about the status of the loan from the Public Information Officer at the PDC indicating that an 

elected official contacted the agency about the status of the loan. The next day, the business owner was 

informed that additional information was needed to process the EIDL application. The requested 

information included the cost and sources of funding for its marina relocation project and the financial 

information necessary to project the business’ cash flow following its relocation. The loan officer 

recommended that the business owner withdraw the disaster loan application until he could provide the 

additional information. On the same day, a state elected official wrote to the PDC asking for favorable 

consideration of the application.

Over the next month, while the borrower continued to submit additional information, two other elected 

officials contacted the PDC on behalf of this borrower. Nevertheless, the Agency declined the loan again

on October 3, 2007. While the PDC cleared the poor credit issue that resulted in the first denial, this 

denial was based on the business’ lack of repayment ability and the fact that the intended use of the 

loan proceeds for the relocation project constituted an ineligible use of Economic Injury Disaster Loan 

funds. Following this loan denial, a public official called the Disaster Assistance Field Operations Center 

requesting the loan’s approval status.

 

On November 27, 2007, the SBA’s senior Disaster Assistance Program executive, the Associate 

Administrator for Disaster Assistance, wrote a letter to one of the elected officials who had contacted 

the SBA on the business’ behalf. The letter explained that the Agency had declined the application due 

to concerns that the projected revenue and expense levels might not be attainable. Also, the letter 

stated that the business may not provide sufficient cash flow to meet current business and personal 

financial obligations, service the sizable level of current debt, and repay additional SBA debt. Further, 

the letter stated that the business owner advised the SBA that his intent was to use the EIDL funds to 

relocate the marina. As EIDL assistance is intended for working capital, these funds may not be used for 

the physical costs of any relocation project.5 

The loan file indicates that on the next day, November 28, 2007, the SBA’s Assistant Director for Loan 

Processing called the applicant. Following the phone call, the Assistant Director noted in the file that 

the applicant still did not have any idea of how long it would take to relocate the marina and that he 

“may likely get a new investor.” Two days later, on November 30, 2007, the Assistant Director again 

contacted the applicant and his consultant and noted in the file that the consultant still wanted the SBA 

funds for the relocation of the marina. These facts illustrate that the applicant was still intending to use 

the loan proceeds to relocate the marina, however, economic injury loan funds may not be used for this 

purpose. 

On January 8, 2008, the Assistant Director noted in the loan file that the applicant’s consultant had 

emailed details about the project. As a result, the loan application was once again reactivated. 

However, this email was not stored/captured/found in the electronic loan file that we reviewed. 

 

5

The SBA disaster declaration limited financial assistance to working capital from Economic Injury Disaster Loans and did not 

provide funds for physical injury.
5

On January 23 and 31 of 2008, the loan officer noted in the loan file that information was still needed to 

process the application. The file notations indicated that the applicant might obtain a new investor and 

the marina would possibly not be relocated until June 2008. While the loan file indicated that the loan 

officer performed additional analysis, the supporting documentation was not in the electronic loan file. 

On February 15, 2008, the PDC approved the $736,300 economic injury loan. The approval justification 

stated that “at appeal level, applicant provided detailed and reasonable projections to support 

repayment ability . . . they also provided detailed explanation as to how the relocation and project costs 

would be funded. . . .” 

We determined that the financial information and projections the loan officer used to assess repayment 

capacity and approve the loan were identical to those the previous loan officer used to decline the loan

on October 3, 2007. The loan officer who denied the loan used an average of the 2006 historical data, 

combined with projections for 2008 and 2009. The use of 2006 historical data was necessary because 

the applicant had purchased the business in April of 2006 and this was the only available historical data. 

This original analysis also questioned the reasonableness of the 2009 projections and indicated the 

applicant lacked repayment ability. 

The analysis supporting the loan approval, however, assessed repayment capacity solely based on the 

average of projections for 2008 and 2009. The approval analysis did not consider the business’ actual 

historical financial data for 2006. The inclusion of this data when the loan was denied, and exclusion of 

it when the loan was approved, may create the appearance that the historical financial data was 

excluded for the sole purpose of justifying the loan approval. The loan officer who approved the loan 

did not explain why his methodology was superior to that used to deny the loan and also did not

address or mitigate the original questions regarding the unreasonableness of the 2009 projections.

While loan officials noted there was additional information supporting the loan’s eligibility, there were 

no such supporting documents in the electronic file. Furthermore, the loan officials were unable to 

produce these documents during the OIG’s audit. The loan officials also told auditors that they were not 

influenced by the elected official inquiries made on this loan. We found no evidence that the loan 

decisions were the result of the external contacts, but the loan file was incomplete and did not explain 

how the prior denial factors were addressed or mitigated. Therefore, we were unable to independently 

verify the loan officer’s assertions that the contacts had no impact on the loan decisions. 

The PDC should not have approved this $736,300 loan because the borrower lacked repayment ability, 

as stated in the PDC’s previous denial. As a result, the SBA received only nine monthly payments 

totaling $33,201 before the loan quickly defaulted. Additionally, there was no documentation to 

support the existence of an adequate alternative source of funding for the relocation project. This loan 

approval decision is deemed an improper payment as defined by the Improper Payments Elimination 

and Recovery Act (Public Law 111-204). 
6

$671,900 Ineligible Economic Injury Disaster Loan Increase Approved by SBA’s Processing 

and Disbursement Center

The PDC approved an $828,100 disaster loan for a combination of working capital and repair of physical 

damage injury on December 5, 2008. The physical injury portion of the loan included $313,900 for the 

replacement of inventory lost due to Hurricane Wilma. On October 8, 2009, the PDC approved a 

$671,900 loan increase to the working capital portion of the loan. The concerns outlined below pertain 

to this subsequent loan increase.

The applicant was a wholesale vendor providing food-service supplies to institutional organizations.

The business was impacted by Hurricane Wilma in October 2005. In response to a Presidential Disaster 

Declaration, the SBA offered both physical injury and Economic Injury Disaster Loans for victims of 

Hurricane Wilma. The deadlines for filing applications were initially set at January 31, 2006, for physical 

damage and July 24, 2006, for economic injury. However, the deadline for economic injury was later 

extended by the PDC until December 31, 2007.

Nearly eleven months after the filing deadline, on October 14, 2008, the applicant requested that the 

SBA accept its loan application. An elected official contacted the SBA’s Field Operations Center on 

behalf of the business on October 30, 2008, and the PDC agreed to accept the late application on 

November 1, 2008. While the loan application was still being processed, a second elected official 

contacted the Field Operations Center regarding the loan application. On December 5, 2008, the PDC

approved a combination working capital and physical loan.

Approximately seven months later, the borrower requested that the SBA increase the loan by $266,000 

to purchase or replace its inventory. The PDC denied this request because it had already provided 

$313,900 to replace inventory. The loan officer also noted that the borrower had already recovered 

from its economic injury as evidenced by increased revenues and the profitability of the business. On 

July 23, 2009, the loan officer informed the borrower that the loan request would be denied. That same 

day, an elected official wrote a letter on the borrower’s behalf. The borrower then made two other 

attempts, on August 4 and August 31, 2009, to obtain a loan increase (the reconsideration and an appeal 

of the previous denial), but the PDC denied both requests. In its last denial, the Deputy Director of the 

PDC wrote a letter to the borrower stating that this decision was final since the borrower had exhausted 

the appeal process.

During the PDC’s reconsideration of the loan increase in August 2009, the borrower disclosed to the PDC

that it was the victim of an alleged fraud committed in 2008. Based upon this information, the PDC

determined that this was the reason the business did not have adequate cash flow. The adverse event 

took place almost two and half years after Hurricane Wilma and prior to the borrower’s application for 

the SBA disaster loan. Nevertheless, it was not disclosed by the borrower prior to the approval of the 

original loan in December 2008. These facts significantly affected the PDC’s denial of the economic 

injury loan increase. The August 27, 2009, and September 11, 2009 denials were based on: (1) the 

alleged fraud’s impact on cash flow; (2) the fact that the SBA had already loaned the business $313,900 

to replace its inventory lost as a result of Hurricane Wilma, and (3) the fact that the business had already 

recovered from its economic injury. On September 23, 2009, another elected official contacted the SBA 

on the borrower’s behalf. On September 30, 2009, the borrower called the ODA Headquarters located 

in Washington, DC. Subsequently, the PDC was asked by SBA Headquarters “to review the file . . . for 

additional EIDL eligibility.” 
7

Although the borrower had requested a loan increase of $266,000 to purchase or replace inventory, on 

October 8, 2009, the SBA approved an increase of $671,900. Following this loan increase, the total loan 

amount equaled $1,500,000 (the maximum loan limit at that time). We found no explanation of why 

the approved loan amount exceeded the amount requested by the borrower. Also, when it overturned 

the prior denial decisions, the PDC did not address or mitigate the documented reasons for the denials. 

Instead, the PDC justified its decision to approve the increase by indicating that the borrower had used 

personal funds to keep the business operating. This, however, was not new information and the PDC

had considered this fact at the time of the prior denials. 

An SBA official told auditors that he was not influenced by the elected official inquiries made on this 

loan. We found no evidence that the loan decisions were the result of the external contacts, but the 

loan file was incomplete and did not explain how the prior denial factors were addressed or mitigated. 

Therefore, we were unable to independently verify the official’s assertions that the contacts had no 

impact on the loan decisions.

The PDC and Headquarters should not have approved this loan increase of $671,900 because the 

borrower had already recovered from the economic injury caused by the disaster and the SBA had 

already loaned the borrower funds to replace inventory lost during the hurricane, as stated in the PDC’s 

previous denial. The SBA received only eleven monthly payments for this loan, totaling $81,917 before 

the loan quickly defaulted. The loan increase of $671,900 approved by the Office of Disaster Assistance

is deemed an improper payment as defined by the Improper Payments Elimination and Recovery Act 

(Public Law 111-204).

Conclusion 

The PDC made approval decisions involving a $736,300 working capital disaster loan and a $671,900 

disaster loan increase that, in effect, reversed previous denial decisions. In doing so, the PDC did not 

adequately address or mitigate the prior denial factors or obtain supporting documentation to 

overcome loan repayment and eligibility deficiencies. Both loans involved repeated denials by PDC staff 

that were later overturned. In both cases, the loans rapidly defaulted. One borrower made 9 monthly 

payments, while the other borrower made 11 payments. One of the businesses appeared to be 

ineligible for working capital disaster funds because it lacked repayment ability and the loan applicant

indicated it intended to use the funds to relocate, not for working capital. The other business also 

appeared to be ineligible for a loan increase because it had already recovered from the losses it incurred 

due to the disaster. 

In reviewing the loan files, we observed that the SBA had received multiple inquiries from elected 

officials on behalf of the two applicants. We recognize that elected officials routinely contact the SBA on 

behalf of constituents, and that constituent casework is an important part of our system of government. 

While some of the constituent letters were missing from the loan files, the letters that were 

documented in the files contained routine inquiry language. The responsible loan officials told auditors 

that they were not influenced by these contacts, and that that they based their reversal decisions on 

additional information provided by the borrowers. We found no evidence that the loan decisions were 

the result of the external contacts, but the loan files were incomplete and did not explain how the prior 

denial factors were addressed or mitigated. Therefore, we were unable to independently verify the loan 

officer’s assertions that the contacts had no impact on the loan decisions. It is in the best interest of the 
8

SBA to fully document reversal decisions to respond to any potential allegations of external influence in 

lending decisions.

Recommendation(s) 

We recommend that the Associate Administrator for Disaster Assistance:

1. Require an adequate approval justification and supporting documentation to address and 

resolve all prior denial factors when a previous denial decision on a loan is overturned. The 

approval justification and supporting documentation should be retained in the Disaster Credit 

Management System.

Agency Comments and Office of Inspector General Response

On December 5, 2013, we provided a draft copy of this report to SBA management for comment. 

On December 16, 2103, SBA management provided a formal response, which is included in its entirety in 

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

The SBA disagreed with the report’s conclusion. However, the SBA agreed to implement the 

recommendation.

Agency Comments

The SBA disagreed with the report’s conclusion that both borrowers were ineligible for EIDL assistance 

and that both loans should be deemed improper payments. The SBA also disagreed with the 

implication that elected officials influenced their loan decisions. In both cases, the SBA asserts the 

decision to approve the loans were made in accordance with SOP 50 30 6 and were justified through 

documented financial analysis and written justification in the file. Management indicated that the loan 

officers approving these two loans followed ODA policy, which does not require loan officers to address 

and resolve prior denial factors when reviewing reconsiderations or appeals.

OIG Response

As stated in the report, the SBA did not sufficiently mitigate previous denial factors. For one borrower, 

the SBA addressed the prior denial factor, but did not have the documentation to support the loan 

officer’s assertion that the prior denial factor was mitigated. For the other borrower, the SBA did not 

address the primary reason for the loan denial. Therefore, the OIG was unable to verify that either 

borrower was eligible for EIDL assistance. Since eligibility for these two borrowers has not been 

established and documentation was missing from the loan files, both loans meet the definition of an 

improper payment. 
9

Recommendation 1

Management Comments

Management concurred with the recommendation. Management agreed to implement new procedures 

that require justification and supporting documentation to address all prior denial factors when a 

previous denial decision on a loan is overturned. The approval justification and supporting 

documentation should be retained in DMCS.

OIG Response

Management comments were responsive to the recommendation. 
10

Appendix I: Scope and Methodology

Our audit objective was to determine whether the SBA had sufficient controls to ensure working capital 

loans under the EIDL Program were approved to eligible borrowers for the correct amount. To achieve 

our objective, we interviewed Agency officials at the SBA’s Processing and Disbursement Center in Fort 

Worth, Texas, and at SBA Headquarters in Washington, D.C. 

From the universe of loans, a statistical consultant selected a statistically valid random sample of 65 

economic injury disaster loans with a final disbursement date between January 1, 2008, and April 30, 

2012, excluding loans of $24,999 or less. The final universe of 2,264 loans totaled $282.4 million. 

From the sample of 65 loans, we identified 3 large defaulted working capital loans that involved 

inquiries by elected officials and loan reconsiderations. As a result, we reviewed these three loans to 

determine if staff at the Processing and Disbursement Center adequately addressed or mitigated prior 

loan denial factors when it approved the loans. We did not identify reportable issues of concern related 

to the third defaulted economic injury disaster loan. For these loans, we reviewed the agency’s 

electronic loan files maintained within the Disaster Credit Management System.

Use of Computer-Processed Data

For our audit, we relied on information maintained by the SBA in the Loan Accounting System and 

Disaster Credit Management System. Previous OIG engagements have verified that the information 

maintained in these systems is reasonably reliable. Further, data elements associated with reviewed 

loans were verified against source documentation scanned into the electronic loan files. As a result, we 

believe the information is reliable for the purposes of this audit. 

Prior Coverage 

U.S. Government Accountability Office Audit Reports

Report GAO-12-253T, Progress Continues in Addressing Reforms to the Disaster Loan Program, issued 

November 30, 2011.

Report GAO-09-900T, Additional Steps Should Be Taken to Address Reforms to the Disaster Loan 

Program and Improve the Application Process for Future Disasters, issued July 29, 2009.

Report GAO-06-860, Actions Needed to Provide More Timely Disaster Assistance, issued July 28, 2006.

Report GAO-06-605T, Improvements Made, but Loan Programs Face Ongoing Management Challenges, 

issued April 6, 2006.

Small Business Administration-Office of Inspector General Reports

Audit Report 09-06, The Uses of Proceeds from Gulf Coast Disaster Loans, issued January 15, 2009.

Audit Report 3-13, Audit of Economic Injury Disaster Loans, issued March 14, 2003.
11

Appendix II: Summary of Events for Loan One

Figure 1 Summary of Agency Loan Actions and Inquiries by Elected Officials for Loan One

Date Event

07/17/2007 The SBA auto declines the loan application due to unsatisfactory credit.

08/22/2007 SBA’s Public Information Officer inquires about the application.

08/23/2007 The PDC / Borrower withdraw the loan application.

08/23/2007 Elected Official # 1 (State Governor) – sends letter to the PDC. 

09/13/2007 Elected Official # 2 (U.S. Senator) – is written letter by the ODA.

09/14/2007 Elected Official # 3 (U.S. Representative) – places phone call to the PDC.

09/24/2007 Elected Official # 3 (U.S. Representative) – places additional phone call 

to the PDC.

10/03/2007 The PDC denies the loan application.

10/22/2007 Public Official #1 (State’s Small Business Division) – places phone call to 

Field Operations Center.

11/27/2007 Elected Official # 2 (U.S. Senator) – is written another letter by the ODA.

02/15/2008 The PDC approves the loan.
12

Appendix III: Summary of Events for Loan Two

Figure 2 Summary of Agency Loan Actions and Inquiries by Elected Officials for Loan Two

Date Event

10/2005 Hurricane Wilma strikes.

12/31/2007 Final Deadline for EIDL Loans for this disaster.

04/8 & 9/2008 Borrower’s lender shuts down the business’ Line of Credit because the business was sold; 

however, the business claims that a potential buyer defrauded it.

10/14/2008 The business asks the PDC for late acceptance of loan application, but the PDC denies it.

10/30/2008 Elected Official # 1 (U.S. Representative) writes to the Field Operations Center on behalf 

of the applicant.

11/1/2008 The PDC notifies the business applicant that a late application will be accepted, if filed 

within 14 days.

11/6/2008 The PDC receives the loan application.

11/7/2008 Elected Official # 2 (U.S. Senator) - writes to the Field Operations Center on behalf of the 

applicant.

12/5/2008 The PDC approves a Combination EIDL & Physical loan for $828,100.

07/23 -28/2009 The borrower requests an increase of the EIDL loan by $266,000 to purchase inventory, 

but the PDC denies the request (Loan Modification # 3).

07/23/2009 Elected Official # 3 (The White House) - writes a letter on behalf of the borrower.

08/27/2009 The borrower asks for reconsideration of the prior denial and the PDC denies again.

09/11/2009 The borrower requests appeal of prior loan denial; however, the PDC issues a “final” 

denial.

09/23/2009 Elected Official #4 (U.S. Representative) called the SBA District Office.

09/30/2009 The borrower called the ODA Headquarters in Washington, D.C. Subsequently, the 

Headquarters management instructed the PDC to review file again.

10/8/2009 The ODA approved an increase in the loan to a total amount of $1.5 million.
13

Appendix IV: Management Comments
14

DATE: December 16, 2013

TO: Robert A. Westbrooks

Deputy Inspector General

FROM: James E. Rivera

Associate Administrator

Office of Disaster Assistance

Subject: Two Economic Injury Disaster Loans Defaulted After the SBA Made Approval 

Decisions Totaling $1.4 Million without Mitigating the Reasons for Prior Denials

We have reviewed the OIG Draft Report regarding SBA’s approval decisions on two defaulted Economic 

Injury Disaster Loans (EIDL). The audit report concludes that neither borrower was eligible for EIDL 

assistance and that both loans should be deemed improper payments. We disagree with the report’s 

conclusion. The report further concludes that although OIG found no evidence that loan decisions were 

influenced as a result of external contacts by elected officials, OIG is unable to independently verify that 

the contacts had no impact on the loan decisions because the loan files were incomplete and did not 

explicitly detail how the prior denial factors were addressed or mitigated. While we realize the 

importance and value of external contacts by elected officials, we also disagree with the implication that 

these officials influenced our loan decisions.

The two files in question were complex in nature and not typical EIDLs. The factors in each case are 

unique and do not lend themselves to a “cookie cutter” approach to underwriting. We reviewed each 

loan file in question and found no departures from standard operating procedures in determining 

eligibility or reviewing requests for reconsideration and appeal of earlier decisions. In both cases, the 

decision to approve the loan was made in accordance with SOP 50 30 6 and was justified through 

documented financial analysis and written justification in the file. Therefore, we strongly object to your 

determination that these two loans constitute improper payments.

In order to provide the disaster loan applicant every opportunity to obtain loan approval, applicants who 

request reconsideration or appeal are assigned a new loan officer. Current policy is for the new loan 

officer to take a “fresh look” at all of the information. This determination is made independently 

without considering the previous loan officers’ reasons for denial. The loan officers who approved the 

two loans in question followed this existing procedure, as explained further below:

Loan #1: $736,300 Economic Injury Disaster Loan

As stated in the OIG report, this loan applicant operated a marina impacted by a U.S. Army Corps of 

Engineers’ decision to reduce the lake water level for dam repairs. The final decision to reverse the 

previous declines was based on a new review of existing information along with a review of new 

information. During the appeal, the applicant provided new information detailing how the business 

would cover the costs of opening a new location without the use of SBA EIDL funds (i.e., through grants 

and other programs of the State and County). Information in the file indicates that rather than fully 

relocating the existing marina, the applicant would continue to sell fuel and rent cottages and RV spaces 

at the existing location. Repayment ability at the appeal level was assessed using existing information in 

U.S. SMALL BUSINESS ADMINISTRATION

Disaster Assistance
15

light of the new information provided by the applicant during the appeal. Projections were enhanced by 

the fact that the applicant planned to continue to maintain a presence at the old location, and were 

determined to be realistic and supported repayment. The loan officer did adequately justify the 

decision under existing ODA policy, which does not require loan officers to address and resolve prior 

denial factors when reviewing reconsiderations or appeals. 

We acknowledge that certain documents used to support the loan officer’s decision were not properly 

scanned into the electronic file in DCMS. However, we believe that the written justification of the loan 

officer provides sufficient evidence that the loan decision was correct. This loan was approved in 2008 

and the processes for ensuring that documentation was scanned into the electronic file were flawed. 

Since 2008, we have changed the procedure for scanning documentation into the file. We are confident 

the changes now ensure that all documents sent in by the applicant are correctly placed in the file 

before they are used in a final determination.

Loan #2: $671,900 Economic Injury Disaster Loan Increase

This loan applicant received an SBA disaster loan for physical damage and economic injury as a result of 

damages caused by Hurricane Wilma in 2005. As stated in the OIG report, the applicant requested a 

working capital loan increase, which was denied because the PDC determined that the applicant had 

already recovered from the economic injury caused by the disaster. Because the applicant provided 

little new information during reconsideration and appeal, both requests were again denied. However, 

the request for loan increase was later re-opened because the file received further review at the AA/DA 

level which revealed that we did not properly assess the borrower’s EIDL eligibility in the previous two 

decline decisions. In a final review, the new loan officer identified adequate cause to extend the injury 

period and ultimately increase the borrower’s EIDL eligibility.

The OIG report maintains that the loan file did not explain how the prior denial factors were addressed 

or mitigated. However, we believe that the loan officer adequately justified the decision to increase the 

loan under existing ODA policy, which does not require loan officers to explicitly address and resolve 

prior denial factors when reviewing reconsiderations or appeals. Additionally, the loan officer 

exhaustively detailed the methodology he applied in determining the additional economic injury (see 

Loan Modification #6 comments). By documenting the measures taken by the borrower to meet the 

business’ working capital needs following the disaster, the loan officer was able to quantify an amount 

not previously calculated during previous analysis. 

Conclusion:

The decisions to approve the two loans were adequately justified under existing standard operating 

procedures; therefore, we disagree with the OIG’s determination that neither business was eligible for 

EIDL assistance. While we believe that our justifications clearly delineate why these two loans were 

approved, and made independently without influence from external contacts, we recognize that the 

documentation was not adequate to the satisfaction of the OIG.

We agree to implement new procedures that require approval justification and supporting 

documentation to address all prior denial factors when a previous denial decision on a loan is 

overturned. The approval justification and supporting documentation should be retained in DCMS.