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Evaluation Report 

Improvement is Needed to Ensure Effective Quality Control at 

Loan Operation Centers
 

January 17, 2014 Report Number 14 08 
 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Small Business Administration
 

Office of Inspector General
 

Washington, D.C. 20416
 

REPORT TRANSMITTAL 

REPORT NO. 14-08 

DATE: January 17, 2014 

TO: John Miller, Director, Office of Financial Program Operations 

Brent Ciurlino, Director, Office of Credit Risk Management 

SUBJECT: Improvement is Needed to Ensure Effective Quality Control at Loan Operation Centers 

This report presents the results of our evaluation of the Quality Control Program at the National 

Guaranty Purchase Center (NGPC) and Loan Operation Centers. 

We conducted this evaluation in accordance with the Council of the Inspectors General on Integrity and 

Efficiency Quality Standards for Inspection and Evaluation. These standards require that we adequately 

plan inspections, present all factual data accurately, fairly, and objectively, and that we present findings, 

conclusions, and recommendations in a persuasive manner. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on our evaluation 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 Settle, Director, Credit Programs Group at 

(703) 487-9940. 

*** 

/s/ 

Robert A. Westbrooks 

Acting Assistant Inspector General for Auditing 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What the OIG Reviewed 

The SBA is authorized under Section 7(a) of the Small 

Business Act and Section 504 of the Small Business 

Investment Act to provide assistance to small businesses in 

the form of government-guaranteed loans and debentures. 

΂͸̼ 7(̠) ͜Λ̠Δ GΎ̠Ϊ̠Δθϥ ΧΪΛͮΪ̠Γ ͻή θ͸̼ ͼ!’ή ΍̠Ϊ̼ͮήθ ΍̼Δ̸ͻΔͮ 

program and is the principal vehicle for providing small 

businesses with access to credit that cannot be obtained 

elsewhere. The ͼ!’ή 504 ͜Λ̠Δ ΧΪΛͮΪ̠Γ ΧΪΛϞͻ̸̼ή ήΓ̠΍΍ 

businesses with long-term financing for the purchase of 

land, buildings, machinery, and other fixed assets. 

Given the importance of loan programs to the ͼ!’ή 

mission, the Agency established operation centers to 

perform loan origination, servicing, purchasing, and 

liquidation activities. In 2004, the National Guaranty 

Purchase Center (NGPC) developed a quality control plan to 

review the quality of the guaranty purchase process. Since 

this time, the OIG has performed multiple audits and 

engagements that assessed loan operation center activities 

and their compliance with SBA requirements. Based on 

material deficiencies noted by the OIG, the need to establish 

an effective quality control program at the loan centers has 

been an SBA Management Challenge since Fiscal Year (FY) 

2007. In 2010, the SBA established a quality control 

program to ensure that centers accurately and consistently 

apply statutory, regulatory, and procedural loan program 

requirements. The goals of the program are to improve 

loan operation center services and reduce management 

waste, fraud, and abuse. 

Our initial survey objective was to determine whether the 

ͩ͆͆ͻ̮̼ Λ͆ FͻΔ̠Δ̮ͻ̠΍ ͵ΪΛͮΪ̠Γ ͩΧ̼Ϊ̠θͻΛΔ’ή (OFPO) Quality 

Control Program for the NGPC and Loan Operation Centers 

was effectively designed and implemented to (1) mitigate 

θ͸̼ ͼ!’ή ΪͻήΊ Λ͆ ΍Λήή, and (2) assure stakeholders on the 

ΩΎ̠΍ͻθϥ Λ͆ θ͸̼ ̮̼Δθ̼Ϊή’ ̸̼΍ͻϞ̼Ϊ̠̭΍̼ήͶ DΎΪͻΔͮ ΛΎΪ ͻΔͻθͻ̠΍ ήΎΪϞ̼ϥ 

ϟΛΪΊ ϟ̼ ͻ̸̼Δθͻ͆ͻ̸̼ ̸̼͆ͻ̮ͻ̼Δ̮ͻ̼ή ͻΔ θ͸̼ ͩF͵ͩ’ή ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ 

program and that material actions within the program were 

not being performed. As a result, we developed a reporting 

objective to determine the status of the Quality Control 

Program and whether all elements of the program were 

being completed. 

What the OIG Found 

Over the past three years the SBA made significant progress 

in implementing a quality control program for its loan 

centers. Our evaluation verified that the SBA established a 

quality control program and developed quality control 

review activities at each of its loan operation centers. 

However, our evaluation found that quality control activities 

were not being performed at the Centers in accordance with 

ͼ!’ή ΛϞ̼Ϊ̠΍΍ ͷΎ̠΍ͻθϥ ΛΔθΪΛ΍ ̠Δ̸ ̼Δθ̼Ϊ ήΧ̼̮ͻ͆ͻ̮ ͮΎͻ̸̠Δ̮̼Ͷ 

Specifically, we found that Centers omitted required quality 

control reviews of significant functions. Additionally, the 

NGPC discontinued regularly scheduled quality reviews for 

about five months during FY 2012 to focus on reviews 

required by the Improper Payments Elimination and 

Recovery Act (IPERA) of 2010. Further, corrective actions on 

deficiencies identified by the Center quality control teams 

were not appropriately tracked until resolution, as required. 

Finally, we determined that the ͼ!’ή ΩΎ̠΍ͻθϥ ̠ήήΎΪ̠Δ̮̼ 

program, responsible for ensuring that quality control 

activities at loan operation centers are working as intended, 

had not been established. We have reported this issue as 

an Other Matter. 

OIG Recommendations 

We recommended that the Director of the Office of 

Financial Program Operations: 

	 Ensure the proper allocation of resources and scoping 

of the quality control program to complete required 

quality control activities at the loan operation centers. 

 Ensure that corrective actions related to quality control 

findings are appropriately documented and completed 

within required timeframes. 

We recommended that the Director of the Office of Credit 

Risk Management: 

	 Establish and implement a plan to conduct quality 

assurance activities at SBA loan operation centers. 

Management Response and Actions Taken 

The SBA agreed with each recommendation. The OFPO 

initiated projects to address long-standing deficiencies 

within the existing quality control program. Specifically, 

OFPO dedicated projects to (1) ensure adequate staffing is 

available to perform quality activities and (2) enhance 

quality control corrective action processes. 

Additionally, the OFPO recently developed and 

implemented a new system to aggregate data, track risk, 

and improve communication over quality control activities. 
 

 

 

 

 

 

 

 

 

 

 

Table of Contents 

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

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

Nature of Limited or Omitted Information...................................................................................................4
 

Results........................................................................................................................................................... 4
 

Other Matter................................................................................................................................................. 9
 

Conclusion..................................................................................................................................................... 9
 

Recommendations ......................................................................................................................................10
 

Agency Comments and OIG Response........................................................................................................10
 

Appendix I: Scope and Methodology.........................................................................................................13
 

Appendix II: Agency Comments.................................................................................................................15
 

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Introduction 

This report presents the results of our limited scope evaluation of the quality control program at 

the National Guaranty Purchase Center and Loan Operation Centers for 7(a) Loans. Our initial 

ήΎΪϞ̼ϥ Λ̭·̼̮θͻϞ̼ ϟ̠ή θΛ ̸̼θ̼ΪΓͻΔ̼ ϟ͸̼θ͸̼Ϊ θ͸̼ ͩ͆͆ͻ̮̼ Λ͆ FͻΔ̠Δ̮ͻ̠΍ ͵ΪΛͮΪ̠Γ ͩΧ̼Ϊ̠θͻΛΔ’ή ͷΎ̠΍ͻθϥ 

Control Program for the NGPC and Loan Operation Centers was effectively designed and 

implemented to (1) mitigate the Small Business Administration’ή (SBA) risk of loss, and (2) assure 

ήθ̠Ί̼͸Λ΍̸̼Ϊή ΛΔ θ͸̼ ΩΎ̠΍ͻθϥ Λ͆ θ͸̼ ̮̼Δθ̼Ϊή’ ̸̼΍ͻϞ̼Ϊ̠̭΍̼ή. During our initial survey work we 

identified deficiencͻ̼ή ͻΔ θ͸̼ ͩF͵ͩ’ή ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ ΧΪΛͮΪ̠Γ ̠Δ̸ θ͸̠θ Γ̠θ̼Ϊͻ̠΍ ̠̮θͻΛΔή ϟͻθ͸ͻΔ 

the program were not being performed. As a result, we developed a reporting objective to 

determine the status of the Quality Control Program and whether all elements of the program 

were being completed. 

To answer our reporting objective, we interviewed Agency officials within the Office of Financial 

Program Operations (OFPO) and the Office of Credit Risk Management (OCRM). Additionally, 

we reviewed the SBA and loan operation center-specific quality control program guides. 

Further, we analyzed monthly quality control metric reports from three different SBA loan 

operation centers for the period of Fiscal Year (FY) 2012 through May 2013. Finally, we analyzed 

select loan operation center training logs and feedback and corrective action logs for the periods 

of FY 2011 through March 2013 and FY 2011 through February 2013 respectively. 

We conducted this evaluation from March 2013 through September 2013, in accordance with 

the Council of the Inspectors General on Integrity and Efficiency (CIGIE) Quality Standards for 

Inspection and Evaluation. Those standards require that we adequately plan inspections, 

present all factual data accurately, fairly, and objectively, and that we present findings, 

conclusions, and recommendations in a persuasive manner. 

Background 

Loan Programs and Loan Operation Centers 

The SBA is authorized under Section 7(a) of the Small Business Act and Section 504 of the Small 

Business Investment Act to provide assistance to small businesses in the form of governmentguaranteed loans and debenturesͶ ΂͸̼ 7(̠) ͜Λ̠Δ GΎ̠Ϊ̠Δθϥ ΧΪΛͮΪ̠Γ ͻή θ͸̼ ͼ!’ή ΍̠Ϊ̼ͮήθ ΍̼Δ̸ͻΔͮ 

program and is the principal vehicle for providing small businesses with access to credit that 

cannot be obtained elsewhere. Under this program, SBA guarantees a portion of loans made 

and administered by commercial lending institutions. 

The ͼ!’ή 504 ͜Λ̠Δ ΧΪΛͮΪ̠Γ ΧΪΛϞͻ̸̼ή ήΓ̠΍΍ ̭ΎήͻΔ̼ήή̼ή ϟͻθ͸ ΍ΛΔͮ-term financing for the 

purchase of land, buildings, machinery, and other fixed assets. These loans are issued through a 

partnership with Certified Development Companies (CDCs) and private sector third-party 

lenders, and are funded through the issuance of government-guaranteed debentures. At the 

end of FY 2012, the S!’ή ̮ΛΓ̭ͻΔ̸̼ 7(̠) ̠Δ̸ 504 ΍Λ̠Δ portfolio totaled $87 billion. 

GͻϞ̼Δ θ͸̼ ͻΓΧΛΪθ̠Δ̮̼ Λ͆ ΍Λ̠Δ ΧΪΛͮΪ̠Γή θΛ θ͸̼ ͼ!’ή ΓͻήήͻΛΔͳ θ͸̼ !̼ͮΔ̮ϥ ͸̠ή ̼ήθ̠̭΍ͻή͸̸̼ 

operation centers to perform loan origination, servicing, purchasing, and liquidation activities. 

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The figure below provides an overview of the loan operation centers included in the scope of 

this evaluation: 

Figure 1 SBA Loan Operation Centers 

Standard 7a Loan Guaranty 

Processing Center (LGPC) 

Citrus Heights, CA; Hazard, KY 

Process 7a loan guaranty 

applications and limited servicing 

Commercial Loan Service Center 

(CLSC) 

Fresno, CA; 

Little Rock, AR 

SBA Express approval , purchase, 

and liquidation; 7a servicing; 504 

liquidation 

National Guaranty Purchase 

Center (NGPC) 

Herndon, VA 

Process 7a guaranty purchase 

requests; liquidation oversight 

Quality Control Program 

Recognizing the importance of ensuring the quality of its deliverables, in 2004 the NGPC 

developed a quality control plan to review the quality of the guaranty purchase process. 

In 2010, the SBA established a Quality Control program to assess quality for all of its loan 

operation centers. The quality control program was designed to ensure that centers accurately 

and consistently apply statutory, regulatory, and procedural loan program requirements. 

The goals of the program are to improve services provided by the loan operation center and 

reduce waste, fraud, and abuse. 

Prior Audits 

An OIG survey of the quality assurance review process at the NGPC in 2006, noted that 

implementation of the quality control (QC) plan had not been achieved and that the QC program 

had not been appropriately staffed and was not conducting reviews as required.1 Further, a 

2006 audit of backlogged loans purchased at the NGPC noted the poor quality of the SBA 

reviews performed on these loans.2 

Subsequent audits performed by the OIG on the guaranty purchase process, high-dollar early 

default loans, and the SBA’ή improper payment reviews have continued to identify weaknesses 

in loan center operations. For example, a 2007 audit determined that the SBA purchased 

guaranties for 25 out of 58 (43%) loans reviewed by the OIG without adequately ensuring all SBA 

requirements were met.3 The OIG estimated that the SBA made approximately $36 million in 

erroneous payments during the scope of this audit. 

1 Report Number 6-26, Advisory Memorandum: Survey of the Quality Assurance Review Process.
 2 Report Number 6-35, !udit of Deficiencies in OF!’s Purchase Review Process for acklogged Loans.
 3 Report Number 7-23, Audit of the Guarantee Purchase Process for Section 7a Loans at the National Guaranty Purchase Center.
 

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Additionally, an audit of the Fiscal Year 2008 Improper Payment Rate for the 7(a) Guaranty Loan 

Program found a high rate of improper payments on loans reviewed.4 The OIG estimated the 

improper payment rate for loan guaranties purchased between April 1, 2007, and 

March 31, 2008, to be 27 percent, or approximately $234 million of the $869 million purchased. 

Further, an audit of the Fiscal Year 2011 Improper Payment Rate for the 7(a) Guaranty Loan 

Program found improper payments for 6 of the 30 sampled 7(a) guaranty purchase loans 

reviewed.5 The audit determined that the SBA did not detect all improper payments when 

conducting improper payment reviews to estimate its FY 2011 improper payment rate for 

7(a) guaranty purchases. The audit also noted that quality control team guidance used to 

conduct improper payment reviews was inconsistent with SBA requirements. The OIG 

determined that while the SBA reported an improper payment rate of 1.73 percent or $40.7 

million in its FY 2011 Agency Financial Report, the rate could have been as high as 20 percent, or 

about $472 million. 

Finally, between November 2010 and February 2013 the OIG has conducted a series of audits 

focused on SBA guaranty purchase reviews over high-dollar early-defaulted loans. These audits 

noted (1) the need for the NGPC to apply increased scrutiny to high-dollar early defaults, 

(2) significant weaknesses in θ͸̼ ͼ!’ή assessment of delegated lender underwriting, and 

(3) recoveries of over $10 million in improper payments were warranted. 

The need to establish an effective quality control program at the loan centers has been an SBA 

Management Challenge since FY 2007.6 The OIG initiated this evaluation in large part to assess 

θ͸̼ !̼ͮΔ̮ϥ’ή ήθ̠θΎή ͆ΛΪ this Management Challenge, which requires the Agency to implement a 

Quality Control program for all of its loan operation centers. 

Nature of Limited or Omitted Information 

We did not limit or omit information from this report. 

Results 

Over the past three yearsͳ ͻΔ Ϊ̼ήΧΛΔή̼ θΛ θ͸̼ ͩIG’ή ̠͢Δ̠̼ͮΓ̼Δθ ͸̠΍΍̼Δ̼ͮͳ θ͸̼ ͼ! Γ̸̠̼ 

significant progress in implementing a quality control program for its loan centers. Through our 

limited evaluation work, we verified that the SBA established a quality control program and 

developed quality control review activities at each of its loan operation centers. However, our 

evaluation found that the Office of Financial Program Operations is currently redesigning certain 

aspects of the program. Our evaluation also found that quality control activities were not being 

performed at the Centers in accordance ϟͻθ͸ ͼ!’ή ΛϞ̼Ϊ̠΍΍ ͷΎ̠΍ͻθϥ ΛΔθΪΛ΍ and Assurance 

Program Guide and Center specific guidance. Specifically, we found that Centers omitted 

required quality control reviews of significant functions. Additionally, the NGPC discontinued 

regularly scheduled quality reviews for about five months during FY 2012 to focus on reviews 

4 Report Number 9-16, The Small usiness !dministration’s Fiscal Year 2008 Improper Payment Rate for the 7(a) Guaranty Loan 

Program. 

5 Report Number 13-07, The Small usiness !dministration’s Improper Payment Rater for 7(a) Guaranty Purchases Remain 

Significantly Underestimated. 6 Report Number 14-01, Report on the Most Serious Management and Performance Challenges Facing the Small Business 

Administration in Fiscal Year 2013 – Management Challenge #4. 

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required by the Improper Payments Elimination and Recovery Act (IPERA) of 2010. Finally, 

corrective actions on deficiencies identified by the Center quality control teams were not 

appropriately tracked until resolution as required. Without an effective quality control program 

the SBA cannot verify that its loan centers are in compliance with statutory, regulatory, and 

procedural loan program requirements and mitigating the ͼ!’ή risk of loss. 

Status of the S!’s Quality ontrol Program at its Loan Operation enters 

To address θ͸̼ ͩIG’ή Γ̠Δ̠̼ͮΓ̼Δθ ̮͸̠΍΍̼Δ̼ͮͳ θhe SBA’ή ͩ͆͆ͻ̮̼ Λ͆ FͻΔ̠Δ̮ͻ̠΍ ͵ΪΛͮΪ̠Γ ͩΧ̼Ϊ̠θͻΛΔή 

(OFPO) made significant progress over the last three years and successfully established a quality 

control program that identified quality control review activities to be performed at each of its 

loan operation centers. In August 2012, after observing quality control processes at a leading 

lending institution, the ͩF͵ͩ’ή ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ Γ̠Δ̠̼ͮΪ began efforts to improve and redesign 

the existing quality control program. The OFPO management officials have titled this effort the 

Quality Improvement Program (QIP). 

During our evaluation, OFPO management provided the OIG with a listing of 11 QIP projects 

meant to establish new, or significantly enhance existing quality control activities. 

These projects included planned activities to address long-standing deficiencies within the 

existing quality control program. Specifically, OFPO has dedicated projects to (1) ensure 

adequate staffing is available to perform quality activities and (2) enhance quality control 

corrective action processes. A complete listing of these projects is listed below: 

OFPO Quality Improvement Program (QIP) Projects 

 Enhanced Review Criteria (Identify and Define Root Causes and Critical versus non-critical);
 

 Determine the impact or materiality of deficiencies within risk tolerance;
 

 Robust and standardized sampling methodology and target audit criteria;
 

 Ensure adequate staffing is made available for QIP;
 

 Developing reporting and communication process on evaluations;
 

 Bi-weekly and monthly training;
 

 Enhanced recapture and tracking process;
 

 Develop process to capture first line staff input and suggestions;
 

 Department quality reports/state of the center quality;
 

 Develop trend analysis on deficiencies impacting process and policy; and
 

 Coordinate committee to review standards across Office of Capital Access offices for 

corrective actions. 

Additionally, to further enhance its quality control efforts, the OFPO recently developed and 

implemented a new data collection tool. According to plans provided by OFPO, the Quality 

Based Evaluator and Risk Tracker (QBERT) system will be used for the purpose of aggregating 

data, tracking risk, and improving communication over quality control activities. We commend 

the SBA on taking actions to improve is quality control program and address longstanding 

weaknesses within the program. As these projects were either ongoing or in development at 

the time of our evaluation, we did not assess Agency progress towards completing these 

projects. 

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SBA Loan Operation Center Quality Control Activities were Not Being Performed 

The SBA’ή Quality Control and Assurance Program Guide established the guidance and 

framework for its loan operation center quality control activities. In turn, each loan operation 

center developed its own center specific guide to detail (1) the center activities which require 

quality reviews, (2) the number of reviews required (daily or monthly), (3) compliance goals, and 

(4) the required corrective action activities. During our evaluation, we determined that multiple 

SBA loan operation centers were not performing required quality control activities established 

either in the SBA Quality Control and Assurance Program Guide or in their center specific 

guide(s). 

National Guaranty Purchase Center - Herndon, VA 

W̼ ̸̼θ̼ΪΓͻΔ̸̼ θ͸̠θ θ͸̼ ͼ!’ή ̠ͣθͻΛΔ̠΍ GΎ̠Ϊ̠Δθϥ ͵ΎΪ̮͸̠ή̼ ̼Δθ̼Ϊ (ͣG͵) ̸ͻ̸ ΔΛθ Χ̼Ϊ͆ΛΪΓ 

reviews to assess quality in the majority of its loan purchase and liquidation oversight 

operations during FY 2013. Specifically, the majority of the NGPC reviews covered 182 or 

65-percent of the 279 high-dollar early-defaulted loans7 (HDEDs) required for review.8 

As the NGPC focused on HDEDs, it generally did not perform required quality control reviews 

over other loan purchases, care and preservation of collateral (CPC) expenses, offers in 

compromise (OIC), and loan charge-offs. These additional areas totaled 69-percent of the 

required quality control activities in the center. As a result, the NGPC only conducted 

31-percent9 of the required quality control reviews during the period from October 2012 

through May 2013. Table 1 below provides further details on the NGPC review activities during 

this period: 

Table 1 NGPC Quality Control Activities October 2012-May 2013 

NGPC 

Activity 

NGPC Required 

Metric 

Frequency # Processed 

at NGPC 

During 

Period 

# Required 

for QC 

Review 

During 

Period 

# Reviewed 

by QC 

During 

Period 

Percent of 

Activity 

Reviewed 

by QC 

Random 

Purchases 

10% previous day 

purchases 

Daily 1,884 188 55 29% 

HDEDs 100% previous day 

purchase 

recommendations 

Daily 279 279 182 65% 

CPC 

Expenses 

10% previous months 

CPC actions 

Monthly 1,057 106 0 0% 

OICs 10% previous months 

OIC actions 

Monthly 781 78 3 4% 

ChargeOffs 

10% of previous 

months charge-off 

actions 

Monthly 1,127 113 0 0% 

Total 5,128 764 240 31% 

7 High dollar early default loans are defined as loans in the amount of $500,000 or more that default within the first eighteen 

months of initial disbursement. 

8 As provided in Table 1, the NGPC guide requires a 100 percent review of all HDED loans. 

9 This percentage does not include quality control reviews over guaranty purchase denials and repairs due to inconsistencies in 

θ͸̼ ͣG͵’ή ̸Λ̮ΎΓ̼Δθ̠θͻΛΔ Λ͆ θ͸̼ή̼ ̠̮θͻϞͻθͻ̼ήͶ 

6 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finally, we determined that the NGPC performed some level of quality control reviews over 

guaranty purchase denials and repairs (i.e., partial denials). However, we identified 

ͻΔ̮ΛΔήͻήθ̼Δ̮ͻ̼ή ͻΔ θ͸̼ ͣG͵’ή ̸Λ̮ΎΓ̼Δθ̠θͻΛΔ Λ͆ θ͸̼ή̼ Ϊ̼Ϟͻ̼ϟ ̠̮θͻϞͻθͻ̼ή ̠Δ̸ ̸̼θ̼ΪΓͻΔ̸̼ θ͸̠θ θ͸̼ 

NGPC did not meet the required quality control review metric of 100 percent. 

Loan Guaranty Processing Center – Citrus Heights CA; Hazard KY 

We determined that the Loan Guaranty Processing Center (LPGC) had not performed quality 

control reviews of new programs as required. The SBA Quality Control and Assurance Program 

Guide states that new processes and complex transactions must be monitored. Specifically, the 

program Guide states that as new loan products and practices are introduced, Center practices 

must be developed to implement the program changes. As part of the implementation 

processes, the Centers must identify the risk characteristics and ensure that procedures, 

reporting, controls, and employee training are focused in these areas. 

T͸̼ ͼ!’ή ͼΓ̠΍΍ ͜Λ̠Δ !̸Ϟ̠Δθ̠̼ͮ (SLA) program was revised and expanded on May 25, 2012. 

The maximum loan amount for SLA loans under the new program was $350,000 and the LGPC 

has responsibility for reviewing the credit worthiness and eligibility of SLA loans, and for issuing 

the loan authorization for SLA loans. Based on documentation provided by the Agency and the 

͜G͵’ή ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ ή̼΍̼̮θͻΛΔ ̮Ϊͻθ̼Ϊͻ̠ Λ͆ ΍Λ̠Δή Ϟ̠΍Ύ̸̼ ̠θ $1Ͷ5 Γͻ΍΍ͻΛΔ ΛΪ ΓΛΪ̼, we determined 

that the LGPC did not conduct any quality control reviews of SLA program loans. Additionally, 

the SBA re-launched its Dealer Floor Plan pilot loan program on February 8, 2011. However, we 

determined that the LGPC quality control team did not conduct reviews of LGPC Dealer Floor 

Plan loan approvals from October 2012 through February 2013. 

Commercial Loan Servicing Centers (CLSCs) – Little Rock, AR; Fresno, CA 

We determined that the CLSCs in Little Rock and Fresno were not conducting required reviews 

over 504 loan liquidation activities. Specifically, the CLSC quality control guides states that 100 

percent of 504 loan protective bids are to be reviewed and reported on monthly.10 Based on 

documentation provided by OFPO, we determined that from October 2012 through May 2013, 

the CLSCs, on average, only reviewed 10 percent of 504 loan protective bids. This coverage was 

significantly less than the 100 percent requirement established by the CLSCs. 

Improper Payments Elimination and Recovery Act Reviews 

The OFPO’ή Ϊ̼ήΧΛΔήͻ̭ͻ΍ͻθͻ̼ή ΛϞ̼Ϊ ͼ!’ή ̮ΛΓΧ΍ͻ̠Δ̮̼ ϟͻθ͸ θ͸̼ Improper Payments and Elimination 

Recovery Act (IPERA) of 2010 significantly impacted the FY 2012 quality control activities for the 

NGPC. The IPERA requires agencies to conduct improper payment reviews for all programs and 

activities susceptible to significant improper payments, and to report their improper payment 

results. ΂͸̼ ͼ!’ή I͵E͸! Ϊ̼Ϟͻ̼ϟ ͻή ̸̼ήͻͮΔ̸̼ θΛ θ̼ήθ θ͸̼ !̼ͮΔ̮ϥ’ή ̮ΛΓΧ΍ͻ̠Δ̮̼ ϟͻθ͸ ΍Λ̠Δ ΧΪΛͮΪ̠Γ 

requirements and includes a qualitative assessment of center loan approval and purchase 

decisions. 

10 Protective bid means an offer made by a secured creditor to pay a designated price for property at a foreclosure sale to 

“ΧΪΛθ̼̮θ” θ͸̼ ή̼̮ΎΪ̸̼ ̮Ϊ̸̼ͻθΛΪ’ή ͻΔθ̼Ϊ̼ήθ ͻΔ θ͸̼ ΧΪΛΧ̼Ϊθϥ θ͸̠θ Γͻͮ͸θ Λθ͸̼Ϊϟͻή̼ ̭̼ ̼΍ͻΓͻΔ̠θ̸̼ ̭ϥ θ͸̼ ͆ΛΪ̼̮΍ΛήΎΪ̼ ή̠΍̼Ͷ 

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The OFPO utilized their quality control teams to assist with assessing improper payments in the 

SBA’ή 7(a) and 504 loan approval and purchase activities. As a result, the ͣG͵’ή regularly 

scheduled quality control activities, with the exception of HDEDs, were generally suspended for 

a five-month period during FY 2012. The quality control activities impacted at the NGPC from 

May through September 2012 included live repairs, random purchases, CPCs, OICs, and loan 

charge-offs. 

Officials from OFPO stated that a lack of staffing resources impacted its ability to conduct 

planned activities under its quality control program. However, we note that previous OIG audit 

findings and recommendations issued in 200611 addressed similar deficiencies regarding 

incomplete reviews and a lack of resources allocated to the quality control program. While SBA 

management initially satisfied the OIG recommendations as intended, it did not maintain 

appropriate resources to ensure required quality control activities continued. These repeated 

deficiencies in the quality control program demonstrate that improvements are still needed in 

θ͸̼ ͼ!’ή Γ̠Δ̠̼ͮΓ̼Δθ ΛϞ̼Ϊήͻͮ͸θ ̠Δ̸ Ϊ̼ήΛΎΪ̮̼ ̠΍΍Λ̮̠θͻΛΔ for this program. 

Further, OMB Circular A-123, Management’s Responsibility for Internal ontrol provides 

guidance to Federal Managers on improving the accountability and effectiveness of Federal 

Programs. The guidance states that management is responsible for maintaining internal 

controls and that monitoring the effectiveness of internal controls should occur in the normal 

course of business (i.e. periodic reviews, reconciliations, or comparisons of data). The quality 

control program as outlined in the Agency's quality control program guide establishes 

the method used by the SBA loan operation Centers to monitor internal controls by verifying 

and documenting compliance with SBA loan regulatory, statutory, and policy requirements. 

As a result, not performing required quality control activities significantly impacts θ͸̼ ͼ!’ή 

̠̭ͻ΍ͻθϥ θΛ Γ̠ͻΔθ̠ͻΔ ̼̼̮͆͆θͻϞ̼ ͻΔθ̼ΪΔ̠΍ ̮ΛΔθΪΛ΍ ̠Δ̸ ̠̮͸ͻ̼Ϟ̼ ͻθή ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ ΧΪΛͮΪ̠Γ’ή ̸̼ήͻΪ̸̼ 

objective and goals. 

Corrective Action Activities at the NGPC were Not Performed as Required 

The NGPC center specific guide states that the Center’ή corrective action plan should identify 

and track (1) quality control errors, (2) root causes of the errors, (3) sources of the errors, and 

(4) error resolutions and or associated recovery amounts. As discussed above, a very limited 

number of quality control reviews were performed at the NGPC. However, we determined that 

when reviews were conducted, for the period of October 2010 through February 2013, the 

NGPC did generally identify quality control errors. Nevertheless, the NGPC did not appropriately 

document the root causes of the errors, the sources of the errors, and error resolutions as 

required. 

Based on the NGPC corrective action logs and discussions with OFPO management officials, we 

determined that OFPO management did not effectively monitor the loan operation center 

corrective action activities. Specifically, management did not ensure that all attributes 

associated to quality control errors were documented and tracked as required. Appropriate 

tracking of corrective actions on quality control errors is critical to ensure that weaknesses in 

11 Report Number 6-26, Advisory Memorandum: Survey of the Quality Assurance Review Process. 

8
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loan operation center activities are resolved and that dollar losses are either mitigated or 

recovered. 

Importantly, the Agency has taken action to address the weaknesses in this area. Specifically, 

the OFPO has drafted a plan to improve its quality control corrective action activities at each of 

the loan operation centers. The plan highlights the need to identify deficiencies, establish 

milestones for corrective action, and measure the effectiveness of actions taken. Finally, the 

OFPO plans to have Center quality control specialists track corrective actions in its QBERT 

system. Specifically, OFPO officials stated that quality control specialists will enter deficiencies, 

sources of the errors, root causes, dollar impacts, and corrective action(s) into the QBERT 

system. 

Other Matter 

The SB!’s Quality !ssurance Program had Not Been Established 

΂͸̼ ͼ!’ή Quality Control and Assurance Program Guide provides guidance and establishes the 

framework for the ͼ!’ή ΍Λ̠Δ ΛΧ̼Ϊ̠θͻΛΔ ̮̼Δθ̼Ϊή’ quality assurance activities. The guide also 

establishes the roles and responsibilities for quality assurance within θ͸̼ ͼ!’ή ͩ͆͆ͻ̮̼ Λ͆ 

Financial Program Operations (including its loan operation centers), Office of Risk Management, 

and Office of Financial Assistance. According to the Guide, t͸̼ ͩ͆͆ͻ̮̼ Λ͆ ͸ͻήΊ ̠͢Δ̠̼ͮΓ̼Δθ’ή 

(ORM) role is to conduct quality assurance reviews based on statutory, regulatory, and 

procedural guidelines. The ORM is no longer a functional office within the SBA and was 

reorganized into the Office of Credit Risk Management (OCRM). 

The guide defines quality assurance as the processes used to provide oversight of quality control 

activities. Quality assurance (QA) provides the checks and balances to ensure that quality and 

internal controls are working as intended. Quality assurance activities, as they relate to the SBA 

loan operation centers, include peer reviews, documentation reviews, quality assurance 

reviews, and improper payment testing. We determined through interviews with OFPO and 

OCRM management officials that quality assurance activities had not been planned or 

conducted since the Quality Control and Assurance Program Guide was established in 

September, 2010. 

The SBA has recently begun efforts to establish the required QA program. Specifically, the 

OCRM agreed to take responsibility for conducting the QA activities. Further, the OCRM 

assigned a financial program analyst to lead quality assurance activities. However, as noted 

above, the OCRM has not established any formal plans for QA or conducted any of the 

associated activities. During discussions with the OIG, management officials within the OCRM 

cited a lack of resources to implement and perform the QA activities as required. The absence 

of quality assurance activities over the ΍Λ̠Δ ΛΧ̼Ϊ̠θͻΛΔ ̮̼Δθ̼Ϊ’ή quality control program prevents 

the SBA from ensuring that the quality control program is functioning effectively to achieve its 

objectives. 

Conclusion 

The OFPO established a quality control program and developed quality control review activities 

at each of its loan operation centers. However, we determined that critical loan operation 

9
 
 

 

 

 

 

 

 

 

 

center activities were not being monitored for quality and that corrective action activities were 

not being documented and tracked as required. Without an effective quality control program 

the SBA cannot verify that its loan centers are in compliance with statutory, regulatory, and 

procedural loan prΛͮΪ̠Γ Ϊ̼ΩΎͻΪ̼Γ̼Δθή ̠Δ̸ Γͻθͻ̠ͮθͻΔͮ θ͸̼ ͼ!’ή ΪͻήΊ Λ͆ ΍ΛήήͶ 

Β̼ ̠̮ΊΔΛϟ΍̸̼̼ͮ θ͸̼ ͼ!’ή Ϊ̼̮̼Δθ ̼͆͆ΛΪθή θΛ ̸̸̠Ϊ̼ήή θ͸̼ ͸ͻήθΛΪͻ̮ ϟ̼̠ΊΔ̼ήή̼ή ϟͻθ͸ͻΔ ͻθή ΩΎ̠΍ͻθϥ 

control activities at the loan operation centers. However, improvements are still needed in the 

ͼ!’ή management oversight and resource allocation to ensure the quality control program is 

achieving its objectives and goals. 

Recommendations 

We recommend that the Director of the Office of Financial Program Operations: 

1.	 Ensure the proper allocation of resources and scoping of the quality control program to 

complete required quality control activities at the loan operation centers. 

2.	 Ensure that corrective actions related to quality control findings are appropriately 

documented and completed within required timeframes. 

We recommend that the Director of the Office of Credit Risk Management: 

3.	 Establish and implement a plan to conduct quality assurance activities at SBA loan operation 

centers. 

Agency Comments and OIG Response 

On November 6 2013, we provided a draft of this report to the Director of the Office of Financial 

Program Operations and the Director of the Office of Credit Risk Management for comment. On 

January 8, 2014, the Agency submitted formal comments, which are included in their entirety in 

!ΧΧ̼Δ̸ͻϤ IIͶ ! ήΎΓΓ̠Ϊϥ Λ͆ Γ̠Δ̠̼ͮΓ̼Δθ’ή ̮ΛΓΓ̼Δθή ̠Δ̸ ΛΎΪ Ϊ̼ήΧΛΔή̼ ͆Λ΍΍ΛϟήͶ 

Summary of Management Comments 

The Agency agreed with all of our recommendations and stated it takes quality control in its 

centers very seriously and is committed to continual improvement in its quality control program. 

The OFPO acknowledged that NGPC activities were not always reviewed for quality, but stated 

available resources were utilized to continue reviews of higher-risk transactions, especially highdollar early-defaulted (HDED) loans. The OFPO committed to update center QC guides as it 

makes risk based decisions on QC activities. 

Additionally, the OFPO acknowledged that QC reviews were not performed in accordance with 

θ͸̼ ͣG͵’ή ͮΎͻ̸̼ ͆ΛΪ ̠ ͆ͻϞ̼ ΓΛΔθ͸ Χ̼ΪͻΛ̸ ͻΔ FΘ 2012 θΛ ͆Λ̮Ύή ΛΔ Ϊ̼Ϟͻ̼ϟή Ϊ̼ΩΎͻΪ̸̼ ̭ϥ θ͸̼ 

IΓΧΪΛΧ̼Ϊ ͵̠ϥΓ̼Δθ E΍ͻΓͻΔ̠θͻΛΔ ̠Δ̸ ͸̼̮ΛϞ̼Ϊϥ !̮θ (I͵E͸!)Ͷ HΛϟ̼Ϟ̼Ϊͳ ͻθ ͻή ͩF͵ͩ’ή ΧΛήͻtion that QC 

activities did not cease and that the reviews were merely substituted during this time period 

with the IPERA audit reviews, which assess compliance with loan program requirements. 

Further, the OFPO noted that due to the sampling methodology established at the LGPC, loans 

made under the Small Loan Advantage (SLA) or Dealer Floor Plan (DFP) were not selected for 

10
 
 

 

 

 

 

 

 

 

 

 

 

 

 

quality reviews. The OFPO recognizes this issue as an area of improvement, and will amend the 

͜G͵’ή ή̠ΓΧ΍ͻΔͮ Γ̼θ͸Λ̸Λ΍Λͮϥ θΛ ̼ΔήΎΪ̼ Δ̼w processes and complex loan transactions are not 

unintentionally excluded. 

The OFPO acknowledged weaknesses in tracking corrective actions and initiated a project to redevelop the corrective action process, which resulted in the development and implementation 

of the Corrective Action Tracker. Additionally, the OFPO noted that in July 2013, it launched the 

Quality-Based Evaluator and Risk Tracker (Q-BERT). This web-based platform unifies all of the 

̮̼Δθ̼Ϊή’ ͷ Ϊ̼Ϟͻ̼ϟ ͆ͻΔ̸ͻΔͮ ̸̼θ̠ͻ΍ή ̠Δ̸ Ϊ̼΍̠θ̸̼ ̸Λ̮ΎΓ̼Δθ̠tion in a single, centralized repository. 

Finally, the OFPO noted that it continuously evaluates the effectiveness of the QC program to 

ensure its quality approach is consistent and effective across centers. 

OIG Response 

We commend the OFPO on its efforts to improve its QC program and have discussed within this 

report that the Agency has made significant progress in implementing a QC program for its loan 

centers. We note that the Agency generally agreed with our findings and with all of our 

recommendations. Further, we ͸̠Ϟ̼ Ϊ̼Ϟͻή̸̼ θ͸ͻή Ϊ̼ΧΛΪθ θΛ ͻΔ̮ΛΪΧΛΪ̠θ̼ θ͸̼ !̼ͮΔ̮ϥ’ή comment 

that θ͸̼ ͼ!’ή I͵E͸! review ͻή ̸̼ήͻͮΔ̸̼ θΛ θ̼ήθ θ͸̼ !̼ͮΔ̮ϥ’ή ̮ΛΓΧ΍ͻ̠Δ̮̼ ϟͻθ͸ ΍Λ̠Δ ΧΪΛͮΪ̠Γ 

requirements and includes a qualitative assessment of center purchase decisions. However, we 

continue to support our position that regular QC activities at the NGPC were discontinued and 

disagree that IPERA reviews serve as an adequate substitute for all regular QC activities 

established by the NGPC. 

΂͸̼ ͼ!’ή FΘ 2012 I͵E͸! Ϊ̼Ϟͻ̼ϟ ϟ̠ή ̼ͮΔ̼rally conducted at the NGPC from May 2012 through 

September 2012. During this timeframe, regular QC reviews at the NGPC were generally 

ήΎήΧ̼Δ̸̸̼Ͷ !̸̸ͻθͻΛΔ̠΍΍ϥͳ θ͸̼ ͼ!’ή FΘ 2012 I͵E͸! Ϊ̼Ϟͻ̼ϟ ̮ΛΔήͻ̸̼Ϊ̸̼ ΍Λ̠Δή ΧΎΪ̮͸̠ή̸̼ ̠θ θ͸̼ 

NGPC from April 1, 2011, throΎͮ͸ ̠͢Ϊ̮͸ 31ͳ 2012Ͷ HΛϟ̼Ϟ̼Ϊͳ θ͸̼ ͣG͵’ή ͷ ͮΎͻ̸̼ Ϊ̼ΩΎͻΪ̸̼ 

daily reviews of random purchases or high-dollar early defaults conducted the previous day. 

FΎΪθ͸̼Ϊͳ θ͸̼ ͼ!’ή I͵E͸! Ϊ̼Ϟͻ̼ϟή ̮ΛΔ̸Ύ̮θ̸̼ ̠θ θ͸̼ ͣG͵ were focused on whether loans were 

purchased in accordance with SBA’ή rules and regulations and if the payment amount issued by 

SBA was appropriate. As a result, these reviews were not focused on assessing the quality of 

other significant activities conducted at the NGPC. These activities include CPC Expense 

reimbursement, OICs, Charge-Offs, or guaranty purchase denials and repairs, which were 

Ϊ̼ΩΎͻΪ̸̼ θΛ ̭̼ Ϊ̼Ϟͻ̼ϟ̸̼ ΓΛΔθ͸΍ϥ ͻΔ ̠̮̮ΛΪ̸̠Δ̮̼ ϟͻθ͸ θ͸̼ ͣG͵’ή ͷ ͮΎͻ̸̼. 

Recommendation 1 - Ensure the proper allocation of resources and scoping of the quality 

control program to complete required quality control activities at the loan operations centers. 

Management Comments 

The OFPO agreed with this recommendation. The OFPO stated that it has hired quality 

control specialists and initiated a process improvement project dedicated to ensure 

adequate staffing is available. The OPFO stated it is updating the quality program guides 

for each center to ensure that necessary activities are reviewed by Quality Control. 

Finally, the OFPO stated it is exploring the development of review ranges for 

θΪ̠Δή̠̮θͻΛΔή Χ̼Ϊ͆ΛΪΓ̸̼ ̭ϥ θ͸̼ ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ ΧΪΛͮΪ̠ΓͶ ΂͸ͻή ϟͻ΍΍ ήΎΧΧΛΪθ θ͸̼ ̮̼Δθ̼Ϊή’ 

ability to complete reviews at various resource levels and will ensure the required 

reviews are conducted. 

11
 
 

 

 

 

 

 

 

 

 

 

 

OIG Response 

Management’ή comments were responsive to the recommendation. The management 

decision for this recommendation is considered resolved and the recommendation will 

remain open pending final action. 

Recommendation 2 - Ensure that corrective actions related to quality control findings are 

appropriately documented and completed within required timeframes. 

Management Comments 

The OFPO agreed with this recommendation. The OFPO stated that it initiated a process 

improvement project in April 2013 to enhance its corrective action process. The OFPO 

stated that this initiative led to the development of the Corrective Action Tracker 

(Tracker) system which tracks all quality incidents that can escalate into more serious 

matters. The OPFO stated that the Tracker has the capability to track and report the 

status of the corrective actions to successful implementation and closure. The OFPO 

began implementing Tracker in the loan operation centers in October 2013, and 

anticipates full implementation by January 2014. 

OIG Response 

Management’ή comments were responsive to the recommendation. The management 

decision for this recommendation is considered resolved and the recommendation will 

remain open pending final action. 

Recommendation 3 - Establish and implement a plan to conduct quality assurance 

activities at SBA loan operation centers. 

Management Comments 

The OCRM agreed with this recommendation. The OCRM stated that providing 

̸̠̼ΩΎ̠θ̼ ΛϞ̼Ϊήͻͮ͸θ Λ͆ ͼ!’ή ΍Λ̠Δ ̮̼Δθ̼Ϊ ͷ ΧΪΛͮΪ̠Γ ͻΓΧ΍̼Γ̼Δθ̠θͻΛΔ ͻή ̼ήή̼Δtial to 

assure effective loan center operations. The OCRM stated that it is finalizing its FY 2014 

Risk Management Plan, which will address the development of a Quality Assurance plan. 

In addition, the OCRM stated that it has designated resources within its Supervision and 

Enforcement Division to lead quality assurance activities. Finally, the OCRM noted that 

it will conduct a review of the quality program guides for each center and establish an 

initial quality assurance plan by March 30, 2014. 

OIG Response 

Management’ή comments were responsive to the recommendation. The management 

decision for this recommendation is considered resolved and the recommendation will 

remain open pending final action. 

12
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix I: Scope and Methodology 

΂Λ ̸̼θ̼ΪΓͻΔ̼ ͻ͆ θ͸̼ ͩ͆͆ͻ̮̼ Λ͆ FͻΔ̠Δ̮ͻ̠΍ ͵ΪΛͮΪ̠Γ ͩΧ̼Ϊ̠θͻΛΔή’ ͷΎ̠΍ͻθϥ ΛΔθΪΛ΍ ͵ΪΛͮΪ̠Γ ͆ΛΪ θ͸̼ 

NGPC and Loan Operation Centers was effectively designed and implemented, we reviewed the 

Overall Quality Control Program Assurance Guide; National Guaranty Purchase Center Specific 

Quality Program Guide; Commercial Loan Servicing Center Specific Quality Program Guide; and 

the Loan Guaranty Processing Center Specific Quality Control Program Guide. 

Additionally, we gathered and evaluated select Center quality control monthly metric reports for 

the period from October 1, 2011, through May 31, 2013. Further, we interviewed Agency 

officials within the Office of Financial Program Operations and Office of Credit Risk Management 

regarding their quality control and assurance activities and oversight. Finally, we analyzed select 

loan operation center training logs and feedback and corrective action logs for the periods of 

FY 2011 through March 2013 and FY 2011 through February 2013 respectively. 

Use of Computer Processed Data (Update) 

The evaluation did not rely on computer-processed data to identify the conditions reported. 

The evidence used for the evaluation consisted primarily of policy guides and tracking 

documents as well as interviews with Agency management officials. 

Prior Coverage (Update) 

The OIG last performed an engagement focused on the quality control process at SBA loan 

operation centers in 2006. In Audit Report 6-26, Survey of the Quality Assurance Review 

Process, issued July 12, 2006, the OIG determined that implementation of the quality control 

plan at the National Guaranty Purchase Center had not been achieved. Additionally, the survey 

found that the quality control program had not been appropriately staffed and was not 

conducting reviews as required. 

Since this time, the OIG has performed multiple engagements to evaluate SBA loan center 

operations over 7(a) and 504 loan origination, purchase, and liquidation activities. Significant 

reports issued within the past 5 years can be accessed on the internet at 

http://www.sba.gov/oig, and include the following: 

The Small usiness !dministration’s Fiscal Year 2008 Improper Payment Rate for the 7(a) 

Guaranty Loan Program, Audit Report 9-16, issued July 10, 2009 

High Dollar Early Defaulted Loans Require an Increased Degree of Scrutiny and Improved
 

Quality Control at the National Guaranty Purchase Center, Audit Report 12-11R, 

Issued March 23, 2012. 

A Detailed Repayment Ability Analysis is Needed on High-Dollar Early Defaulted Loans to 

Prevent Future Improper Payments, Audit Report 12-18, issued August 16, 2012. 

13
 
 

Report on the Most Serious Management and Performance Challenges Facing the Small 

Business Administration in FY 2013, Report 13-02, October 15, 2012 

The Small usiness !dministration’s Improper Payment Rate for 7(a) Guaranty Purchases 

Remains Significantly Underestimated, Audit Report 13-07, issued November 15, 2012. 

14
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix II: Agency Comments
 

U.S. SMALL BUSINESS ADMINISTRATION
 

WASHINGTON, D.C. 20416
 

MEMORANDUM
 

January 8, 2013
 

To: Robert A. Westbrooks 

Acting Assistant Inspector General of Auditing 

From: John A. Miller 

Director, Office of Financial Program Operations 

Brent M. Ciurlino 

Director, Office of Credit Risk Management 

Subject: Response to Draft Report on Improvement is Needed to Ensure Effective Quality Control at 

Loan Operations Centers, Project No. 13004 

Thank you for the opportunity to review the draft report. We appreciate the role the Office of 

Inspector General (OIG) plays in assisting management in ensuring that programs are effectively 

managed, and for the feedback provided in this draft report. 

΂͸̼ ͩIG ̸Ϊ̠͆θ Ϊ̼ΧΛΪθ ̮ΛΔ̮΍Ύ̸̸̼ θ͸̠θ θ͸̼ ͩ͆͆ͻ̮̼ Λ͆ FͻΔ̠Δ̮ͻ̠΍ ͵ΪΛͮΪ̠Γ ͩΧ̼Ϊ̠θͻΛΔή (ͩF͵ͩ) “Γ̸̠̼ 

signi͆ͻ̮̠Δθ ΧΪΛͮΪ̼ήή ͻΔ ͻΓΧ΍̼Γ̼ΔθͻΔͮ ̠ ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ ΧΪΛͮΪ̠Γ ͆ΛΪ ͻθή ΍Λ̠Δ ̮̼Δθ̼ΪήͶ” ͩF͵ͩ 

agrees that significant progress has been made in the quality control (QC) program, and is 

committed to continual improvement in the program. 

OFPO takes QC in its centers very seriously. In October, 2008, OFPO began designing a 

comprehensive quality program across all of its centers. Previously quality control was 

conducted within each center at various levels of sophistication. OFPO identified the need for a 

more robust, consistent, and independent quality control program. One year later, in October 

2009, the OIG published the Fiscal Year 2010 Report on the Most Serious Management and 

Performance Challenges Facing the Small Business Administration, expanding Management 

Challenge #4 from citing the need to establish a quality program in the National Guaranty 

Purchase Center (NGPC), to a quality program across all centers. OFPO, consistent with its QC 

program design and the expanded Management Challenge #4, made tremendous and 

purposeful strides in implementing a robust QC program in its loan centers. The program 

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provides a comprehensive and effective approach for quality and accuracy in all operations. It 

provides for independence in reporting and functioning, without separating quality from center 

operations. 

The QC program is led in each center by a designated QC Specialist; this individual is responsible 

for managing the program and processes in their respective center. The QC program 

collaborated with the loan centers to establish center specific QC review (review) activities and 

θ̠Ϊ̼ͮθήͳ ̠Δ̸ ̸̼θ̼ΪΓͻΔ̸̼ θ͸̠θ ̠Δϥ ̠̮θͻΛΔ ̸̼̼Γ̸̼ “̮ΛΓΧ΍̼Ϥ” ϟΛΎ΍̸ ̭̼ ήΎ̭·̼̮θ θΛ Ϊ̼Ϟͻ̼ϟͶ ΂͸̼ 

finalized QC process, including information such as transactions reviewed, monthly sampling 

thresholds, allocation of resources, reporting, and review checklists were subsequently 

̸Λ̮ΎΓ̼Δθ̸̼ ͻΔ ̼̠̮͸ ̮̼Δθ̼Ϊή’ ΩΎ̠΍ͻθϥ ΧΪΛͮΪ̠Γ ͮΎͻ̸̼ (ͮΎͻ̸̼)Ͷ The QC program leverages center 

professional staff to conduct monthly sampling reviews. 

΂͸̼ ͩIG’ή ̸Ϊ̠͆θ Ϊ̼ΧΛΪθ indicated that all QC activities were not being performed in accordance 

ϟͻθ͸ ͩF͵ͩ’ή ΛϞ̼Ϊ̠΍΍ ͷ ̠Δ̸ ̮̼Δθ̼Ϊ ήΧ̼̮ͻ͆ͻ̮ ͮΎͻ̸̼ήͶ ΂͸̼ ̸Ϊ̠͆θ Ϊ̼ΧΛΪθ ήθ̠θ̼ή θ͸̠θͳ “͙[̮\̼Δθ̼Ϊή 

ΛΓͻθθ̸̼ Ϊ̼ΩΎͻΪ̸̼ ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ Ϊ̼Ϟͻ̼ϟή Λ͆ ήͻͮΔͻ͆ͻ̮̠Δθ ͆ΎΔ̮θͻΛΔήͶ” ͼΧ̼̮ͻ͆ͻ̮̠΍΍ϥͳ θ͸̼ Ϊ̼port 

ήθ̠θ̼ήͳ “[̠\ή θ͸̼ ͣG͵ ͆Λ̮Ύή̸̼ ΛΔ [͸ͻͮ͸-dollar early-defaulted loans], it generally did not 

Χ̼Ϊ͆ΛΪΓ Ϊ̼ΩΎͻΪ̸̼ ΩΎ̠΍ͻθϥ ̮ΛΔθΪΛ΍ Ϊ̼Ϟͻ̼ϟή͙” ͩF͵ͩ ̠̮ΊΔΛϟ΍̸̼̼ͮή θ͸̠θ ̠̮θͻΛΔή ͻΔ θ͸̼ ͣG͵ ϟ̼Ϊ̼ 

ΔΛθ ̠΍ϟ̠ϥή Ϊ̼Ϟͻ̼ϟ̸̼ ̠ή ̸̼θ̠ͻ΍̸̼ ͻΔ θ͸̼ ̮̼Δθ̼Ϊή’ ͮΎͻ̸̼ήʹ ͸Λϟ̼Ϟ̼Ϊͳ ͻΔ these instances, QC utilized 

the resources available to continue reviews of the higher-risk transactions – especially highdollar early-defaulted (HDED) loans. It should be noted that the OIG cited the NGPC for 

deficiencies on HDED loans in a previous audit, resulting in the management decision for QC to 

review 100 percent of HDED loans submitted for guaranty purchase. OFPO management 

prudently targeted higher risk activities identified through audit feedback, but did not update 

the guide to reflect the adjustment. Going forward, OFPO commits to update the center QC 

guides as it makes responsible, risk-based decisions on QC activities. 

Further, the draft report states that the NGPC ceased QC activities for a five month period in FY 

2012 to focus on reviews required by the Improper Payment Elimination and Recovery Act 

(IPERA). While OFPO does not dispute that QC reviews were not performed in accordance with 

θ͸̼ ͣG͵’ή ͮΎͻ̸̼ ̸ΎΪͻΔͮ θ͸ͻή θͻΓ̼ Χ̼ΪͻΛ̸ͳ ͻθ ̸Λ̼ή ΔΛθ ̠ͮΪ̼̼ ϟͻθ͸ θ͸̼ ̠ήή̼ΪθͻΛΔ θ͸̠θ ͷ ̠̮θͻϞͻθͻ̼ή 

were not performed. The IPERA audit represents a statistically valid random sample designed 

θΛ θ̼ήθ θ͸̼ !̼ͮΔ̮ϥ’ή ̮ΛΓΧ΍ͻ̠Δ̮̼ ϟͻθ͸ ΍Λ̠Δ ΧΪΛͮΪ̠Γ Ϊ̼ΩΎͻΪ̼Γ̼Δθήͳ ̠Δ̸ ̼ήή̼Δθͻ̠΍΍ϥ ΓͻΪΪΛΪή θ͸̼ 

ͷ Ϊ̼Ϟͻ̼ϟ ΧΪΛ̮̼ήήͶ !ή ήΎ̮͸ͳ ͻθ ͻή ͩF͵ͩ’ή ΧΛήͻθͻΛΔ θ͸̠θ ͷ ̠̮θͻϞͻθͻ̼ή ϟ̼re not ceased; the 

reviews were merely substituted during this time period with the IPERA audit reviews. 

The SBA Quality Control and Assurance Program Guide states that the QC program will monitor 

new processes and complex transactions. The OIG references this requirement in the draft 

report, and concludes that the 7(a) Loan Guaranty Processing Center (LGPC) did not conduct QC 

reviews of loans made under the Small Loan Advantage (SLA) or Dealer Floor Plan (DFP) 

ΧΪΛͮΪ̠Γήͳ ̠ή Ϊ̼ΩΎͻΪ̸̼ ̭ϥ ͩF͵ͩ’ή ΛϞ̼Ϊ̠Ϊ̮͸ͻΔͮ Ωuality program guidance. OFPO analyzed its 

Ϊ̼ΧΛΪθή ̠Δ̸ ̮ΛΔ͆ͻΪΓ̸̼ θ͸̼ ͩIG’ή ̠ήή̼ΪθͻΛΔ θ͸̠θ ΔΛ ͼ͜! ΛΪ DF͵ ΍Λ̠Δή ϟ̼Ϊ̼ Ϊ̼Ϟͻ̼ϟ̸̼ ̸ΎΪͻΔͮ θ͸̼ 

specified timeframe; however, the lack of QC reviews in the aforementioned loan programs 

occurred because of the sampling methodology employed by the LGPC. The sampling 

Γ̼θ͸Λ̸Λ΍Λͮϥ ̸Λ̮ΎΓ̼Δθ̸̼ ͻΔ θ͸̼ ̼Δθ̼Ϊ’ή ΧΪΛͮΪ̠Γ ͮΎͻ̸̼ requires the Center to review 3 

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percent of all loan approvals exceeding $1.5 million performed the previous month. The 

sampling methodology does not consider delivery method when determining the monthly 

sample, and therefore, would not exclude any 7(a) delivery methods. Rather, in conformance 

ϟͻθ͸ θ͸̼ ̼Δθ̼Ϊ’ή ή̠ΓΧ΍ͻΔͮ Γ̼θ͸Λ̸Λ΍Λͮϥͳ ͷ reviews were not conducted on SLA loans as loans 

approved under this delivery method do not meet the dollar threshold in which the loan 

sample is determined. QC reviews were not conducted on DFP loans during this timeframe as 

they were not selected for QC review due to the limited number of loans approved under this 

delivery method, even though the sampling methodology did not exclude DFP loans. As such, it 

ͻή ͩF͵ͩ’ή ΧΛήͻθͻΛΔ θ͸̠θ θ͸̼ ΍̠̮Ί Λ͆ ͷ Ϊ̼Ϟͻ̼ϟή ΛΔ θ͸̼ ͼ͜! ̠Δ̸ DF͵ was consistent with the 

sampling methodology identified in the guide. Though the annual IPERA loan samples included 

SLA and DFP loans, OFPO recognizes this issue as an area of improvement, and will amend the 

͜G͵’ή ή̠ΓΧ΍ͻΔͮ Γ̼θ͸Λ̸Λ΍Λͮϥ θΛ ̼ΔήΎΪ̼ Δ̼ϟ ΧΪΛ̮̼ήή̼ή ̠Δ̸ ̮ΛΓΧ΍̼Ϥ ΍Λ̠Δ θΪ̠Δή̠̮θͻΛns are not 

unintentionally excluded due to the ̼Δθ̼Ϊ’ή established parameters. 

The draft report indicates that corrective actions identified during the QC review process were 

not adequately tracked to completion between October 2010 and February 2013. While the 

corrective actions were being tracked to completion by the QC program in FY 2011 and FY 2012, 

the process in place did not require QC to capture the enhanced level of detail, which was later 

implemented in FY 2013. In the initial development stages of the program, deficiencies 

ͻ̸̼Δθͻ͆ͻ̸̼ θ͸ΪΛΎͮ͸ θ͸̼ ͷ Ϊ̼Ϟͻ̼ϟ ΧΪΛ̮̼ήή ϟ̼Ϊ̼ Ϊ̼̮ΛΪ̸̸̼ ̭ϥ θ͸̼ ͷ ήΧ̼̮ͻ̠΍ͻήθή ͻΔθΛ θ͸̼ͻΪ ̮̼Δθ̼Ϊ’ή 

tracking tool. The tracking tool was represented through a spreadsheet or database and acted 

in compliance with the initial corrective action guidance. However, as the process evolved, the 

QC program identified additional deficiency tracking details and characteristics to collect for 

analysis and reporting purposes. In April 2013, OFPO initiated a project to redevelop the 

corrective action process, which resulted in the development and implementation of the 

Corrective Action Tracker. 

The Corrective Action Tracker (Tracker) maintains and provides consistent data for tracking and 

analyzing loan-level deficiencies status and trends across centers. It tracks all quality incidents 

that can escalate into more serious matters, such as Lender, Borrower, CDC complaints, audit 

findings, and policy noncompliance, and includes details regarding the action taken, source of 

the error (SBA vs. lender), dollar impact, lender information, and loan type which were not 

tracked in the initial process. The Tracker has the capability to maintain a systematic approach 

for tracking and reporting the status of the corrective actions to successful implementation and 

closure, and involves all appropriate staff and stakeholders in the corrective action process. 

In July 2013, the QC program launched the Quality-Based Evaluator and Risk Tracker (Q-BERT). 

This web-based platform unifies all of the ̮̼Δθ̼Ϊή’ ͷ Ϊ̼Ϟͻ̼ϟ ͆ͻΔ̸ͻΔͮ ̸̼θ̠ͻ΍ή ̠Δ̸ Ϊ̼΍̠θ̸̼ 

documentation in a single, centralized repository using Microsoft Access. The combined data 

from all centers provides greater analytics and reporting, resulting in a complete, accurate 

picture of the centers’ ΪͻήΊ ΍̠Δ̸ή̮̠Χ̼ ̠̮ΪΛήή ̠΍΍ ΍Λ̠Δ ΧΪΛ̸Ύ̮θ ΍ͻΔ̼ή θ͸ΪΛΎͮ͸ΛΎθ θ͸̼ ΍Λ̠Δ ΍ͻ̼̮͆ϥ̮΍̼Ͷ 

Q-E͸΂’ή reporting capability increases management awareness and provides assurance that 

center risk tolerance thresholds are being followed for all risk-related activities. 

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OFPO continuously evaluates the effectiveness of the QC program to ensure its quality 

approach is consistent and effective across centers. Through this process, QC has identified 

several opportunities to enhance center processes, leading to a more efficient and effective 

quality program. The OIG commends OFPO for its efforts to address longstanding issues in the 

̸Ϊ̠͆θ Ϊ̼ΧΛΪθͳ ̠Δ̸ ͻθ ͻή ͩF͵ͩ’ Λ̭·̼̮θͻϞ̼ θΛ ̮ΛΔθinually improve the QC program. 

̠͢Δ̠̼ͮΓ̼Δθ’ή Ϊ̼ήΧΛΔή̼ θΛ θ͸̼ Ϊ̼̮ΛΓΓ̼Δ̸̠θͻΛΔή ͻΔ θ͸̼ ̸Ϊaft report is noted as follows: 

1. Ensure the proper allocation of resources and scoping of the quality control program 

to complete required quality control activities at the loan operations centers. 

OFPO concurs with this recommendation and has hired a Quality Control Specialist in its loan 

operation centers. OFPO has also initiated a process improvement project dedicated to 

ensuring adequate staffing is available for quality reviews. OFPO is currently evaluating 

potential staffing methods to determine the most effective approach for each loan processing 

center. Additionally, OFPO is engaged in updating the quality program guides for each center 

to ensure that necessary activities are reviewed by Quality Control, and is exploring the 

development of review ranges for transactions performed by the quality control program as an 

option. Establishing a minimum and maximum percent of monthly transaction reviews 

̠Δθͻ̮ͻΧ̠θ̼ή θ͸̼ ̮̼Δθ̼Ϊή’ ̠̭ͻ΍ͻθϥ θΛ ̮ΛΓΧ΍̼θ̼ Ϊ̼Ϟͻ̼ϟή ̠θ Ϟ̠ΪͻΛΎή Ϊ̼ήΛΎΪ̮̼ ΍̼Ϟ̼΍ήͳ ̠Δ̸ ϟͻ΍΍ ̼ΔήΎΪ̼ 

the required reviews are conducted as center demands change. 

2. Ensure that corrective actions related to quality control findings are appropriately 

documented and completed within required timeframes. 

OFPO concurs with this recommendation and initiated a process improvement project in April 

2013 to enhance its corrective action process. This initiative lead to the development of the 

Corrective Action Tracker (Tracker), designed to maintain and provide consistent data for 

tracking and analyzing loan-level deficiencies status and trends across loan operation centers. 

It tracks all quality incidents that can escalate into more serious matters, such as Lender, 

Borrower, CDC complaints, audit findings, and policy noncompliance, and includes details 

regarding the action taken, source of the error (SBA vs. lender), dollar impact, lender 

information, and loan type which were not tracked in the initial process. The Tracker has the 

capability to maintain a systematic approach for tracking and reporting the status of the 

corrective actions to successful implementation and closure, and involves all appropriate staff 

and stakeholders in the corrective action process. 

OFPO began implementing the Corrective Action Tracker in the loan operation centers in 

October 2013, and anticipates full implementation by January 2014. 

3. Establish and implement a plan to conduct quality assurance activities at SBA loan 

operation centers. 

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OCRM concurs with this recommendation and understands that providing adequate oversight 

Λ͆ ͼ!’ή ΍Λ̠Δ ̮̼Δθ̼Ϊ’ή ͷ program implementation is essential to assure effective loan center 

operations. OCRM has not yet developed a formal quality assurance program due to limited 

ήθ̠͆͆ Ϊ̼ήΛΎΪ̮̼ή ̠Δ̸ ̠ ̸̼Χ̠ΪθΓ̼Δθ̠΍ Ϊ̼ΛΪ̠ͮΔͻϪ̠θͻΛΔͶ ͩ͸͢’ή ̼͆͆ΛΪθή ͻΔ FΘ 2013 ϟ̼Ϊ̼ ͆Λ̮Ύή̸̼ ΛΔ 

extensive improvements in its lender monitoring and Risk Based Review processes and the 

implementation of a formal Supervision and Enforcement program. OCRM is finalizing its FY 

2014 Risk Management Plan, which will address the development of a Quality Assurance plan. 

As part of the reorganization, the Quality Assurance function has been consolidated into 

ͩ͸͢’ή ͼΎΧ̼ΪϞͻήͻΛΔ ̠Δ̸ EΔ͆ΛΪ̮̼Γ̼Δθ DͻϞͻήͻΛΔ ̠Δ̸ ̠ FͻΔ̠Δ̮ͻ̠΍ !Δ̠΍ϥήθ ͸̠ή ̭̼̼Δ ̸̼ήͻͮΔ̠θ̸̼ θΛ 

lead quality assurance activities. OCRM will conduct a review of the quality program guides for 

each center and establish an initial quality assurance plan by March 30, 2014. 

Again, thank you for the opportunity to review the draft report. Please let us know if you need 

additional information or have any questions regarding our response. 

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