Performance Audit Report 

504 Recovery Act loans Were Originated and 

Closed in Accordance with SBA Policies 

For Official Use Only 

September 27, 2012 Report Number 12-23R 
u.s. Small Business Administration 

Office of Inspector General 

Washington, D.C. 20416 

REPORT TRANSMITTAL 

DATE: 	 September 27, 2012 

To: 	 Grady Hedgespeth 

Director, Office of Financial Assistance 

John A. Miller 


Director, Office of Financial Program Operations 


SUBJECT: 	 Report on whether the 504 Recovery Act Loans Were Originated and 

Closed in Accordance with SBA Policies 

This report presents the results of our audit of the origination and closing of 504 Recovery Act loans. 

The objective of this audit was to determine whether 504 Recovery Act loans were originated and 

closed in accordance with Small Business Administration policies and procedures. 

We request that you provide your management decision for each recommendation on the attached SBA 

form 1824, Recommendation Action Sheet, by October 27, 2012 (30 days after the final report date). 

Your decision should identify the specific actions taken or planned for each recommendation and the 

target dates for completion. 

We appreciate the cooperation and courtesies of the Small Business Administration 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/ original signed 

John K. Needham 

Assistant Inspector General for Auditing 
EXECUTIVE SUMMARY: 

504 Recovery Act Loans Were Originated and Closed in Accordance 

with SBA Policies 

What DIG Audited 

The SBA's 504 Program provides small businesses 

with long-term, fixed-rate financing for the purchase 

of land, buildings, machinery, or other fixed assets. 

The DIG audited a sample of 504 Program Recovery 

Act loans that were approved between June 1, 2009 

and January 31, 2010. We selected all 10 loans 

involving refinancing from a universe of 1,141 loans. 

We then selected a random sample of 50 loans from 

the remaining 1,131 loans. The fieldwork was 

performed by RER Solutions, Inc., (RER) under 

contract with the DIG, with oversight and follow-up 

by the DIG. The contractor reviewed Small Business 

Administration (SBA) loan files using an DIG 

checklist. For all loans examined, RER also reviewed 

information in Colson's Services Corporation CDC 

Connection and SBA's Electronic Loan Information 

Processing System (ELlPS) to determine the status of 

the loans in the sample. 

OIG Recommendations 

The DIG recommended a total of three actions, all of 

which were addressed to the Director of the Office 

of Financial Program Operations, specifically: 

• 	 Determine how the deficiencies in the four SBAapproved loans occurred, and take corrective 

action to prevent similar deficiencies in other 

SBA-approved 504 loans. 

• 	 Provide feedback to the SBA loan officers who 

approved the 504 loans in which deficiencies 

were identified. 

• 	 Notify the improper payment review team of 

the improper 504 loan guaranties to ensure the 

proper estimation of improper payments in the 

504 Loan Program. 

Agency Comments and Actions Taken 

The SBA agreed with two of the recommendations 

and partially agreed with one recommendation. The 

SBA said it has taken, or will take, steps to address 

many of our concerns in the 504 originating and 

closing process. Specifically, it will (1) analyze the 

four loans with deficiencies and will propose 

corrective actions to the DIG, (2) increase credit 

training mentoring of loan officers, and (3) notify the 

Improper Payments Review Team of the improper 

504 loan guaranties identified during the audit. 

What OIG Found 

The SBA generally originated and closed 504 

Recovery Act loans in accordance with SBA policies 

and procedures. However, we identified origination 

and closing deficiencies in 3 of the 50 randomly 

sampled loans reviewed. This resulted in 

unsupported or inappropriate loan approvals of 

$414,000. 

All three loans with inappropriate or unsupported 

loan approvals were regular 504 Certified 

Development Company (CDC) loans approved by the 

SBA. The deficiencies in the three loans included: 

• 	 Unsupported or inaccurate repayment 

projections; 

• 	 Collateral shortfalls; and 

• 	 Inadequate equity injections. 

In addition, one loan reviewed-in our judgmental 

sample of ten loans-also had questionable 

repayment projections. This loan had an 

inappropriate approval of $1,147,000. As of 

July 31, 2012, all four loans were current. 

Deficiency Loan Approval 

Amount 

Lacked creditworthiness due to 

inaccurate repayment ability 

analysis 

$150,000 

Questionable repayment 

projections $1,147,000 

Loan approved with collateral 

shortfall $161,000 

Insufficient equity contribution $103,000 

TOTAL $1,561,000 
Table of Contents 


Introduction ................................................................................................................................5 


RESULTS ..................................................................................................................................7 


Finding: 504 Program Recovery Act Loans were Generally Originated and Closed in 

Accordance with SBA's Policies and Procedures .......................................................................7 


The SBA Approved Two Loans that Lacked Creditworthiness ..............................................8 


The SBA Approved a Loan with a Collateral Shortfall..........................................................9 


The SBA Approved a Loan as an Existing Business Instead of As a New Business 


Transaction Resulting in an Insufficient Equity Contribution ...............................................9 


Conclusion .............................................................................................................................10 


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


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


Appendix II Randomly Sampled Loans .......................................................................................14 


Appendix III: Judgmentaliy Sampled Loans ...............................................................................15 


Appendix IV: Loans with Deficiencies........................................................................................16 


Appendix V: Management Comments .......................................................................................17 

Introduction 

This report presents the results of our audit of the origination and closing of 

504 Development Company Program (504 Program) loans made under the American 

Recovery and Reinvestment Act (Recovery Act). The Recovery Act and Office of 

Management and Budget (OMB) guidance encouraged Offices of Inspectors General to 

conduct oversight of potential risks posed by Recovery Act programs implemented by 

their respective agencies. Accordingly, we conducted this audit due to concerns that 

the Small Business Administration (SBA or the Agency) and companies participating in 

the Certified Development Company (CDC) Program would not exercise due diligence in 

originating and closing Recovery Act 504 loans. The concerns were due to the 

temporary fee elimination for the 504 Loan Program and the CDCs being reimbursed for 

processing fees by the SBA instead of charging the fees to the borrowers. 

The objective of our audit was to determine whether 504 program loans, disbursed 

pursuant to the Recovery Act, were originated and closed in accordance with SBA 

policies and procedures, and to identify any evidence of suspicious activity. To answer 

our objective, we selected all 10 loans involving refinancing from the universe of 1,141 

Recovery Act 504 loans that had been approved between June I, 2009 and 

January 31, 2010 with at least one disbursement as of January 31, 2010. We then 

selected a random sample of 50 loans from the remaining 1,131 loans. The fieldwork 

was performed by RER Solutions, Inc., (RER) under contract with the OIG, with follow-up 

by the OIG. The contractor reviewed Small Business Administration (SBA) loan files 

using a standard OIG review methodology that we prepared based on applicable 

Standard Operating Procedures. For all loans examined, RER also reviewed information 

in Colson's Services Corporation CDC Connection and SBA's Electronic Loan Information 

Processing System (ELlPS) to determine the status of the loans in the sample. We also 

interviewed SBA's Directors of the Fresno and Little Rock Servicing Centers; the Director 

of the Sacramento Loan Processing Center; and the Director, Office of Financial Program 

Operations. 

We conducted this audit between March 2010 and May 2012 in accordance with 

Generally Accepted Government Auditing Standards. Those standards require that we 

plan and perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit objectives. 

We believe that the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. Staff turnover and limited resources created 

delays in completing fieldwork and issuing the audit report. 

Background 

The SBA's 504 Program provides small businesses with long-term, fixed-rate financing 

for the purchase of land, buildings, machinery, or other fixed assets. The SBA issues 

these loans through a partnership with CDCs and private sector third-party lenders. 

The SBA then funds the loans through the issuance of government guaranteed 

debentures. The CDCs are non-profit corporations that the SBA certifies and regulates 

5 

to package, process, close, and service CDC loans. Section 504 loans are financed as 

outlined in Table 1. 

A 504 project has three main partners and generally: a Third Party Lender provides 

50-percent or more of the financing; a CDC provides up to 40-percent of the financing 

through a 504 debenture (guaranteed 100-percent by SBA); and a borrower injects at 

least lO-percent of the financing. This standard financing and other variations of 504 

Program financing are shown in Table 1. 

Table 1 504 loan Financing Structure 

Standard Financing 

Structure 

New Business or 

Limited or Special 

Purpose Propertl 

Both New Business 

and Limited or 

Special Purpose 

Property 

3rd Party Lender 50% 50% 50% 

CDC/SBA 40 35 30 

Borrower 10 15 20 

Source: Standard Operating Procedure (SOP) 50 10 

Congress enacted the Recovery Act on February 17, 2009 to stimulate the u.S. economy 

and increase credit to small businesses. Changes authorized in the Recovery Act and 

subsequent legislation temporarily eliminated 504 upfront fees and expanded the 

program to allow refinancing under certain circumstances. 

Section 501 of the Recovery Act authorized the temporary elimination of two program 

fees for eligible loans approved through the Agency's section 504 Development 

Company Program on or after February 17, 2009. Borrowers no longer were required to 

pay Third-Party Participation fees or CDC processing fees. Further, the SBA was required 

to reimburse the CDCs for the waived processing fees. 

Based on established criteria, including loan volume and quality, the SBA selects CDCs to 

participate in a streamlined loan application processing procedure known as the 

Abridged Submission Method (ASM). Under this process, the CDC is required to collect 

and retain all exhibits to SBA Form 1244, Application for Section 504 Loan. However, the 

CDC is only required to submit certain documents to the SBA with the application. 

The CDC files, including all of the exhibits, or supporting documents, must be available 

for review by the SBA at any time. This process causes the SBA to rely heavily on the 

CDC's analysis; therefore, continued quality performance of the CDC's portfolio is 

essential. 

1 SOP 50 10 5(A), effective date March 1, 2009, identifies a New Business as a business that is 2 years old or less at 

the time the loan is approved. This includes a change of ownership because it will result in new, unproven 

ownership/management and increased debt unrelated to business. SOP 5010 5 (B), effective date October 1, 

2009, modifies this to state that a business that is more than 2 years old at the time the loan is approved may be 

considered a New Business if it is a change of ownership that will result in new, unproven ownership/management 

and increased debt unrelated to business operations. If there is a change of ownership, the CDC must review the 

management and level of debt and make a determination whether an additional borrower's contribution of 5% is 

necessary. A limited or Special Purpose Property is a limited-market property with a unique physical design, 

special construction materials, or a layout that restricts its utility to the use for which it was built. 

6 
Review of Internal Controls 

The SBA's Standard Operating Procedure (SOP) 0002, Internal Control Systems, provides 

guidance on the implementation and maintenance of effective systems of internal 

control as required by OMB guidance. According to OMB Circular A-123, effective 

systems of internal control improve the accountability and effectiveness of federal 

programs and operations by establishing, assessing, correcting, and reporting on 

internal controls. To assess the internal controls relevant to our objectives, we 

reviewed SBA SOPs 50 10 5(A) and 50 10 5(B). 

We identified minor internal control weaknesses in the Agency's origination of 504 

Program Recovery Act loans. We found that documentation supporting requests for 

loans was not always sufficient. Specifically, we identified four instances where the SBA 

accepted CDC loan requests with unsupported or inaccurate repayment projections, 

insufficient collateral, or insufficient equity contributions. 

Implementing the recommendations in this report will address the identified minor 

internal control weaknesses, and improve the Agency's origination and closing of 504 

loans. We will provide a copy of the final report to the senior official responsible for 

internal controls in the Office of the Chief Financial Officer. 

RESULTS 

Finding: 504 Program Recovery Act Loans were Generally Originated and 

Closed in Accordance with SBA1s Policies and Procedures 

The SBA generally originated and closed 504 Recovery Act loans in accordance with 

established policies and procedures. 2 However, we identified origination and closing 

deficiencies in six percent of the randomly selected loans reviewed. These deficiencies 

resulted in inappropriate or unsupported loan approvals of approximately $414,000 of 

the $25,826,000 approvals in our sample. All three loans with inappropriate or 

unsupported loan approvals were made using the Abridged Submission Method (ASM) 

and were approved by the SBA. 

In addition, one loan reviewed in our judgmental sample of all ten loans involving 

refinancing, also had origination and closing problems. This loan resulted in an 

unsupported loan approval of $1,147,000. We also identified one instance of a 

suspicious act that was unrelated to our audit objective, which has been referred to our 

Investigations Division. 

Specifically, for the three loans with deficiencies, the SBA: (1) accepted an inaccurate 

repayment ability analysis, (2) allowed a collateral shortfall, and (3) mistakenly classified 

the business as existing rather than new which resulted in an insufficient amount of 

equity being required. Further, one loan from our judgmental sample also had 

2 	 SBA's SOP 50 10 5, Lender and Development Company Loan Programs, contains the requirements for lenders 

and CDCs to participate in SBA lending programs with different levels of SBA delegation. 

7 

questionable repayment projections. In accordance with the Improper Payments 

Elimination and Recovery Act of 2010 (lPERA), the SBA is required to report to Congress 

on its estimate of improper payments in the 504 Loan Program. Pursuant to IPERA, 

inappropriate or unsupported loan approvals are considered improper payments. 

Examples of the deficiencies are further outlined below. 

The SBA Approved Two Loans that Lacked Creditworthiness 

One of the loans reviewed in our sample lacked creditworthiness due to an inaccurate 

repayment ability analysis. The SBA's SOP 50 10 5 requires the CDCs to perform a 

financial analysis of repayment ability. This analysis should be based on historical 

income statements and/or tax returns (if an existing business) and projections, including 

the reasonableness of supporting assumptions. In addition, the applicant must exhibit a 

strong consistent cash flow that is sufficient to cover the debt. According to Chapter 13 

Code of Federal Regulations (CFR) 120.150, the loan applicant must be creditworthy and 

the loans must be so sound as to reasonably assure repayment. In determining the 

creditworthiness, the SBA will consider: (a) character, reputation, and credit history of 

the applicant, it's associates and guarantors; (b) experience and depth of management; 

(c) strength of business; (d) past earnings, projected cash flow, and future prospects; (e) 

ability to repay the loan; (f) sufficient invested equity to operate on a sound financial 

basis; (g) potential for long-term success; (h) nature and value of collateral; and (i) the 

effect any affiliates may have on the ultimate repayment ability of the applicant. 

We reviewed a loan, approved for $150,000, to a start-up business in Utah for which 

the CDC calculated the repayment ability based on the historical operations of two 

affiliated businesses located in Nevada. Although the affiliates' consolidated cash flow 

was sufficient to cover the debt service on the subject property, both affiliates were 

well-established businesses incorporated in 2002, and were located over an hour away 

from the start-up business. It does not appear reasonable to assume the newly 

established business would operate at the same capacity of the existing businesses. 

In addition, our review of this loan did not identify any supporting analysis for how the 

new business would achieve a similar level of sales as the existing businesses. Further, it 

did not appear that any consideration was given to allow for a ramp up period for the 

new business to achieve that same level of sales. 

In addition, 110an reviewed in our judgmental sample of all 10 loans involving 

refinancing, also had questionable repayment projections. This loan was approved for 

$1,147,000. The interim financials for this business did not support first year 

projections. They showed a negative Debt Service Coverage Ratio (DSCR) in 2009, the 

year the loan was made, and there were no underlying assumptions for the projections. 

The business would have needed a drastic increase in sales in order to break even. 

Therefore, it does not appear to be reasonable to assume the business would have been 

able to achieve these increased sales in 2009 and meet even higher projections in year 

two, 2010. 

8 
The SBA Approved a Loan with a Collateral Shortfall 

Another loan in our sample, approved for $161,000, had insufficient collateral coverage. 

According to the SBA's SOP 50 10 5, 

the SBA's second lien position will be considered adequate when the applicant 

meets all of the following criteria: a strong consistent cash flow that is sufficient 

to cover the debt; demonstrated and proven management; the applicant 

business has been in operation for more than two years; and the proposed 

project is a logical extension of the applicant's current operations. 

If one or more of the four criteria is not met, additional collateral and/or increased 

equity contributions may be required. 

The SBA's second lien position was not adequate for this loan because the applicant 

business had been in operation for less than two years and therefore, did not meet all of 

the required criteria in SOP 50 10 5 to accept a second lien position. In addition, there 

was no equity in SBA's second lien position because the liquidation value of the material 

and equipment was $222,900 and the first lien position was $225,000. Nevertheless, 

neither the CDC nor the SBA required additional collateral. Furthermore, an increased 

equity contribution was also not required. Our review of the loan file did not identify 

any analysis by the lender to determine if other collateral was available. If additional 

collateral was available, we believe it should have been taken to secure this loan to a 

new business. 

The SBA Approved a Loan as an Existing Business Instead ofAs a New Business 

Transaction Resulting in an Insufficient Equity Contribution 

Both the CDC and the SBA mistakenly classified a fourth loan, approved for $103,000, as 

an existing business transaction, instead of being correctly identified as a new business 

transaction. As a result, the SBA did not require a sufficient equity contribution. 

According to SOP 50 105, a new business is described as one that is less than two years 

old at the time the loan is approved. This includes a change of ownership because it will 

result in new, unproven ownership and/or management and increased debt unrelated 

to business operations. In addition, the SOP requires a lO-percent equity contribution 

for an existing business, and a 15-percent equity contribution for a new business or 

limited/special purpose property. The borrower of this loan had been operating a takeout restaurant/deli at a gas station convenience store and he purchased a full-service 

restaurant. In doing so, he sold his existing business to fund the purchase of a new one. 

This should be considered a change of ownership because an existing business was sold 

to a new owner who now operates the restaurant under the same name. 

The misclassification of this borrower as an existing business rather than a new business 

allowed the borrower to contribute an equity contribution of lO-percent, or $12,750, 

less than the required 15-percent contribution. 

9 
Conclusion 

The SBA generally originated and closed 504 Recovery Act loans in accordance with SBA 

policies and procedures. However, our audit results show that a small number of 

inappropriate or unsupported 504 loan approvals did occur. To prevent the occurrence 

of similar deficiencies in other SBA-approved 504 loans, the SBA will need to determine 

how the deficiencies occurred and provide feedback to SBA loan officers. Furthermore, 

as inappropriate or unsupported loan approvals are considered improper payments in 

accordance with the Improper Payments Elimination and Recovery Act of 2010, the SBA 

will need to ensure an accurate improper payment rate is reported in future years. 

Recommendations 

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

1. 	 Determine how the deficiencies in the four SBA-approved loans occurred and 

take corrective action to prevent the occurrence of similar deficiencies in 

other SBA-approved 504 loans. 

2. 	 Provide feedback to the SBA loan officers who approved the 504 loans-in 

which deficiencies were identified-to prevent similar issues in the approval 

of other 504 loans. 

3. 	 Notify the Improper Payment Review Team of the improper 504 loan 

guaranties identified during this audit to ensure the proper estimation of 

improper payments in the 504 Loan Program. 

10 
Agency Comments and Office of Inspector General Response 

On August 17, 2012, we provided a draft of this report to the Director, Office of 

Financial Assistance and the Director, Office of Financial Program Operations for 

comment. On September 20, 2012, the Director, Office of Financial Program Operations 

submitted formal comments which are included in their entirety in Appendix VI. 

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

Recommendation 1 

Determine how the deficiencies in the four SBA-approved loans occurred and take 

corrective action to prevent the occurrence ofsimilar deficiencies in other SBA-approved 

504 loans. 

Management Comments 

The Office of Financial Program Operations (OFPO) partially agreed with this 

recommendation. It did not agree that two of the four loans were inappropriate or 

unsupported approvals. The OFPO will follow the recommendation for the remaining 

two loans and provide their analysis on all four loans and the proposed corrective 

actions to the OIG by October 31, 2012. 

OIG Response 

Management's comments were responsive to the recommendation. We continue to 

support our conclusion that all four loans represented inappropriate or unsupported 

approvals. We will work with the OFPO during the audit follow-up process to ensure 

corrective actions are taken to fully resolve this recommendation. 

Recommendation 2 

Provide feedback to the SBA loan officers who approved the 504 loans-in which 

deficiencies were identified-to prevent similar issues in the approval of other 504 loans. 

Management Comments 

The OFPO concurred with this recommendation and said that the loan officers involved 

with these loans have been notified. In addition, the Sacramento Loan Processing 

Center has increased its credit training and will continue to mentor loan officers and 

improve their credit analysis skills. This training will be completed by 

December 15, 2012. 

OIG Response 

Management's comments were responsive to the recommendation. 

11 

Recommendation 3 

Notify the Improper Payment Review Team of the improper 504 loan guaranties 

identified during this audit to ensure the proper estimation ofimproper payments in the 

504 Loan Program. 

Management Comments 

The OFPO concurred with this recommendation and said that they will issue a 

memorandum to the Improper Payment Review Team and include a copy of the final 

audit report along with a copy of the OFPO analysis on the four loans by 

December 15, 2012. 

OIG Response 

Management's comments were responsive to the recommendation. 

12 
Appendix I: Scope and Methodology 

To answer our audit objective, we identified a universe of 1,141 Recovery Act Loans approved between 


June 1, 2009 and January 31, 2010 with at least one disbursement as of January 31, 2010. 


We judgmentally selected and examined all ten loans involving refinancing from the universe of 1,141 


loans. We then selected a random sample of 50 loans from the remaining 1,131 loans. 


The fieldwork was performed by RER Solutions, Inc., (RER) under contract with the OIG, with oversight 


and follow-up by the OIG. The contractor reviewed Small Business Administration (SBA) loan files using 


a standard OIG review methodology that we prepared based on applicable Standard Operating 


Procedures. For all loans examined, RER also reviewed information in Colson's Services Corporation CDC 


Connection and SBA's Electronic Loan Information Processing System (ELlPS) to determine the status of 


the loans in the sample. We also interviewed SBA's Directors of the Fresno and Little Rock Servicing 


Centers; the Director of the Sacramento Loan Processing Center; and the Director, Office of Financial 


Program Operations. 


Prior Coverage 

During the past 5 years, the GAO issued one report pertaining to SBA's oversight of the 504 program. 

In addition, the SBA OIG issued two reports. 

GAO Report (s) 

Shear, W. (2009). Small Business Administration's Implementation ofAdministrative Provisions in the 

American Recovery and Reinvestment Act. GAO-09-507R, April 16, 2009. 

SBA OIG Reports 

SBA OIG (2009). SBA-Serviced Liquidation of Certified Development Company Loans, Report 

Number 09-11. March 3D, 2009. 

SBA OIG (2010). Audit of Premier Certified Lenders in the Section 504 Loan Program, Report 

Number 10-10. March 23, 2010. 

13 
5 

10 

15 

20 

25 

30 

35 

40 

45 

50 

Appendix II Randomly Sampled Loans 

Loan Number Loan Name Approval Date Approval Amount 

1 3702875003 ADVINTAGE WINE AND DISTRIBUTION 10/20/2009 $396,000 

2 3643695007 A.C.T. HOME CARE INC. 9/21/2009 263,000 

3 3692755008 SILVER SPOON ENTERPRISES INC 10/14/2009 164,000 

4 3555095004 CHICKEN SCRATCH AT CALERA INC. 8/4/2009 693,000 

3521335006 ALICE NAIL LLC 7/16/2009 104,000 

6 3509715010 JOHNSON R.V. SALES 7/10/2009 1,025,000 

7 3543825001 CENTRAL ILLINOIS COURIER INC. 7/29/2009 198,000 

8 3468115010 BRANDON V. CUCCIA D.D.S. 6/16/2009 288,000 

9 3487945007 AGGREGATE CRUSHER SPECIALISTS 6/26/2009 633,000 

3487845001 THE MELTAWAY CREAMERY AND SAND 6/26/2009 133,000 

11 3477715004 BOUCHER'S FOOD SERVICES INC. 6/22/2009 103,000 

12 3522905002 ENTERPRISE VALLEY PHYSICAL THERAPY 7/17/2009 150,000 

13 3446645004 LOST RECOVERY INC. 6/2/2009 176,000 

14 3480945004 BILL'S TOWING AND AUTO REPAIR LLC 6/23/2009 714,000 

3559415001 THE PARTNERSHIP CENTER LTD 8/6/2009 114,000 

16 3490205009 COMFORT INN 6/29/2009 1,513,000 

17 3604935004 TRAFFIC MASTERS INC. 8/31/2009 106,000 

18 3671665006 BOWEN CONSTRUCTION CO INC. 9/30/2009 66,000 

19 3633235005 SMALL BAR 9/15/2009 382,000 

3719175001 MURRAY HAMPTON INN 10/28/2009 1,500,000 

21 3465475007 ELAN INTERNATIONAL INC. 6/15/2009 496,000 

22 3565045004 MADIGAN PRATI & ASSOCIATES INC. 8/11/2009 168,000 

23 3455905001 CENTRAL ALUMINUM SUPPLY CORP 6/8/2009 245,000 

24 3666005002 R.A.H. INDUSTRIES INC. 9/29/2009 3,334,000 

3482795000 EVS NEW HAMPSHIRE INC. 6/24/2009 474,000 

26 3620705005 HERITAGE CROSSINGS 9/8/2009 335,000 

27 3521615007 CLEAR VIEW WINDOWS INC. 7/16/2009 214,000 

28 3610625001 TEQUIPMENT INC. 9/2/2009 1,337,000 

29 3543815009 THE WATERFORD INN 7/29/2009 478,000 

3476905000 SNIPPERS INC. 6/22/2009 51,000 

31 3653665002 PADILLA & GARCIA PC 9/24/2009 82,000 

32 3452135000 SECRET RECIPES RECEPTION CENTER 6/4/2009 184,000 

33 3473945006 CYCLE VISIONS 6/18/2009 388,000 

34 3481315005 LYNDEN LUBE & AUTO 6/24/2009 294,000 

3586835004 CASA LATINA BAKERY 8/20/2009 $486,000 

36 3584245000 PHOENIX RECYCLING TECHNOLOGIES 8/19/2009 797,000 

37 3655055000 CNA ENTERTAINMENT INC. 9/24/2009 589,000 

38 3697545003 POUCH CONVERTING TECHNOLOGIES 10/16/2009 161,000 

39 3687385010 JEFFREY ELENBERGER D.D.S. 10/9/2009 313,000 

3584615004 NICK'S INN 62 INC. 8/20/2009 126,000 

41 3552295010 MODERN RECOVERY & REMARKETING 8/3/2009 244,000 

42 3462695008 CONCESSION SPECIALISTS INC. 6/11/2009 127,000 

43 3646725009 RAY'S APPLE MARKET 9/22/2009 900,000 

44 3500975000 WASH TIME EXPRESS INC. 7/7/2009 750,000 

3490125009 GH FOODS LLC 6/29/2009 2,409,000 

46 3639375002 PACIFIC LIGHT FINANCIAL & INVEST 9/17/2009 91,000 

47 3453185006 SDA DENTAL GROUP LLC 6/5/2009 539,000 

48 3464815000 BROADWAY CHIROPRACTIC P.S. 6/12/2009 189,000 

49 3624735000 X-PRESS ENTERPRISES LLC 9/10/2009 456,000 

3645845008 PROFESSIONAL PHYSICAL THERAPY 9/21/2009 848,000 

Total $25,826,000 

14 

Appendix III: Judgmentally Sampled Loans 

Loan 

Number 

Loan Name 

Approval 

Date 

Approval 

Amount 

1 3448675006 JOHNSON'S 

MEDICAL INC. 

6/3/2009 $440,000 

2 3559615002 SHERMAN 

MECHANCIAL 

INC. 

8/6/2009 1,147,000 

3 3572425009 STL OFFICE 

SOLUTIONS 

INC. 

8/13/2009 1,803,000 

4 3582505002 ACCURATE 

MEASUREMENT 

CONTROLS INC. 

8/19/2009 386,000 

5 3634365000 PARKE HOTEL $ 

CONFERENCE 

CENTER,LLC 

9/16/2009 3,520,000 

6 3643265007 ELEMENT 

CREATIVE, LLC 

9/20/2009 305,000 

7 3646875008 PLEASANT 

VALLEY 

DENTAL 

9/22/2009 293,000 

8 3659255009 SPLASH & 

DASH INC. 

9/26/2009 1,208,000 

9 3666885008 MIDWEST 

TWISTERS 

GYM. 

ACADEMY INC 

9/29/2009 335,000 

10 3698825006 MOONEY 

FARMS 

10/16/2009 1,467,000 

Total $10,904,000 

15 

Appendix IV: Loans with Deficiencies 

Loan Number Deficiency JudgmentallRandom Loan Approval 

Amount 

[Ex. 4] 

Lacked creditworthiness 

due to inaccurate 

repayment ability analysis 

Random 

[Ex. 4] 

[Ex. 4] Questionable repayment 

projections 

Judgmental [Ex. 4] 

[Ex. 4] Loan approved with 

collateral shortfall 

Random [Ex. 4] 

[Ex. 4] Insufficient equity 

contribution 

Random [Ex. 4] 

TOTAL $1,561,000 

16 

Appendix V: Management Comments 

:):'t': ~'G> U.S. SMALL BUSINESS ADMINISTRATION 


* * WASHINGTON, D.C. 20416 


~ ~ ~ ~h. 1953 	 .. ".... MEMORANDUM 

'vIST\"" September 20,2012 

To: 	 John Needham 

Assistant Inspector General for Auditing 

From: 	 John A. Miller 

Director, Office of Financial Program Operations 

Subject: 	 Response to Draft Report on the 504 Recovery Act Loans Were Originated and Closed in 

Accordance with SBA Policies, Project No. 10505C 

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

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

managed. 

The OIG report concluded that SBA generally processed and approved 504 Recovery Act loans in 

accordance with SBA policies and procedures. This is a very positive report of the quality work 

conducted at the SBA's Sacramento Loan Processing Center (SLPC). OIG sampled 50 randomly selected 

and 10 judgmentally selected loans approved between June 1, 2009 and January 31, 2010. Of the 

randomly selected and judgmentally selected loans, OIG stated that a small number of inappropriate or 

unsupported 504 loan approvals occurred. 

The Office of Financial Program Operations, which oversees the SLPC, agrees with the OIG on two of the 

four approvals cited in the report as inappropriate or unsupported. Please note that all four loans are 

current and there is no indication at this time that any of the four loans noted above will not continue to 

perform. 

OFPO's response to the recommendations in the draft report is as follows: 

1. 	 Determine how the deficiencies in the four SBA-approved loans occurred and take corrective 

action to prevent the occurrence of similar deficiencies in other SBA-approved 504 loans. 

Because OFPO believes that two of the four loans were not inappropriate or unsupported 

approvals, OFPO partially concurs with this recommendation as and will follow the 

recommendation for the remaining two loans. OFPO will provide its analysis on all four loans 

and its proposed corrective actions to OIG by October 31, 2012. 

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2. 	 Provide feedback to the SBA loan officers who approved the 504 loans-in which deficiencies 

were identified-to prevent similar issues in the approval of other 504 loans. 

OFPO concurs with this recommendation. The loan officers involved have been notified. It 

should also be noted that the SLPC has increased its credit training and will continue to mentor 

loan officers and improve their credit analysis skills. The training will be completed by December 

15,2012. 

3. 	 Notify the Improper Payment Review Team of the improper 504 loan guaranties identified 

during this audit to ensure the proper estimation of improper payments in the 504 Loan 

Program. 

OFPO concurs with this recommendation and will issue a memorandum to the Improper 

Payment Review Team and include a copy of the final audit along with a copy of the OFPO 

analysis on the four loans by December 15, 2012. 

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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