7(a) Loan Approval for Borrowers with Unresolved COVID-19 Pandemic Loan Compliance Issues

The Office of Inspector General (OIG) is issuing this Inspection Report to assess the Small Business Administration’s (SBA) process for approving 7(a) loans for borrowers with unresolved pandemic loan compliance issues. From October 1, 2019 through May 8, 2023, SBA approved and disbursed 172,598 7(a) loans, totaling $83.4 billion. The 7(a) lenders who have delegated approval authority approved 92 percent of these loans and SBA approved the remaining 8 percent. SBA implemented a process to screen 7(a) loan applications for eligibility, which included screening for Paycheck Protection Program (PPP) and COVID-19 Economic Injury Disaster Loan (EIDL) hold codes prior to loan approval. However, SBA did not implement the process until August 2023, after we initiated this review. Prior to August 2023, neither SBA nor lenders reviewed approved 7(a) loans to ensure borrowers did not have unresolved compliance issues that could negatively impact their eligibility for the 7(a) loan. As a result, there were 5,044 approved and disbursed 7(a) loans, totaling $4.5 billion, where the borrower had a PPP loan or COVID-19 EIDL with an unresolved eligibility or potential fraud issue. SBA stated it resolved hold codes for 3,015 of 5,044 loans and we did not assess the agency’s methodology or whether it appropriately removed hold codes. We will assess the appropriateness of SBA’s removal of hold codes for the 3,015 loans prior to closing our recommendation. We recommended SBA review and appropriately resolve hold codes related to the 5,044 7(a) loans to determine impact on 7(a) eligibility and seek remedy or repayment of all 7(a) loans deemed ineligible.