We reviewed 8 of the 42 loans purchased by 1 district office during the period July 1974 through February 1975. Loan guaranty purchase authorizations continued to be executed without apparent investigation or comment regarding the participating bank's failure to comply with the terms of SBA's guaranty agreement, or regarding the possibility of negligence, or misrepresentation by participating banks.

In two of the eight loans, the purchase authorization did not contain the required statement that "SBA has no knowledge of or evidence to suggest negligence, fraud, or misrepresentation on the part of the claimant. While the remaining purchase authorizations contained the phrase, "there is no indication of fraud or collusion," the basis for such a conclusion was not evident in the purchase authorization.

Furthermore, the required postpurchase examination and report, including the district counsel's review of the sufficiency of collateral documents and the agency's legal liability, were not made for four of the eight loans reviewed. In In the four instances in which postpurchase examinations were made, it was to transfer the loan to "in liquidation" status.

The required postpurchase examination format was not used. As a result, the loan specialist's reports did not show (1) a review of the participating bank's disbursement of the loan proceeds for conformance with the loan authorization or (2) a concise narrative reflecting the scope of the examination and whether the discrepancies found, if any, would result in a loss to SBA.

The assistant district director agreed that the district had not begun to conduct postpurchase examination and reports using the guidelines provided by the assistant regional director.

At another district office, we reviewed 5 of the 99 loans purchased from July 1974 through February 1975. These five loans represented 19 percent of the $6,961,079 paid to participants by the district during this period. This district office also had not taken adequate corrective action.

"Review of Selected Aspects of Liquidation and Disposal Activities"

The report showed that supervisory controls are not sufficient to assure effective liquidation actions to obtain repayment of the loan in the minimum time. Loan officers stated that timely actions were not taken because of priorities given to other functions, shortage of personnel, and heavy workload. As a result of delays in liquidation, there was no assurance that the agency was receiving maximum recovery on the collateral or from other sources.

Internal audit officials recommended that the Associate Administrator for Operations:

--Pursue the problem of implementing supervisory con-
trols concerning liquidation functions to the extent
that unjustified delays would be eliminated and
liquidation action taken against a borrower would
be productive and effective.

--Promote action to the extent necessary to implement supervisory controls that would require loan officers to follow prescribed liquidating procedures and in a timely manner when a loan is classified as "in liquidation." This action is necessary to preserve the interest of the agency so as to assure maximum recovery in the minimum time for every case in liquidation.

The Associate Administrator for Operations agreed with the recommendations and directed that the findings serve as a basis for a thorough evaluation of liquidation and disposal activities. At the time of our examination, not all of the internal audit recommendations, however, were fully implemented at the district office level.

In one district office, supervisory controls did not appear to be sufficient to assure that prescribed procedures for liquidation actions were followed in a timely manner. For example:

--A loan in liquidation since October 1969 was
awaiting current financial information prior
to further action.

--Two loans in liquidation over 1 year had not been charged off because other cases had higher priority.

--Two borrowers with loans in liquidation, whose pri-
mary source of income was from farming, offered com-
promises based on farm income from the 1974 crop
year. Because 1974 was a poor crop year, neither
company met its compromise offer. One company, in
liquidation since June 1973, offered a compromise
based on the 1975 crop year. The other company, in
liquidation since July 1971, had not made any further
compromise offers.

At one district office liquidation activities were assigned to a single loan officer. This was to resolve the problem of supervisory controls over liquidation activities. In following up on this action, we received conflicting opinions on the adequacy of supervision over liquidation activities. The loan officer who was assigned responsibility stated that he was not trained in liquidation activities before his appointment and he had little or no supervision. The Assistant District Director for Finance and Investment said that he considered his supervision of the loan officer adequate.

DIGESTS OF SEVEN REPORTS PREVIOUSLY ISSUED UNDER PUBLIC LAW 93-386