text: b" Office of Inspector General\n\nU.S. Small Business Administration\n\n\n Inspection Report\n\n No. 98-03-01\n\n Loan Agents\n\n and the\n\n Section 7(a) Program\n\n March 1998\n\x0cMarch 31, 1998\n\nTO:\t Aida Alvarez\n Administrator\n\nTHROUGH: Karen S. Lee\n Acting Inspector General\n\nFROM: Tim Cross\n Assistant Inspector General\n for Inspection and Evaluation\n\nSUBJECT: Inspection of Loan Agents and the Section 7(a) Program\n\n We are pleased to submit our inspection report on Loan Agents and the Section 7(a)\nProgram, which focuses on preventing loan agent fraud. Although competent and honest\nloan agents help small businesses gain access to capital, some agents have perpetrated\nfraudulent schemes which have resulted in SBA\xe2\x80\x99s purchase of defaulted loans. As of the\nend of Fiscal Year 1997, in the 7(a) program alone, criminal investigations had been\ninitiated on 354 individuals involving loan applications handled by 18 loan agents.\nTwenty-eight percent of these agents had prior criminal records. Moreover, allegations\ninvolving loan agents continue to be reported to the Office of Inspector General (OIG).\n\n Over the past few years, Agency officials have been examining ways to make loan\nagents more accountable. Factors affecting SBA\xe2\x80\x99s ability to accomplish this include the\nAgency\xe2\x80\x99s diminished staff resources and the potential for loan agents to use the Internet to\ncommit fraud on a national scale. Accordingly, and consistent with SBA\xe2\x80\x99s emerging\noversight role, any system to enhance loan agent accountability should emphasize fraud\nprevention over expensive after-the-fact remedies; avoid creating undue hardship for small\nbusinesses, lenders, and honest loan agents; monitor agents\xe2\x80\x99 performance to identify\nproblems; and take into account technological change.\n\n An important preventive tool--and one recommended by SBA\xe2\x80\x99s Committee on Loan\nPackager Reforms--is the registration of loan agents. Without an up-to-date registry, no\neffective accountability or controls are possible. As part of this process, loan agents\nshould provide limited personal data so that the OIG could conduct a criminal history\ncheck. Based on the experience of some lenders, the OIG believes that the mere act of\nrequesting verifiable information could deter dishonest individuals from involvement in the\n7(a) program.\n\n To accomplish the above without the administrative burden of fingerprinting, the OIG\nrecommends that you propose expanding current legislation to include loan agents among\nthose subject to National Crime Information Center criminal history checks. The OIG\nfurther recommends that the Associate Administrator for Financial Assistance establish a\nloan agent registration system that, among other things, creates Internet lists of registered\n\x0cloan agents and those agents whose privilege to conduct business with SBA has been\nsuspended or revoked, ensures that loan agent registration is not considered an Agency\nendorsement, and informs lenders that SBA is under no obligation to guarantee loans in\nwhich agents were involved after the above privilege was suspended or revoked.\n\n Because systematic monitoring of loan agent performance can serve as an early\nwarning system for identifying problems, the OIG recommends that the Associate\nAdministrator for Financial Assistance establish a loan agent monitoring system that holds\nthe lender responsible for the accuracy of data (including electronic data) originated by\nloan agents and transmitted by the lender to SBA, ensures that all loan data is linked to the\nagents involved, establishes purchase rate benchmarks that would trigger closer\nexamination of a loan agent\xe2\x80\x99s performance, and centralizes the evaluation of agent\nperformance to ensure consistency. Finally, the report discusses the possible use of\nlenders\xe2\x80\x99 bond insurance policies to help protect SBA from losses due to loan agent fraud.\n\n The Acting Associate Administrator for Financial Assistance commented that the\nOffice of Financial Assistance (OFA) shares the concerns identified in the report and is\nbasically in agreement with the recommendations. She noted, however, that OFA remains\nsomewhat less convinced than the OIG of the magnitude of the problems caused by loan\nagents.\n\n The OIG inspection team appreciates the excellent cooperation received from SBA\nstaff, other Federal officials, lenders, loan agents, and representatives from other non\xc2\xad\ngovernmental organizations. We would welcome the opportunity to brief you on this\ninspection at your convenience.\n\n\n\nAttachment\n\ncc: Chris Sale\n\x0c TABLE OF CONTENTS\n\n\n\n Page\n\n\nEXECUTIVE SUMMARY iii\n\n\nBACKGROUND 1\n\n\nOBJECTIVES, SCOPE, AND METHODOLOGY 7\n\n\nCURRENT BARRIERS TO LOAN AGENT ACCOUNTABILITY 9\n\n\nCHANGES AFFECTING SBA\xe2\x80\x99S FUTURE REGULATION OF\n\nLOAN AGENTS 13\n\n\nPREVENTIVE MEASURES 17\n\n\nMONITORING PERFORMANCE 27\n\n\nAN OPTION FOR LONG-TERM CONSIDERATION:\n\nBLANKET BOND POLICIES AND SBA 31\n\n\nAPPENDICES\n\n\n A Current Version of the Compensation Agreement 33\n\n\n B Draft of the Revised Compensation Agreement 35\n\n\n C Office of Financial Assistance Comments 37\n\n\n D Contributors to this Report 39\n\n\x0c ABBREVIATIONS\n\n\nCFR Code of Federal Regulations\nCLP Certified Lenders Program\nCPA Certified Public Accountant\nFY Fiscal Year\nGSA General Services Administration\nHUD Department of Housing and Urban Development\nIRS Internal Revenue Service\nLowDoc Low Documentation Loan Program\nLSP Lender Service Provider\nNAGGL National Association of Government Guaranteed Lenders\nNCIC National Crime Information Center\nNPR National Performance Review\nOCIO Office of the Chief Information Officer\nODA Office of Disaster Assistance\nOFA Office of Financial Assistance\nOIG Office of Inspector General\nOMB Office of Management and Budget\nPLP Preferred Lenders Program\nSBA Small Business Administration\nSBLC Small Business Lending Company\nSIC Standard Industrial Classification\nSOP Standard Operating Procedure\nVA Department of Veterans Affairs\n\x0c EXECUTIVE SUMMARY\n\n\n Purpose and Background\n\n\nThe 7(a) Program. Under Section 7(a) of the Small Business Act (Public Law 85-536, as\namended), the Small Business Administration (SBA) guarantees up to 80 percent of a\nprivate lender\xe2\x80\x99s loan to a small business borrower who cannot obtain credit elsewhere on\nreasonable terms and conditions. The number of 7(a) loans approved each year more than\nquadrupled between Fiscal Year (FY) 1990 and FY 1997, from 10,848 to 45,288, while\nthe number of SBA employees decreased from approximately 4,100 to 3,100.\n\nLoan Agents. The 7(a) program involves not only SBA, borrowers, and lenders but also\nloan agents, who provide referral and/or loan application services for a fee. Because of\nthe Agency\xe2\x80\x99s recent experience with fraud on the part of some loan agents, the Office of\nInspector General (OIG) initiated this inspection to identify efficient ways to reduce the\nopportunities for fraud and minimize its impact on the program. The loan agent issue also\nhighlights the problem of trying to regulate any cottage industry: how a resource-\nconstrained agency can keep a program relatively secure while allowing access to a wide\nrange of users and enabling private entrepreneurs to provide support services needed by\nsome users. On the plus side, competent and honest loan agents can screen prospective\nborrowers for eligibility and, when appropriate, assist them in preparing application\npaperwork. Agents also can increase small business access to capital by reaching\nunderserved communities.\n\nProblems with Loan Agents. Dishonest agents, on the other hand, pose a problem for\nborrowers, lenders, and SBA. OIG cases have included various fraudulent schemes, such\nas submitting false tax returns or other financial data, charging the borrower excessive\nfees, using fictitious names on SBA forms, exaggerating their ability to gain loan approval,\nacting in illegal collusion with officials of lending institutions, and conspiring with\nborrowers to submit false loan packages. Such schemes have forced the purchase of\ndefaulted loans by SBA and, ultimately, the taxpayer. As of the end of FY 1997, in the\n7(a) program alone, criminal investigations had been initiated on 354 individuals involving\nloan applications handled by 18 loan agents. The loan volume associated with these\ninvestigations exceeded $123 million. Twenty-eight percent of these agents had prior\ncriminal records. Moreover, allegations involving loan agents continue to be reported to\nthe OIG.\n\nWork Performed. To identify ways to reduce fraud by loan agents, the inspection team\ninterviewed SBA central office officials, SBA district office staff, lenders in high\nvolume/high loan-purchase districts, loan agents, program officials at other Federal\nagencies, and relevant staff in other OIGs. The team also obtained information from the\nNational Association of Government Guaranteed Lenders (NAGGL) and provided input\non its proposal for a loan agent registration and training process.\n\x0cBecause loan agents and the Agency will increasingly rely on electronic communications,\nteam members obtained information on electronic security measures from SBA\xe2\x80\x99s Office of\nthe Chief Information Officer (OCIO) and outside organizations. Finally, the team\nevaluated the possible use of professional liability/malpractice insurance, individual bonds,\nand/or lenders\xe2\x80\x99 blanket bond policies to ensure loan agent integrity and cover at least part\nof the Agency\xe2\x80\x99s financial position in the event of loan agent fraud.\n\n\n Conclusions\n\nBarriers to Accountability. There are several barriers to making loan agents more\naccountable. The most basic may be overcoming the confusion over loan agents\xe2\x80\x99 roles\nand functions, which vary widely. Second, there are few preventive measures, such as\nbackground checks, that would bar questionable individuals or firms from becoming loan\nagents. Third, SBA information systems presently lack reliable data on the number of\nactive loan agents. Fourth, it is often difficult to assess the impact of loan agent activity,\ne.g., determining whether a loan defaulted because of agent fraud, incompetence, or\nreasons unrelated to the agent\xe2\x80\x99s actions. The final barrier is SBA\xe2\x80\x99s diminished staff\nresources, which limit the Agency\xe2\x80\x99s ability to monitor agent performance.\n\nChanges Affecting Future Regulation. As SBA staffing has been reduced, the Agency\xe2\x80\x99s\nrole has shifted from being directly involved in loans to monitoring and regulating lenders.\nWhile this provides opportunities, it also poses increased risks, such as lenders being less\nlikely to report agent fraud because they fear bad publicity. In addition, many lenders are\ncontracting out certain loan functions, raising concerns about accountability and quality\ncontrol.\n\nChanges in technology also are altering the way lenders, SBA, and related service\nproviders do business. These include the Internet and its potential for fraudulent use, the\nAgency\xe2\x80\x99s gradual movement toward a largely paperless office environment, the\nstrengthening of SBA\xe2\x80\x99s internal computer systems, the quest for secure methods of\nsending financial data electronically, and decreased emphasis on personal contact between\na lender, loan agent, and borrower, possibly affecting the quality of credit decision-\nmaking.\n\nA System for Accountability. Consistent with SBA\xe2\x80\x99s emerging oversight role, any system\nto enhance loan agent accountability should:\n\n\xe2\x80\xa2 \tEmphasize fraud prevention over expensive after-the-fact remedies.\n\n\xe2\x80\xa2 \tAvoid creating undue hardship for small businesses, lenders, and honest loan\n agents.\n\n\xe2\x80\xa2 \tMonitor agents\xe2\x80\x99 performance to identify problems.\n\x0c\xe2\x80\xa2 Take into account technological change.\n\nPreventive Measures. Although the lenders and SBA officials interviewed generally agree\nthat lenders should be held responsible for the loans they approve, regardless of whether\nloan agents were involved, all parties to a loan transaction need adequate preventive tools\nto minimize agent fraud. An important preventive tool--and one recommended by the\nAgency\xe2\x80\x99s Committee on Loan Packager Reforms--is the registration of loan agents.\nRegistration can reduce the potential for fraud while also channeling loan agents into\nSBA-sponsored training and/or testing designed to ensure a standard for competence. In\naddition, registration can provide an accurate accounting of loan agents and a means of\ntracking their performance.\n\nRecently, SBA has moved closer to developing a loan agent registration process that\nwould require everyone who acts as a loan agent to register, including those who perform\nsuch services infrequently. A revised Compensation Agreement, which is submitted at\nloan closing, would trigger the registration process; training and/or testing would be\nconducted after an agent had been involved in a certain number of loans; and a list of\nregistered agents would be made available to all lenders, SBA staff, and prospective\nborrowers. The Agency would also establish a procedure for suspension or revocation of\na loan agent\xe2\x80\x99s privilege to conduct business with SBA consistent with the Code of Federal\nRegulations (13 CFR 103).\n\nAn effective registration system requires screening to prevent or deter dishonest loan\nagents from participating in SBA programs. Currently, all prospective 7(a) borrowers\nmust certify whether they have a prior criminal record and provide basic personal data. In\naddition, the Agency has required prospective borrowers to sign a waiver allowing SBA\nor lenders to verify their tax returns against Internal Revenue Service (IRS) records.\nSome bankers have surmised that the mere act of requesting such verifiable information\nhas deterred dishonest borrowers from proceeding with their loan applications.\n\nHaving loan agents provide limited and non-tax-related personal data would help the OIG\nto obtain a criminal history and could deter fraud. The simplest way for SBA to gain\naccess to loan agent criminal histories from the National Crime Information Center\n(NCIC)--without the administrative burden of requiring fingerprints--is to expand\nrecent legislation that allows the Agency\xe2\x80\x99s Administrator to verify the existence of 7(a)\nand other loan applicants\xe2\x80\x99 criminal backgrounds through the NCIC. The current\nestimated cost of such a check is between $2 and $6 per agent. The OIG recommends\nthat the Administrator propose expanding current legislation to include loan agents\namong those subject to National Crime Information Center criminal history checks.\n\nTo avoid unnecessary delays for loan applicants, SBA could tentatively register agents\nprior to completing their screening. Agents who then fail the background checks would\nbe removed from the list of registered agents and placed on publicly available lists of\nagents whose privilege to conduct business with SBA had been revoked or suspended\n\x0cuntil further notice. Agents failing to register at all would also be placed on the list of\nagents suspended until further notice.\n\nWe believe that this registration process would be effective in curbing loan agent fraud.\nTo give it some force and credibility among lenders, SBA should also advise all lenders\nthat the Agency is under no obligation to guarantee loans in which agents were involved\nafter their privilege to conduct business with SBA had been suspended or revoked. In\naddition, the lists could be made available promptly to prospective borrowers, lenders, and\nSBA field staff through the Agency\xe2\x80\x99s Internet Home Page. A similar process is used by\nthe General Services Administration (GSA) to maintain lists of parties excluded from\nprocurement and other types of programs.\n\nAccordingly, the OIG recommends that the Associate Administrator for Financial\nAssistance establish a loan agent registration process that-\xc2\xad\n\na) Requires that any person or entity acting as a loan agent on any Section 7(a)\n business loan register with the SBA.\n\nb) Ensures that each loan agent provides information, over his or her signature,\n that includes the Compensation Agreement, as revised, and the following:\n\n \xe2\x80\xa2 \tThe agent\xe2\x80\x99s name, date of birth, place of birth, and Social Security\n number.\n\n \xe2\x80\xa2 \tWritten authorization for the OIG to request information from criminal\n justice agencies.\n\n \xe2\x80\xa2 \tAcknowledgment that the agent is aware of the requirements of Title 13,\n Part 103, of the Code of Federal Regulations.\n\nc) E\n \t stablishes, through the Office of the Chief Information Officer (OCIO),\n Internet lists of registered loan agents and agents whose privilege to conduct\n business with SBA has been suspended or revoked.\n\nd) Ensures that SBA\xe2\x80\x99s loan application packages, Internet Home Page, and other\n media carry the disclaimer that loan agent registration is neither an\n endorsement by the Agency nor a guarantee that using a registered agent will\n result in loan approval.\n\ne) I\t nforms lenders that SBA is under no obligation to guarantee loans in which\n loan agents were involved after the suspension or revocation of their privilege to\n conduct business with the Agency.\n\nMonitoring Performance. Systematic monitoring can serve as an early warning system\nfor identifying problems before they can grow. An existing Standard Operating Procedure\n\x0crequires SBA to monitor third-party representatives, such as loan agents, but the\ninspection team found that it has not been consistently followed. Effective monitoring\nrequires reliable data on which decisions can be made, ready access to the data by officials\nresponsible for monitoring, and timely analysis of the data for the purpose of taking\ncorrective action. Agency officials plan to track the performance of loan agents in the\nemerging Corporate Data Base, and lenders will be responsible for submitting current loan\ndata and status updates directly to SBA through the Internet. Because SBA depends on\nlenders\xe2\x80\x99 information systems, lenders must be held accountable for any data they send to\nthe Agency, including any originated by loan agents.\n\nSBA also needs to review loan agent data on a regular basis to identify and correct\nproblems. For example, it should set numerical standards that would trigger closer\nexamination of an agent\xe2\x80\x99s activities if the purchase rate of loans associated with the agent\nexceeded a defined limit or fell outside the range of most agents\xe2\x80\x99 purchase rates. Given\nthe potentially wide geographical coverage of loan agents and the inconsistencies among\nsome district offices in their handling of the agents, the OIG believes that a single office\nshould be responsible for handling the analysis of all loan agents and any follow-up. The\nOIG recommends that the Associate Administrator for Financial Assistance\nestablish a loan agent monitoring system that-\xc2\xad\n\na) Holds the lender responsible for the accuracy of data (including electronic data)\n originated by loan agents and transmitted by the lender to SBA.\n\nb) Ensures that the Corporate Data Base links all loan data to associated loan\n agents, including the purchase rate of such loans.\n\nc) E\n \t stablishes purchase rate benchmarks that, if exceeded, would trigger closer\n Agency examination of a loan agent\xe2\x80\x99s performance.\n\nd) Centralizes the evaluation of loan agent performance in a single office, rather\n than among district offices, to ensure consistency in the monitoring and handling\n of loan agents.\n\nBlanket Bond Policies and SBA. A final issue for long-term SBA consideration is the\npotential use of a lender\xe2\x80\x99s financial institution bond insurance policy, which protects\nagainst loss resulting from dishonest or fraudulent acts committed by employees acting\nalone or in collusion with others. The report discusses what would be required to use\nsuch a policy to help SBA protect itself from losses due to loan agent fraud.\n\n\n\n\n SBA Comments\n\x0cThe Acting Associate Administrator for Financial Assistance commented that the Office of\nFinancial Assistance (OFA) shares the concerns identified in the report and is basically in\nagreement with the recommendations. She noted, however, that OFA remains somewhat\nless convinced than the OIG of the magnitude of the problems caused by loan agents.\n\x0c BACKGROUND\n\n\n\nSection 7(a) Program\n\nUnder Section 7(a) of the Small Business Act (Public Law 85-536, as amended), SBA\nguarantees private lenders\xe2\x80\x99 loans to small business borrowers who cannot obtain credit\nelsewhere on reasonable terms and conditions. SBA currently guarantees up to 80 percent\nof the face amount of such loans. The guarantee amount is generally limited to $750,000\nexcept for Defense Loan and Technical Assistance Program, International Trade, and\nPollution Control loans. In fulfillment of its guarantee to lenders, SBA currently\npurchases between $400 million and $450 million of defaulted 7(a) loans annually, with\nactual losses since 1990 exceeding $200 million per year. Annual purchases are projected\nby SBA to double by the year 1999 if loan demand forecasts are realized. Emphasizing\nthe use of guarantees against borrower default reflects the Agency\xe2\x80\x99s shift during the 1980s\nfrom directly subsidizing credit risk to improving access to capital at the least possible\ncost. More than 8,000 lenders--banks, Small Business Lending Companies (SBLCs), and\nother credit providers--have made at least one 7(a) loan in the past five years.\n\nThe number of 7(a) loans approved each year more than quadrupled between Fiscal Year\n(FY) 1990 and FY 1997, from 10,848 to 45,288. Over the same time period, the number\nof SBA employees decreased from approximately 4,100 to 3,100. As a resource-\nconstrained SBA increasingly relies on private sector lenders to carry out Section 7(a)\nprogram objectives, other major changes are occurring. First, lenders and borrowers are\nusing third-party cottage industries such as loan agents to handle traditional loan functions\nnot only in the 7(a) program but in other programs as well. Second, new technologies for\nloan-making and monitoring are emerging. Third, SBA\xe2\x80\x99s responsibilities are shifting from\ndirect involvement in loan management to more of an oversight role.\n\n\nLoan Agents Defined\n\nThe 7(a) loan program involves not only SBA, borrowers, and lenders but also various\ntypes of loan agents who conduct business with the Agency. Although the distinctions\nbetween them are not always clear, the three major types of loan agents are loan\npackagers, referral agents, and lender service providers. Loan packagers, according to\nthe definitions in the Code of Federal Regulations,1 are agents compensated by either loan\napplicants or lenders to prepare loan applications. Referral agents--who refer either loan\napplicants to lenders, or lenders to loan applicants--may be compensated by either party.\nLender service providers carry out lender functions in originating, disbursing, servicing,\nor liquidating Agency loans in return for compensation from lenders. SBA determines\nwhether or not one is a packager or lender service provider on a loan-by-loan basis.\n\n1\n Title 13, Code of Federal Regulations, Part 103, Section 1 (13 CFR 103.1).\n\x0cFinally, a loan agent need not be an individual. For example, Certified Development\nCompanies and Small Business Development Centers can package loans.\n\n\nPositive Contributions of Loan Agents\n\nCompetent and honest loan agents can help lenders, borrowers, and SBA by screening\nprospective borrowers for eligibility early in the loan origination process and, when\nappropriate, preparing application paperwork in a complete, consistent manner. Because\nloan agents know how the 7(a) program works, they also serve as a communication link\namong the parties to a loan. These contributions can increase loan volume and save time\nfor borrowers, lenders, and the Agency. To avoid conflicts of interest, a good agent is\ncareful not to work for both the lender and borrower during origination on the same loan.\n\nPreparing a complete and understandable loan package is not a simple task. According to\nSBA district officials, the Agency continually is required to use additional forms even as it\nstrives to simplify the application process. Some of these, such as the form asking if the\nborrower is delinquent on child support payments, may have little direct relevance to a\ncredit decision.\n\nPerhaps the greatest contribution of loan agents is that they can increase small business\naccess to capital by reaching underserved communities and bringing into the program\npeople who otherwise might not be served by SBA. Agents often bring smaller, rural\nbanks into the 7(a) program--where one or two SBA loans can be very meaningful to a\nsmall town\xe2\x80\x99s economy. In short, loan agents can expand SBA program outreach at no\ndirect cost to the Agency, thus leveraging private sector resources.\n\n\nProblems with Loan Agents\n\nUnfortunately, some agents, particularly loan packagers, have had a negative influence on\nborrowers, lenders, and SBA. Office of Inspector General (OIG) cases involving loan\nagents have included a range of fraudulent schemes.\n\n \xe2\x80\xa2 \t ubmitting false or fictitious applications, including false invoices, liens,\n S\n financial statements, and tax returns.\n\n \xe2\x80\xa2 \tCharging the borrower excessive fees for preparation of the loan package.\n\n \xe2\x80\xa2 \tFalsifying or omitting required fee information to SBA.\n\n \xe2\x80\xa2 \tConcealing the true name of the agent by using fictitious names on SBA\n forms.\n\x0c \xe2\x80\xa2 \tRequiring kickbacks from successful borrowers.\n\n \xe2\x80\xa2 \tRequiring other incentives, such as the signing of \xe2\x80\x9cmanagement agreements\xe2\x80\x9d\n or consulting contracts from borrowers.\n\n \xe2\x80\xa2 \t isstatements to applicants, \xe2\x80\x9cguaranteeing\xe2\x80\x9d approval of loans, and alleging to\n M\n have contacts inside SBA or lending institutions.\n\n \xe2\x80\xa2 \t eliberately providing false information to applicants regarding SBA\n D\n regulations on use of loan proceeds.\n\n \xe2\x80\xa2 \t harging \xe2\x80\x9ccontingency,\xe2\x80\x9d \xe2\x80\x9cadvance,\xe2\x80\x9d or \xe2\x80\x9cfinders\xe2\x80\x9d fees, for which there is no\n C\n provision in SBA regulations.\n\n \xe2\x80\xa2 \tIllegal collusion with officials of lending institutions.\n\n \xe2\x80\xa2 \tConspiracy with borrowers to submit false loan packages.\n\n \xe2\x80\xa2 \tBribes or gratuities to SBA or bank officials for loan approvals.\n\nThese schemes, which have been copied from one fraudulent agent to another, have\nresulted in loan purchases by SBA and, ultimately, the taxpayers. Moreover, before SBA\ninitiated a \xe2\x80\x9ctwo master\xe2\x80\x9d rule, loan agents were able to be compensated by the borrower\nand the lender on the same loan--a clear conflict of interest.2\n\nIn some cases, one loan agent can commit a combination of crimes. For example, a\npackager conspired with two individuals to defraud SBA by submitting false financial\nstatements, tax returns, and other documents to influence the Agency to guarantee a\n$360,000 loan. The false documents were prepared to substantiate earlier false statements\nthat a contract for deed existed and that the packager had maintained the business\xe2\x80\x99 records\nfor years. The packager was eventually convicted on 12 counts of conspiracy, mail fraud,\nmaterial false statements, and money laundering.\n\nSometimes agents simply exaggerate their capabilities. In one high-tech twist, a loan\nagent firm used the Internet to portray itself as an \xe2\x80\x9cSBA preferred packager,\xe2\x80\x9d a non\xc2\xad\nexistent designation.\n\nAs of the end of FY 1997, in the 7(a) program alone, criminal investigations had been\ninitiated on 354 individuals involving loan applications handled by 18 loan agents. The\n\n2\n The new Standard Operating Procedure (SOP) 50-10 (4), effective December 1, 1997, describes the\ncapacities in which an agent may work for a loan applicant or lender. For example, an agent working for\nthe applicant as a packager may also be a referral agent for the lender on the same loan if both parties are\naware of both relationships. However, an agent working for an applicant as a packager generally may not\nwork as a lender service provider on that loan.\n\x0cloan volume associated with these investigations exceeded $123 million. Twenty-eight\npercent of these agents had prior criminal records. Moreover, allegations involving\nloan agents continue to be reported to the OIG.\n\nAccording to SBA officials and others in the small business lending community,\nprospective borrowers use loan agents because they have been rejected more than once by\nlenders. This raises questions about the quality of some of the loan applications being\nbrought to lenders for approval.\n\nQuestions have also been raised concerning the competence of some loan agents.\nAccording to SBA officials, lenders, and loan agents, a number of loan agents lack the\ncompetence to adequately prepare loan applications. Comments about these loan agents\nranged from complaints from borrowers that loan applications were not completed quickly\nenough to concerns from Agency officials and fellow loan agents that certain agents\nlacked the business skills to properly prepare a loan application.\n\n\nCommittee on Loan Packager Reforms\n\nIn 1994, to remedy the problem of fraud in SBA programs, then-SBA Administrator\nErskine Bowles established a Fraud Prevention Task Force, which included a Committee\non Loan Packager Reforms chaired by an Office of Financial Assistance (OFA) official.3\nIn December 1996, the Committee made its recommendations.\n\n \xe2\x80\xa2 \tEstablish a code of Standards of Conduct for loan packagers.\n\n \xe2\x80\xa2 \t stablish a loan training curriculum for packagers covering policies,\n E\n procedures, standards, conflicts of interest, application package requirements,\n and financial information presentation.\n\n \xe2\x80\xa2 I\t n conjunction with the Office of the Chief Information Officer (OCIO),\n establish a data base of information on packagers, including information from a\n registration process.\n\n \xe2\x80\xa2 \t odify SBA Form 159, Compensation Agreement, to reflect more\n M\n clearly the services provided and fees charged by packagers and loan\n referral agents. The form would serve as a disclosure statement for all such\n services and fees and would be signed by each provider, lender, and small\n business concern.\n\nThe Committee stated that implementation of registration and tracking depended on the\ndevelopment of the planned client server data base. The data base, now called the\nCorporate Data Base, will differ from the current systems in that the data elements of all\n\n3\n The issue of defining the role of \xe2\x80\x9cpackagers\xe2\x80\x9d is discussed later in this report.\n\x0cprograms will be kept in the same system, thus allowing SBA to link lenders, borrowers,\nand agents with any programs in which they participate. Such a data base could indicate\nquestionable patterns of activity, e.g., a packager doing all of his/her business within one\nmarket segment, such as gas station loans. The part of the system that collects\ninformation about businesses, principals, and resource partners (such as lenders) is the\nClient Data Base.\n\nUnder the current plan, data will be entered by SBA\xe2\x80\x99s field offices. OFA\xe2\x80\x99s proposed data\nelements for loan agents include the agent\xe2\x80\x99s name, Social Security number, company\nname, employer identification number, company address and phone number, type of agent,\nyears of experience, the lender(s) the agent works for, loan number, agent fee, loan\namount, narrative fields for complaints and related matters, and information on\nsuspensions and debarments (also known as revocations).\n\n\nThe Key Issue: Security vs. Access\n\nIn a broad sense, the loan agent issue highlights the fundamental problem of trying to\nregulate any cottage industry: how to maintain program security while allowing access to\na wide range of users and enabling private entrepreneurs to provide support services\nneeded by some of the users. More specifically, this raises the following questions:\n\n\xe2\x80\xa2 \t ow can SBA assure prospective borrowers that the loan agents with whom they do\n H\n business will not defraud them?\n\n\xe2\x80\xa2 \t ow can SBA keep dishonest and/or incompetent loan agents out of the 7(a) program\n H\n without harming the program\xe2\x80\x99s outreach?\n\n\xe2\x80\xa2 \t o what extent should SBA regulate professionals such as accountants or lawyers who\n T\n occasionally act as loan agents?\n\n\xe2\x80\xa2 \tHow can SBA minimize losses from loan agent involvement?\n\n\xe2\x80\xa2 \t ow can a resource-constrained SBA regulate loan agents while minimizing the need\n H\n for more paperwork and staff?\n\n\nProgram Surety, Not Security\n\nUnfortunately, the only way to ensure perfect program security is to deny everyone\naccess. A more useful concept is program surety. Program surety is risk management\nthat balances access with security by striving to limit rather than eliminate risk, thereby\nconserving resources. Despite barriers to minimizing loan agent fraud and incompetence,\nthe concept of surety offers a framework for balancing the seemingly conflicting interests\nidentified above.\n\x0c OBJECTIVES, SCOPE, AND METHODOLOGY\n\n\n\nThe issues involving loan agents are likely to reflect larger SBA challenges as the Agency\nchanges from paper-intensive, hands-on program management to electronic-based, lender-\nreliant program execution. The purpose of this inspection was to identify efficient ways to\nreduce the opportunities for loan agent fraud and minimize its impact on prospective\nborrowers, lenders, and SBA.\n\nAs part of this inquiry, the inspection team sought to determine (1) what percentage of\n7(a) loans involved loan agents and (2) what percentage of such loans had defaulted.\nUnfortunately, SBA\xe2\x80\x99s main data bases currently do not track whether a loan involved a\nloan agent, nor do the Agency\xe2\x80\x99s district offices consistently keep track of loan agents.\nMoreover, there was the problem of whether purchases could be attributed primarily to\nharmful loan agent behavior or to loan agents conscientiously reaching the somewhat\nhigher risk borrowers that SBA is supposed to serve. Complicating such an analysis is the\nfact that most 7(a) loan defaults do not occur until three to five years after origination.\n\nThe inspection team interviewed SBA central office officials, SBA district office staff,\nlenders in high volume/high loan-purchase districts, and loan agents to learn their\nperspectives on the benefits and drawbacks of loan agents. The team also interviewed\nprogram officials at the Internal Revenue Service (IRS), the Department of Housing and\nUrban Development (HUD), the Department of Veterans Affairs (VA), Fannie Mae, and\nthe Department of Agriculture to determine if their handling of third-party agents revealed\nmethods applicable to SBA. Although this inspection focused on the 7(a) program, the\nteam interviewed officials in SBA\xe2\x80\x99s Office of Disaster Assistance to learn about that\nprogram\xe2\x80\x99s experiences with loan agents and its planned use of paperless office technology.\nThe team also examined OIG audit and investigative documents and contacted relevant\nstaff in other OIGs.\n\nIn addition, the inspection team obtained information from the National Association of\nGovernment Guaranteed Lenders (NAGGL), including NAGGL\xe2\x80\x99s efforts to ensure loan\nagent competence and integrity. In response to NAGGL\xe2\x80\x99s request, the team submitted\npreliminary comments on the loan agent registration process, the draft SBA agent\nCompensation Agreement, the draft code of ethics, and the issue of training for use in\nNAGGL\xe2\x80\x99s proposal for agent registration and training.\n\nBecause loan agents and SBA will increasingly rely on electronic communications, team\nmembers researched the emerging challenges of a paperless environment through using the\nInternet and attending a conference on cyberspace fraud. Further information was\nobtained from OCIO staff as well as from outside organizations involved with the\npaperless office.\n\x0cFinally, to identify private sector methods of ensuring loan agent integrity and covering at\nleast part of SBA\xe2\x80\x99s financial position in the event of loan agent fraud, the team\ninterviewed a surety association and two prominent insurance companies. One company\nranks among the top 50 property and casualty insurers in the U.S., and the other was one\nof the first SBA preferred surety companies. The team evaluated the feasibility of using\nprofessional liability/malpractice insurance, individual bonds, and/or lenders\xe2\x80\x99 blanket bond\npolicies for the above purposes. A special focus was whether SBA could hold a lender\nresponsible for fraudulent behavior by agents acting on the lender\xe2\x80\x99s behalf by making a\nclaim against the lender\xe2\x80\x99s blanket bond policy.\n\nAll work on this inspection was conducted between September 1996 and November 1997\nin accordance with the Quality Standards for Inspections issued in March 1993 by the\nPresident\xe2\x80\x99s Council on Integrity and Efficiency. The entrance conference with program\nmanagement was held in March 1997.\n\x0c CURRENT BARRIERS TO LOAN AGENT ACCOUNTABILITY\n\n\n\nDefining Loan Agents\xe2\x80\x99 Roles\n\nThe most basic barrier to making loan agents more accountable may be determining what\na specific agent really does. Even with the definitions of the three types of loan agents, it\nis sometimes difficult in practice to distinguish one type from another, as was apparent\nfrom statements by agents, lending industry representatives, and some SBA officials.\nAccording to testimony by NAGGL officials before Congress in 1995, the definition of a\n\xe2\x80\x9cpackager\xe2\x80\x9d has been a problem due to the variety of services associated with the term. To\ncomplicate matters, the term \xe2\x80\x9cpackager\xe2\x80\x9d is sometimes used synonymously with \xe2\x80\x9cagent.\xe2\x80\x9d\nThus, a \xe2\x80\x9cpackager\xe2\x80\x9d could complete paperwork for the borrower, complete paperwork for\nthe lender, find borrowers and locate lenders for them, or locate borrowers in exchange\nfor a lender referral fee. Moreover, the agent could work on the entire loan application\nprocess, from origination to approval, or only on a portion of it.\n\nIn 1995, an SBA 7(a) program official testified before Congress that, because of changes\nin the marketplace, the Agency\xe2\x80\x99s long-standing guidelines regarding loan packagers no\nlonger met SBA\xe2\x80\x99s needs. Historically, loan packagers provided their services only to\nprospective borrowers. Over the years, traditional loan packagers have responded to the\ngrowth and changes in the lending industry by modifying or expanding their operations.\nToday, a number of packagers provide loan packaging and loan servicing functions\ndirectly to SBA\xe2\x80\x99s lending partners. The above 7(a) official further noted that new\nindividuals and entities have continually entered the marketplace to provide one or more\nof a variety of loan packaging and lender services. Thus, a packager of one loan may be a\nlender service provider on another loan, depending on the activities undertaken on each\nloan.\n\nOther agents simply change their specialties. For example, some agents who were strictly\npackagers are now lender service providers. According to an SBA district official, loan\npackagers may be declining in number due to the availability of new software programs\nthat automate the loan application package process. As a result, lenders may be packaging\nmore loans in-house, and the larger, nationwide lenders are more likely to hire loan\npackagers as lender service providers.\n\nFinally, the lines between a lender and agent can be blurred. For example, in one instance\nan independent agent packaged loans for a bank while working out of an office within the\nbank. Although the agent was not on the payroll of the bank, he was given the title of vice\npresident.\n\x0cFew Restrictions to Entering the Profession\n\nAt present, virtually any individual or firm can become a loan agent. There is currently no\nbackground check on an agent before he/she conducts business with SBA program\nparticipants. Except for occasional state requirements, which are not directly related to\nSBA program requirements, agents may enter and leave the occupation at will.\n\nIn addition, loan agents are not restricted by geography. According to SBA district\nofficials, loan agents are able to operate across state lines and Agency district office\njurisdictions. The increasing popularity of the Internet provides another tool for agents to\nbroaden their geographical coverage.\n\n\nLack of Reliable Data on the Number of Loan Agents\n\nSBA cannot determine either the percentage of loans nationwide that involve agents or the\ntotal number of agents, in part because its data bases do not currently track whether loans\ninvolve agents. Field offices have differing systems for identifying loan agents, and some\nhave not tracked them at all, despite a requirement to do so.4 According to several SBA\nofficials in major district offices, the current version of the Compensation Agreement (see\nAppendix A) is not tracked by district offices. The offices do examine, however, the fees\ncharged by an agent to make sure they are not excessive compared to the norm for that\ndistrict.\n\nEven where documents are tracked, loan agents can easily evade oversight. For example,\nin one case a fraudulent referral agent\xe2\x80\x99s name never appeared on the loan applications\nbecause the bank packaged the loans.\n\nMoreover, some agents do not remain in the profession long because the work is non-\nsalaried and the cash flow is inconsistent. Thus, the number of agents is ever-changing.\nTo complicate matters, some accountants and lawyers act as loan agents only to\ncomplement the accounting, legal, and other services they provide to their small business\nclients.\n\n\nDetermining the Impact of Loan Agents\n\nAt the district office level, it is unclear whether packaged loans have higher purchase rates\nthan non-packaged loans. Although there was no data to determine this, some district\nofficials believe that the purchase rate is higher for packaged loans. Even if the rates are\nhigher, determining a loan agent\xe2\x80\x99s responsibility for a defaulted loan is difficult. For\n\n4\n SOP 50 10 3, dated August 31, 1991. SBA officials have stated that such a requirement existed before\nthis SOP. Effective December 1, 1997, SOP 50-10(4) requires the completion of the Compensation\nAgreement, which is in the process of being modified.\n\x0cexample, a loan could have defaulted as a result of an honest agent\xe2\x80\x99s efforts to reach the\nhigher risk borrowers SBA seeks to serve or for reasons unrelated to the agent\xe2\x80\x99s actions.\nMoreover, it is the borrower who is held responsible for the loan package, regardless of\nwhether a loan agent was involved, and it is the lender\xe2\x80\x99s duty to exercise due diligence in\ndeciding whether to approve a loan.\n\nFinally, as an SBA official noted, the Agency only finds out about agent fraud at the end\nof the lending process, after the damage has been done. When these limitations are added\nto the ease of entry into the loan agent field, it is no surprise that it is difficult to know\nwhat overall impact--positive or negative--loan agents have on the 7(a) program.\n\n\nSBA\xe2\x80\x99s Diminished Resources\n\nAs noted earlier, the Agency has experienced a significant reduction in staff resources at a\ntime of increasing demand for its services. Because of this, some SBA officials contend\nthat the Agency does not have the resources to regulate loan agents. Although district\noffices vary in their attention to loan agents, generally a prospective borrower must\ncomplain about an agent before the Agency takes action.\n\x0c CHANGES AFFECTING SBA\xe2\x80\x99S FUTURE REGULATION OF LOAN AGENTS\n\n\n\nChanges in SBA\xe2\x80\x99s Role\n\nAs SBA\xe2\x80\x99s staff resources diminish, the Agency is shifting its emphasis from being directly\ninvolved in loans to monitoring and regulating lenders. This is consistent with SBA\xe2\x80\x99s\nattempts to transform itself into a leading edge financial institution by expanding its ability\xc2\xad\n-through its lending partners--to provide access to credit for small businesses.\n\nWhile such a transformation provides opportunities, it also poses increased risks. For\nexample, lenders may be less likely to report fraud out of fear that bad publicity will affect\ntheir customers\xe2\x80\x99 and shareholders\xe2\x80\x99 impressions of their institutions. This has already\noccurred in cases of computer crime against lenders. In such an environment, Agency\nofficials are concerned that it will be even more difficult to monitor loan agents.\nMoreover, there are no guarantees that the diminishing of SBA\xe2\x80\x99s direct involvement in\nloans will make more resources available to regulate its lending partners.\n\n\nChanges in Lenders\xe2\x80\x99 Environment\n\nSBA is not alone in relying on outside parties to carry out its work. According to industry\nofficials, many lenders are contracting out functions to cottage industries such as\ntemporary workers, information systems firms, and loan agents. Moreover, NAGGL\nofficials testified in an October 12, 1995, hearing before the House of Representatives\nSmall Business Committee that loan functions traditionally performed by lenders\nthemselves--packaging, analyzing credit, servicing, or liquidating loans--are now being\nperformed by outside parties that are growing in number. In 1996, outsourcing at large\nbanks increased by 18 percent over the previous year.5\n\nOutsourcing is not without its liabilities, however. Industry officials have expressed\nconcern about accountability: as more lender functions are contracted out, protection of\ndata and the disclosure and sharing of borrower information with outside parties may\nbecome major problems. If borrower information is compromised, lenders could be\nexposed to litigation and/or financial loss. There is also the question of quality control,\nparticularly when servicing firms use new employees, each of whom is expected to\nbecome proficient in several areas simultaneously.\n\n\n\n\n5\n Moore, Michael. Biggies Seek Help Strategically. American Banker, April 17, 1997: 10A.\n\x0cChanges in Technology\n\nChanges in technology are altering the way lenders, SBA, and related service providers do\nbusiness. With the advantages of more efficient communication and information systems\ncome potential drawbacks. For example, the Internet allows everyone, including service\nproviders, to reach a national audience. Unfortunately, this capability magnifies the\npotential for misrepresentation and, in extreme cases, financial loss. As noted earlier, one\nloan agent firm used the Internet to advertise itself falsely as an \xe2\x80\x9cSBA \xe2\x80\x98preferred\xe2\x80\x99 loan\npackager.\xe2\x80\x9d In another instance, a different firm used the Internet to advertise \xe2\x80\x9ca direct\nchannel of communications with the SBA and lenders . . . \xe2\x80\x9d In such situations, SBA\xe2\x80\x99s\ndistrict office-based approach to regulation may not provide adequate geographical\ncoverage.\n\nAnother technological change is SBA\xe2\x80\x99s gradual movement toward a largely paperless\noffice environment. The Office of Disaster Assistance (ODA) has started to process\ndisaster home loans without paper, and OFA plans to do so with LowDoc loans.\nMoreover, according to an Agency official, a software development company that\nproduces a computer program for SBA loan applications has proposed a system whereby\nborrowers can prepare applications using its software and then transmit them\nelectronically to lenders. Finally, the National Performance Review (NPR) has granted\nmoney to SBA to use electronic signatures with the FA$TRAK loan program.\n\nThe Agency is also strengthening its internal computer systems. As noted earlier, SBA is\ndeveloping the Corporate Data Base, which will allow lenders to provide original data\ndirectly to SBA rather than have Agency staff manually enter it, thus saving staff\nresources.\n\nThe downside is that with the advent of electronic banking, the Internet, and other\nevolving technologies, the parties to a transaction need a secure means of sending financial\ndata electronically and a reliable method for authenticating the transactions. Although\ndigital signatures, data encryption, and electronic certification of participants\xe2\x80\x99 identity are\nstill in their infancy, the pieces of electronic security are gradually coming together.\n\nPerhaps the greatest change that new technology brings to SBA and its lending partners is\nnot in the realm of information processing but in human relations. According to a former\npackager who is now a banker, a disadvantage of electronic initiatives is that they can\nminimize the personal contact between the lender, the loan agent, and the borrower. This,\nin turn, reduces the ability of lenders to develop an intuitive sense of a prospective\nborrower\xe2\x80\x99s character, upon which a large part of credit decision-making has traditionally\nbeen based. How such a change affects the quality of SBA\xe2\x80\x99s loan portfolio remains to be\nseen.\n\n\n\nA System for Accountability\n\x0cBased on the previously described barriers and changes, and consistent with SBA\xe2\x80\x99s\nemerging oversight role, any system to enhance loan agent accountability should:\n\n\xe2\x80\xa2 \tEmphasize fraud prevention over expensive after-the-fact remedies.\n\n\xe2\x80\xa2 \tAvoid creating undue hardship for small businesses, lenders, and honest loan\n agents.\n\n\xe2\x80\xa2 \tMonitor agents\xe2\x80\x99 performance to identify problems.\n\n\xe2\x80\xa2 \tTake into account technological change.\n\nThe following chapters discuss what SBA has done thus far and what still needs to be\ndone.\n\x0c PREVENTIVE MEASURES\n\n\n\nThroughout the Federal Government, agencies are having to carry out their missions with\nfewer resources. One school of thought proposes two approaches to help the\nGovernment stretch its public resources: anticipatory and market-oriented. The former\nemphasizes preventing problems, while the latter relies more on market-based incentives\nthan on resource-intensive command-and-control regulation.6 Such approaches have\nbeen used successfully in areas such as economic development, environmental protection,\nand health care. When applied to regulating a cottage industry, an agency could prevent\nundesirable members of that industry from participating in a program, while making it\neconomically worthwhile for other members to comply with the program\xe2\x80\x99s rules. Before\nSBA can apply such approaches to loan agents, however, it should be clear where ultimate\nresponsibility lies.\n\n\nResponsibility for Loan Agent Actions\n\nAs a third-party industry, loan agents are not the main beneficiaries of the 7(a) program.\nInstead, it is the small business seeking credit and the lender seeking profit at reduced risk.\nAccordingly, the SBA district officials interviewed asserted that the borrower or the\nlender, and not a loan agent, bears primary responsibility for a loan. The lenders\ninterviewed were even more adamant, arguing that they should be held responsible for\nloans they approve, regardless of whether loan agents were involved. SBA already has the\npower to hold lenders responsible for the loans made; for example, the Agency can deny\nliability on a loan guarantee, terminate the Form 750 (Loan Guaranty Agreement), and\nremove Preferred Lenders Program (PLP) or Certified Lenders Program (CLP) status\nfrom a PLP or CLP lender. Moreover, SBA traditionally has viewed itself as primarily\ninvolved with lenders and borrowers, not third parties such as loan agents.\n\nTwo changes are likely to make lender responsibility more important. First, as more\nagents become lender service providers, i.e., under contract to lenders, the opportunities\nfor collusion with lenders\xe2\x80\x99 employees are likely to increase. Poor lender due diligence may\ncreate an environment for fraud. Because the small business lending departments in some\nbanks operate somewhat autonomously, this problem may worsen. Second, as SBA\nallows electronic interchange between lenders and the Agency, SBA will need some\nassurance that loan agents cannot access and manipulate the lenders\xe2\x80\x99 data.\n\nUnfortunately, simply holding lenders responsible after the fact is not enough. Lenders, as\nwell as borrowers and SBA staff, need adequate preventive tools to minimize the chances\nof agent fraud or incompetence. Moreover, such tools should be compatible with SBA\xe2\x80\x99s\nchanging loan programs and technological environment.\n6\n Osborne, David and Ted Gaebler. Reinventing Government: How The Entrepreneurial Spirit Is\nTransforming The Public Sector. New York, NY: Plume, 1993, pp. 219, 223, 301, 304.\n\x0cRegistration of Loan Agents\n\nAn important preventive tool--and one recommended by the Agency\xe2\x80\x99s Committee on\nLoan Packager Reforms--is the registration of loan agents. Registration is both\nanticipatory and market-oriented because it seeks to screen out problem agents early,\nwhile also defining which agents can profit from SBA\xe2\x80\x99s programs. Registration can\nreduce the potential for loan agent fraud while channeling agents into SBA-sponsored\ntraining and/or testing designed to ensure a standard for competence. In addition,\nregistration can provide an accurate accounting of loan agents and a means of tracking\ntheir performance--something the Agency does not have now. In short, registration is a\nform of indirect regulation in which the parameters and players are defined, but not\nregulated on a day-to-day basis.\n\n\nIRS Enrolled Agent Program\n\nOf the Federal programs that regulate agents, the most relevant is the IRS Enrolled Agent\nProgram, which was created to improve the quality of taxpayer representation before the\nIRS. Although any person can be a tax preparer, only enrolled agents, attorneys, or\ncertified public accountants (CPAs) can represent their taxpayer clients before IRS.\nEnrollment in the program is generally contingent on passing an examination proving\ncompetence in tax matters. Attorneys and CPAs in good standing are automatically\neligible to be enrolled agents. In addition, IRS performs a limited background check,\nincluding examining the tax records of enrolled-agent applicants.\n\nIRS officials stated that the most important factor in combating unethical enrolled agents\nis to place them under the authority of law, which is accomplished by registration.\nMoreover, IRS found that the mere act of requiring information can deter fraud. For\nexample, when IRS required that taxpayers list dependents\xe2\x80\x99 Social Security numbers on\ntax returns, a large number of apparently phony \xe2\x80\x9cdependents\xe2\x80\x9d were no longer claimed.\nYet, despite the effort in regulating enrolled agents, perhaps the most important aspect of\nthe program is that IRS still holds the user of the agent\xe2\x80\x99s services--the taxpayer--ultimately\nresponsible for the contents of a tax return, even if the enrolled agent is at fault.\n\n\nViews on the Registration of SBA Loan Agents\n\nWhen we discussed the idea of an SBA registration system with Agency officials, lenders,\nand loan agents, we found-\xc2\xad\n\n \xe2\x80\xa2 \t idespread support for registration, but differences as to what registration\n W\n would entail and how it would be administered.\n\x0c \xe2\x80\xa2 \t ear that publishing a list of registered agents could be construed as an\n F\n endorsement from SBA.\n\n \xe2\x80\xa2 \t ivided opinion as to how extensive the background check should be for loan\n D\n agents.\n\n \xe2\x80\xa2 \t ifferences of opinion as to whether using fingerprinting to obtain complete\n D\n criminal histories was necessary for screening the majority of loan agents,\n particularly for those who seldom handle loans.\n\n \xe2\x80\xa2 \tConcerns expressed by SBA officials about\n\n \xe2\x80\xa2 e\t nsuring full disclosure to the loan applicant of the services being\n provided, the costs of those services, and other relevant transactions;\n\n \xe2\x80\xa2 \tincluding training and testing as part of the registration process;\n\n \xe2\x80\xa2 i\tnadvertently driving those who only occasionally act as loan agents--e.g.,\n CPAs and attorneys--out of SBA programs, thus harming outreach to\n underserved areas; and\n\n \xe2\x80\xa2 h\t aving problems with loan agent registration possibly delaying prospective\n borrowers\xe2\x80\x99 applications.\n\n\nNAGGL and SBA Efforts at Registration\n\nIn September 1997, NAGGL\xe2\x80\x99s Packager Training Task Force proposed details of a\nregistration system, based on input from its members (including an SBA official) and the\nOIG. The basic principles behind the system are-\xc2\xad\n\n\xe2\x80\xa2 \t he Compensation Agreement (Form 159) should be used as a source document to\n T\n monitor agents and the fees charged by agents.\n\n\xe2\x80\xa2 \t he agent code of ethics should be developed as an agreement to abide by Federal\n T\n regulations.\n\n\xe2\x80\xa2 \t raining should focus on disseminating SBA requirements to agents in the form of a\n T\n training manual.\n\n\xe2\x80\xa2 \t egistration should be accomplished through successful completion of a test and an\n R\n SBA screening process.\n\n\xe2\x80\xa2 \tTo maintain their registration status, agents should re-register every two years.\n\x0cSince the NAGGL proposal, SBA has moved closer to a loan agent registration process.\nThe following, although not final, are some of the basic components of the evolving\nprocess:\n\n\xe2\x80\xa2 \t egistration would apply to everyone who acts as a loan agent, including those who\n R\n do so infrequently.\n\n\xe2\x80\xa2 \t revised Compensation Agreement (see Appendix B for a draft) submitted at loan\n A\n closing would trigger the registration process. Not only would it be the basic source\n document, but it would alert SBA staff to check whether a loan agent was already\n registered. It also might incorporate by reference any future loan agent code of ethics\n to be developed. Any information not collected on the Compensation Agreement form\n might be collected using a separate registration form and a Form 912, Statement of\n Personal History.7\n\n\xe2\x80\xa2 \t raining and/or testing would occur after an agent had been involved with a certain\n T\n number of loans.\n\n\xe2\x80\xa2 \t he revised Compensation Agreement would ask what loan agents were used and the\n T\n fees charged.\n\n\xe2\x80\xa2 \t list of registered agents would be widely available to lenders, SBA staff, and\n A\n prospective borrowers.\n\n\xe2\x80\xa2 \t he procedure for suspension or revocation of a loan agent\xe2\x80\x99s privileges would be\n T\n consistent with the Code of Federal Regulations (13 CFR 103).\n\n\nScreening Loan Agents\n\nEstablishing a registration system requires screening loan agents to prevent dishonest ones\nfrom participating in SBA programs. Implementing screening involves two issues. First,\nhow extensive should screening be? Although loan agents, lenders, and SBA officials\ninterviewed support the idea of screening, there was disagreement as to how much is\nnecessary.\n\nSecond, when should screening take place? If an unregistered agent submits a loan\npackage, should SBA refuse to guarantee the loan until the agent is screened and then\nregistered? Although this would provide a market incentive for the agent to get\nregistered, it could delay credit to the unsuspecting small business borrower. Or, should\ninitial registration be automatic, but with the option of quickly withdrawing an agent\xe2\x80\x99s\nregistration later if he/she does not pass the screening process?\n\n7\n The Form 912, Statement of Personal History, asks about the existence of a prior criminal record. Any\nperson misrepresenting information on this form is subject to criminal penalty.\n\x0cThe Extent of Screening\n\nThe issue of how much screening is necessary applies directly to the concept of program\nsurety, i.e., allowing access to the 7(a) program while providing reasonable assurance of\nsecurity. Currently, all prospective 7(a) borrowers must certify on the Statement of\nPersonal History whether they have a prior criminal record as well as provide personal\ndata such as date of birth. In addition, the Agency has required prospective borrowers to\nsign a waiver allowing SBA or lenders to verify their tax returns against IRS records.\nSome bankers have surmised that the mere act of requesting such verifiable information\nhas deterred dishonest borrowers from proceeding with their loan applications.\n\nHaving loan agents provide limited and non-tax-related personal data would help the OIG\nto obtain a criminal history and could deter fraud. The most comprehensive system for\nresearching an agent\xe2\x80\x99s criminal history is the Department of Justice\xe2\x80\x99s National Crime\nInformation Center (NCIC). The simplest way for SBA to gain access to the NCIC for\nadministrative purposes, e.g., checking the background of loan agents, is through\nauthorizing legislation. Recent legislation allows SBA\xe2\x80\x99s Administrator to verify the\nexistence of 7(a) and other loan applicants\xe2\x80\x99 criminal backgrounds through the NCIC. 8\nExpanding this legislation to include loan agents would strengthen the Agency\xe2\x80\x99s fraud\nprevention efforts at a current estimated cost of between $2 and $6 per agent. Without\nsuch legislation, an NCIC check of loan agents would likely require fingerprinting--a\nmajor burden for all concerned.\n\n\nWhen Screening Should Occur\n\nThere are two ways to handle the timing of screening. The first would use screening as a\nprerequisite for registration: an agent would have a grace period to register so that a\nsmall business using this agent could obtain credit even though the agent was not yet\nregistered. SBA would set a time limit for the agent to register; any loan package\nprepared after the limit would not be accepted. Without the limit, there would be little\nincentive for an agent to register. The downside of this method is that an unsuspecting\nborrower who uses an unregistered agent might be prevented from obtaining credit.\n\nAn alternative method suggested by SBA officials is to allow registration before screening.\nThis would avoid harming the loan applicant who happens to use an unregistered agent. If\nthe agent did not pass the screening process, he/she would be removed from the list of\nregistered agents and placed on publicly available lists of agents whose privilege to\nconduct business with SBA had been suspended until further notice or revoked. Agents\nfailing to register would be placed on the list of agents suspended until further notice.\nThis method would be practicable if the following conditions were met:\n\n8\n Small Business Programs Reauthorization and Amendments Act of 1997.\n\x0c\xe2\x80\xa2 \t he OIG has ready access to the National Crime Information Center for quick criminal\n T\n history checks.\n\n\xe2\x80\xa2 \t BA immediately removes an agent\xe2\x80\x99s name from the list of registered agents if that\n S\n agent fails the screening.\n\n\xe2\x80\xa2 \t BA vigorously moves to suspend or revoke the privilege of agents to conduct\n S\n business with the Agency when appropriate.\n\n\xe2\x80\xa2 \t BA informs lenders that it is under no obligation to guarantee loans in which loan\n S\n agents were involved after the suspension or revocation of their privilege to conduct\n business with the Agency. Operationally, however, SBA would have the flexibility to\n determine whether special circumstances applied.\n\n\nThe Basic Registration System\n\nTo be effective, a loan agent registration system must balance security concerns, access to\nthe 7(a) program, and administrative efficiency. The following proposed registration\nprocess incorporates ideas and concerns of SBA officials, lenders, and loan agents. It\nwould apply to everyone acting as a loan agent, including the accountant or attorney who\noccasionally handles an SBA loan. The basic registration steps are-\xc2\xad\n\n\xe2\x80\xa2 \t t the time of loan closing, SBA staff would check the Compensation Agreement to\n A\n determine if a loan agent involved with the loan was registered.\n\n\xe2\x80\xa2 I\t f the agent was not registered, SBA could send a letter informing the agent of the\n registration requirement, specifying a due date for a response, and requesting the\n following:\n\n \xe2\x80\xa2 \tThe agent\xe2\x80\x99s name, date of birth, place of birth, and Social Security number.\n\n \xe2\x80\xa2 \t uthorization for the OIG to request information from criminal justice\n A\n agencies.\n\n \xe2\x80\xa2 \t cknowledgment that the agent is aware of the requirements of 13 CFR 103,\n A\n which by reference would make the agent subject to any applicable future code\n of ethics.\n\n\xe2\x80\xa2 \t lternatively, SBA could obtain the above information via a revised Compensation\n A\n Agreement.\n\x0c\xe2\x80\xa2 \t BA would ensure that any known loan agent remaining unregistered would be placed\n S\n on a \xe2\x80\x9csuspended until further notice\xe2\x80\x9d list, pending proceedings on revoking the agent\xe2\x80\x99s\n privilege to conduct business with SBA. The loan agent would have the right to\n appeal under 13 CFR 134.102 (c).\n\n\xe2\x80\xa2 \tAny required training and/or testing that SBA determines is necessary would occur\n after an agent passed the screening process.\n\n\nInforming the Public\n\nSBA would need to announce to the public, including loan agents, its registration\nrequirement. The announcement could be made through policy notices sent to lenders and\nlobbying associations, brochures in application packages, and the Internet.\n\nOnce the registration system is in place, prospective borrowers, lenders, and SBA field\nstaff need to know--in as close to real time as possible--which loan agents are registered\nand which have had their privilege to conduct business with SBA suspended or revoked.\nThe most cost-effective way to accomplish this may be to make the lists available through\nthe Agency\xe2\x80\x99s Internet Home Page. Those not familiar with the Internet could call SBA\xe2\x80\x99s\ntoll-free Answer Desk, which in turn would refer to the Internet list. Establishing such\nlists would require changes to Title 13, Code of Federal Regulations, Part 103, and\npossibly Agency Standard Operating Procedures (SOPs).\n\nOther agencies use the Internet to keep the public informed. For example, the General\nServices Administration (GSA) maintains lists of parties excluded from procurement and\nother types of programs. Moreover, HUD has issued an Internet consumer alert about\n\xe2\x80\x9cthird party tracers\xe2\x80\x9d who track down refunds owed to citizens but may falsely represent\nthemselves as affiliated with HUD. In such cases, the Internet\xe2\x80\x99s power can work in an\nagency\xe2\x80\x99s favor.\n\nRecommendation 1. The OIG recommends that the Administrator propose\nexpanding current legislation to include loan agents among those subject to National\nCrime Information Center criminal history checks.\n\n\n\nRecommendation 2. The OIG recommends that the Associate Administrator for\nFinancial Assistance establish a loan agent registration process that-\xc2\xad\n\na) Requires any person or entity acting as a loan agent on any Section 7(a) business\n loan register with the SBA.\n\nb) Ensures that each loan agent provides information, over his or her signature,\n that includes the Compensation Agreement, as revised, and the following:\n\x0c \xe2\x80\xa2 \tThe agent\xe2\x80\x99s name, date of birth, place of birth, and Social Security\n number.\n\n \xe2\x80\xa2 \tWritten authorization for the OIG to request information from criminal\n justice agencies.\n\n \xe2\x80\xa2 \tAcknowledgment that the agent is aware of the requirements of Title 13,\n Part 103, of the Code of Federal Regulations.\n\nc) E\n \t stablishes, through the Office of the Chief Information Officer (OCIO),\n Internet lists of registered loan agents and agents whose privilege to conduct\n business with SBA has been suspended or revoked.\n\nd) Ensures that SBA\xe2\x80\x99s loan application packages, Internet Home Page, and other\n media carry the disclaimer that loan agent registration is neither an\n endorsement by the Agency nor a guarantee that using a registered agent will\n result in loan approval.\n\ne) I\t nforms lenders that SBA is under no obligation to guarantee loans in which\n loan agents were involved after the suspension or revocation of their privilege to\n conduct business with the Agency.\n\n\nTraining and Testing\n\nSBA officials believe that training and/or testing can improve loan agents\xe2\x80\x99 competence and\nhave discussed linking them with the registration process. As indicated earlier, NAGGL\nalso supports the need for training. Although the OIG supports such efforts, it may be\nnecessary to implement the registration process first and add testing and/or training later\nafter the following issues are resolved:\n\n\xe2\x80\xa2 \tWho would receive training--all loan agents or just the high volume ones?\n\n\xe2\x80\xa2 \tHow extensive would the training be?\n\n\xe2\x80\xa2 \tWho would provide the training--SBA or an outside entity?\n\n\xe2\x80\xa2 \tIn what situations would testing be more appropriate than training?\n\nFortunately, SBA has a number of options. For example, even if a training/testing system\nwere not in place, the Agency could still place basic loan agent instructions and forms on\nthe Internet so that even inexperienced agents would have sufficient guidance.\n\x0cAnother option is for SBA to arrange for loan agent training to be accepted as part of\nCPAs\xe2\x80\x99 and attorneys\xe2\x80\x99 continuing education requirements, thus encouraging greater\ninvolvement in the 7(a) program and with underserved areas. A third option is for an\nopen-book test to be an alternative to training, particularly in locations where training is\nnot feasible.\n\nRegardless of whether SBA uses training, testing, or some combination of the two, the\nlogistics need not be labor-intensive or complex. For example, the Agency or its designee\ncould place courses on the Internet as self-study tutorials or offer correspondence courses.\nLikewise, open-book tests could be handled by computer or through the mail.\n\x0c MONITORING PERFORMANCE\n\n\n\nRole of Monitoring\n\nAs SBA relies more on the private sector to carry out 7(a) objectives, effective monitoring\nof the performance of those involved, such as loan agents, becomes increasingly\nimportant. Systematic monitoring can serve as an early warning system for identifying\nproblems before they can grow.\n\n\nCurrent Status of Monitoring\n\nAs noted earlier, SOP 50-10-3, issued in 1991, required the monitoring of third-party\nrepresentatives, e.g., loan agents. We found, at least among the district offices\ninterviewed, that it has not been consistently followed. According to SBA officials,\ndistrict offices at one time kept manual records of loan agents, but as the Agency became\nmore computerized and other tasks took priority, the records were not always maintained.\nDistrict offices vary in how much emphasis they place on monitoring loan agents and in\nhow they apply rules governing loan agent behavior, e.g., fees charged to prospective\nborrowers. To complicate matters, some loan agents operate in more than one district,\nmaking it difficult for a single district office to know the full extent of an agent\xe2\x80\x99s activities.\n\nEven if a district office had complete records, it would be difficult to analyze agents\xe2\x80\x99 effect\non SBA programs. For example, one district official stated that many of that district\xe2\x80\x99s\nagent-packaged loans had been through the liquidation process. Without further\nexamination, however, it is difficult to determine how much responsibility, if any, agents\nshould bear for loan purchases or liquidations. Moreover, there is no easy way to identify\nunusual patterns of activity, such as an agent doing all of his/her business within one\nsector of the economy or one demographic group. Clearly, the Agency needs better tools\nfor monitoring.\n\n\nSystematic Monitoring\n\nAt a minimum, systematic monitoring requires-\xc2\xad\n\n\xe2\x80\xa2 Reliable data on which decisions can be made.\n\n\xe2\x80\xa2 Ready access to the data by officials responsible for monitoring.\n\n\xe2\x80\xa2 Timely analysis of the data for the purpose of taking corrective action.\n\x0cReliability of Data. Agency officials plan to track the performance of loan agents in the\nemerging Corporate Data Base by collecting data elements such as the agent\xe2\x80\x99s name,\nSocial Security number, company name, employer identification number, company address\nand phone number, test date and score, type of agent, years of experience, the lender(s)\nthe agent works for, loan number, agent fee, loan amount, narrative fields for complaints\nand related matters, and information on suspensions and \xe2\x80\x9cdebarments,\xe2\x80\x9d i.e., revocations of\nan agent\xe2\x80\x99s privilege to conduct business with SBA. Some of this information will come\nfrom the revised Compensation Agreement.\n\nAccording to SBA officials, the Agency will be able to link loan agents with data extracted\nfrom the loan portion of the client data base, e.g., the purchase rate and Standard\nIndustrial Classification (SIC) codes of loans with which an agent was involved. Lenders\nwill be responsible for submitting current loan data and status updates directly to SBA\nthrough the Internet.\n\nThe reliability of such data depends in large part on lender safeguards against unauthorized\ndata manipulation. Given the increasing popularity of the Internet, it is likely that loan\nagents will provide information electronically through lenders. This is a cause for concern.\nAccording to the President\xe2\x80\x99s Commission on Critical Infrastructure Protection, the \xe2\x80\x9cprice\nfor the efficiency of networking is increased exposure of data and systems to unauthorized\nand anonymous access.\xe2\x80\x9d9 Because of this, the data upon which SBA will depend to make\ndecisions may be vulnerable to alteration by loan agents. Currently, a dishonest loan agent\ncan simply make false statements on a written form. An agent with a computer link to a\nlender could penetrate the information system to alter loan--and agent--data after a loan\nwas approved but before the data was transmitted to SBA. Such an agent might input an\nalias, show lower fees than were actually charged, or even remove his/her name from a\nloan, thus making accountability extremely difficult.\n\nThreats to financial institutions\xe2\x80\x99 information systems are far from just theoretical. In 1994,\nfor example, computer hackers penetrated Citibank\xe2\x80\x99s system and stole $10 million.\nBecause SBA is dependent on lenders\xe2\x80\x99 information systems, it needs to hold lenders\naccountable for any electronic data they send to the Agency, even if part of the data\noriginated with loan agents. Although the draft revision of the Form 750, Loan Guaranty\nAgreement, would have lenders comply with a broad range of SBA requirements, there is\nnothing specifically covering the transmission of electronic data. Adding an electronic\ndata transmission requirement to this document could provide a simple way to hold\nlenders accountable. Without such provisions, SBA could leave itself and borrowers\nvulnerable to the few--but potentially destructive--loan agents who use the computer to\ncommit fraud.\n\n\nAccess to Data. SBA is working to make data available to as many users as possible. In\nthe emerging Corporate Data Base, an SBA employee would be able to enter an\n9\n The President\xe2\x80\x99s Commission on Critical Infrastructure Protection. Critical Foundations: Thinking\nDifferently. Washington, D.C.: 1997, p.17.\n\x0cidentification number for a loan agent, lender, borrower, or other entity and determine the\nprograms in which the person or entity was involved. For example, not only could an\nSBA field employee learn which loans, lenders, and geographical areas a loan agent had\nbeen active with but also whether the loan agent was in good standing, involved in other\nSBA programs, or the subject of any complaints. If the data base performs as advertised,\nSBA will have a potent tool for monitoring and solving problems early.\n\n\nAnalysis of Loan Agent Data. Systematic analysis of loan agent data would enable SBA\nto identify and correct problems. The Agency needs to set numerical standards that would\ntrigger closer examination of an agent\xe2\x80\x99s activities. According to SBA officials, a lender\nwith a purchase rate exceeding five percent triggers closer Agency scrutiny. A similar\nbenchmark could be established for loans associated with specific loan agents. Another\noption is for the Agency to compare the purchase rate of loans associated with each agent\nto the range into which most agents\xe2\x80\x99 purchase rates fall. A loan agent whose purchase\nrate fell outside of the range would command greater attention. SBA might discover, for\nexample, that a significant number of defaults occurred early, possibly indicating loan\nagent fraud.\n\nOne of the first steps for SBA would be to determine who would be responsible for\nperforming the analysis of loan agent data. Loan agents are not restricted to district or\neven regional boundaries, particularly in the era of the Internet. Moreover, given the\ninconsistencies among some district offices in their handling of loan agents, we believe that\nthe most effective course is for a single office of SBA to be responsible for handling the\nanalysis of all loan agents and any actions resulting from that analysis.\n\n\nRecommendation 3. The OIG recommends that the Associate Administrator for\nFinancial Assistance establish a loan agent monitoring system that-\xc2\xad\n\na) Holds the lender responsible for the accuracy of data (including electronic data)\n originated by loan agents and transmitted by the lender to SBA.\n\nb) Ensures that the Corporate Data Base links all loan data to associated loan\n agents, including the purchase rate of such loans.\n\nc) E\n \t stablishes purchase rate benchmarks that, if exceeded, would trigger closer\n Agency examination of a loan agent\xe2\x80\x99s performance.\n\nd) Centralizes the evaluation of loan agent performance in a single office, rather\n than among district offices, to ensure consistency in the monitoring and handling\n of loan agents.\n\x0c AN OPTION FOR LONG-TERM CONSIDERATION:\n\n BLANKET BOND POLICIES AND SBA\n\n\nOne approach that may help SBA protect itself from losses due to loan agent fraud is the\nlender\xe2\x80\x99s financial institution bond insurance policy, also known as a blanket bond policy.\nUnder current regulations, SBA is released from liability on its loan guarantee when the\nlender\xe2\x80\x99s improper action or inaction has placed SBA at risk.10 Such action or inaction\ncould result from negligence or misconduct on the part of the lender and its employees.\n\nUnder Section 18(e) of the Federal Deposit Insurance Act, banks under Federal Deposit\nInsurance Corporation protection can be required to have fidelity insurance to insure\ncertain risks containing the potential for significant loss. Other types of lenders, although\nnot subject to such a requirement, also have fidelity insurance, without which they could\nnot operate or stay in business.\n\nThe financial institution bond protects against a loss resulting directly from dishonest or\nfraudulent acts committed by an employee acting alone or in collusion with others. Such\nacts must be committed by an employee with the manifest intent (a) to cause the insured to\nsustain such loss and (b) to obtain financial benefit for the employee or another person or\nentity. The bond policy covers all of an institution\xe2\x80\x99s employees without specifically\nnaming them. A criminal charge or indictment is not required in order to establish fraud.\n\nA standard financial institution bond form (Standard Form 24) is used throughout the\nlending community. Examples of employees covered under the bond policy include an\nofficer or other employee while employed in, at, or by any of the insured\xe2\x80\x99s offices or\npremises; an attorney retained by the insured; and a person provided by an employment\ncontractor to perform employee duties for the insured. Additional coverage has been\ndeveloped for those employees not directly covered under the blanket bond policy. This\ncoverage is in the form of a \xe2\x80\x9crider\xe2\x80\x9d that is attached to the bond policy, e.g., a Freddie Mac\nrider developed by the surety industry to protect Freddie Mac from agent fraud in the real\nestate industry. An agent rider would serve as an instrument that the lender and SBA\ncould use to cover their losses from agent fraud. Covering lender service providers would\nbe easier given the direct relationship these agents have with lenders, i.e., they are paid by\nthe lenders.\n\nThe financial institution bond is a private agreement between the insurer (the bond\ncompany) and the insured (the lender). SBA would not be able to make a claim directly to\nthe insurance company; only the insured, i.e., the lender, can make such a claim.\nNevertheless, SBA could consider this insurance coverage during the purchase of a loan\nand after a loan has been purchased. After all, the purchase of a loan does not waive the\nright of SBA to recover any money paid on the guarantee, plus interest, as a result of\nfraud on the part of a lender and its employee(s).\n\n10\n Title 13, Code of Federal Regulations, Part 120, Section 524 (13 CFR 120.524).\n\x0cOnce a rider is drafted, it must be approved be each of the fifty states\xe2\x80\x99 insurance\ndepartments. This process can take one to two years; however, it may be possible to\nshorten the process because the rider would be used to protect money guaranteed by the\nFederal Government.\n\x0cAPPENDIX C (Appendix A and Appendix B (SBA Form 159 and revised SBA Form\n159, respectively) can be obtained by contacting the Inspection and Evaluation Division of\nthe OIG on (202) 205-7197 or by fax on (202) 205-6922).\n\n US SMALL BUSINESS ADMINISTRATION\n WASHINGTON, D.C. 20416\nDate: March 31, 1998\n\nTo: Tim Cross\n Assistant Inspector General\n for Inspections and Evaluation\n\nFrom: Jane Palsgrove Butler\n Acting Associate Administrator\n for Financial Assistance\n\nSubject: OIG Final Draft Inspection Report\n Loan Agents and the Section 7(a)\n Program\n\n\nThe referenced Report, in essence, concludes with the following recommendations:\n\n1. Expand legislation to include loan agents among those subject to National Crime Information Center criminal\nhistory checks.\n\n2. Establish loan agent registration process that:\n a. Requires registration with SBA\n b. Ensures provision of the following specified information-\xc2\xad\n \xe2\x80\xa2 Name, date of birth, place of birth, and SSN\n \xe2\x80\xa2 Written authorization for information from criminal justice agencies\n \xe2\x80\xa2 Acknowledgment of awareness of provisions of 13CFR, Part 103\n c. Establishes lists of registered and debarred agents for Internet Home Page\n d. Ensure appropriate disclaimer re no endorsement on loan application packages, Internet Home Page, and\nother media\n e. Informs lenders that SBA has no obligation to guarantee loans packaged by suspended or debarred agents\n\n3. Establish a loan agent monitoring system that:\n a. Holds the lender responsible for the accuracy of data originated by loan agents\n b. Ensures that the SBA Data Base links all loan data to associated loan agents, including the purchase rate\n of such loans\n c. Establishes purchase rate benchmarks to trigger examination of a loan agent's performance\n d. Centralizes evaluation of loan agent performance\n\nOFA generally shares the OlG's concerns about agents doing business with SBA through its loan programs and\nhas worked closely with the OIG during this effort. Of some significance is the OIG's recommendation to access\nthe National Crime Information Center database, thereby negating the need for fingerprinting. While we share the\nconcerns identified in the Report and are basically in agreement with the recommendations, we remain somewhat\nless convinced than the OIG of the magnitude of the problems and of the losses caused by fraudulent agents.\n\x0cAPPENDIX D\nCONTRIBUTORS TO THIS REPORT\n\n\nPhil Neel, Team Leader\nMichael Gaheen, Inspector\nJohn Vanneste, Inspector\n\x0c"