An internal audit of the Small Business Administration's much touted low-documentation loan program recommended the agency revoke guarantees for some problem loans.
The audit of 70 of the so-called low-doc loans valued at $3.7 million found problems with 55, including improper disclosure of one loan to the spouse of a senior bank executive.
"We would only revoke a guarantee if a lender lends imprudently, not because of a documentation mistake," said John Cox, associate administrator for financial assistance.
Lenders have praised the SBA low-doc program because loans for less than $50,000 can be issued with a one-page application. The agency guarantees 80% of the loan amount.
About 50% of the SBA's 7(a) guaranteed loans are done through the low- doc program. The audit found five loans to borrowers with questionable repayment ability and two to businesses ineligible for the program.
The auditors estimated that 1,932 loans for $115.9 million were at risk, which could result in an increase in the fees to borrowers or lenders.
What's more, the auditors recommended that the SBA remove lenders from the program if they do not comply with the agency's performance standards.
Robert Kottler, senior vice president of small-business banking for Hibernia National Bank in New Orleans, said he was not concerned with the potential penalties.
"They would just be enforcing what the banks should do anyway," Mr. Kottler said.
The most common problems found were lenders who failed to verify businesses' financial information with the Internal Revenue Service or did not check the use of the loan proceeds.