According to an SBA insider memo issued in April of 2009, with the subject line 'Detecting Fraud in Small Business Administration Lending Programs,' "OIG (Office of the Inspector General) investigations during the past ten years have identified fraud schemes perpetrated by loan agents in the hundreds of millions of dollars."
It goes on to note concerns that there may be an increase in fraud activity as loan volume increases with the passage of the American Recovery and Reinvestment Act.
It indicates that it will continue to rely almost entirely on lending institutions to report suspected fraud to the OIG.
The memo fails to mention lenders themselves as a potential source of fraud. Though, the OIG knew about the problem in 2002 and continued to mention lender fraud in reports to Congress until at least 2015, the last available report to Congress made by the OIG.
"Between 2002 and 2007 the SBA IG issued more than 60 different reports on lender oversight issues, alone." Senator John Kerry. "The SBA can't keep depending on the people they're charged with overseeing to report issues within their own companies, it makes no sense."
"Lax oversight from the SBA-IG allowed BLX to defraud both borrowers and the American tax payer with impunity in spite of its having left a trail of red flags that anyone who looked closely at how it was conducting its SBA business would have been able to see," Said David Einhorn, founder of Green Light Capital
It was exactly this reliance on lending institution self-reporting that led to the Business Loan Express fraud going on for 5 years before investigators were able to shut it down. "BLX resulted in $76 million in fraudulent SBA loans, unacceptable," said Kerry.
This is what led to the SBA's failure to identify the fraudulent activities Burton Messick of Compass Bank and Robert McGee of SWFC. Who swindled Wood out of her business, the building she had purchased, renovated and more than half a million dollars of their life savings.
Messick and McGee both withheld information from the SBA and Wood failed to follow SBA regulations and sought to create a deal outside of SBA oversight that insured Wood would end up in bankruptcy.
"It's important for borrowers to understand that a prime loan can be converted into a predatory loan through loan modification or mortgage servicing fraud which is one of many ways in which rogue lenders escape scrutiny by regulators," said McDonnell.
McGee conspired to hide the fraudulent actions of SWFC and Compass Bank by committing underwriting fraud. Inserting false balance sheets into a document bundle as reported time sensitive, knowing that Wood was not financially savvy enough to go through each of the documents and would not notice the inaccuracies. By doing this he was able to accuse Wood and Kevin Howard of fraud to the OIG, both of which would deny any knowledge if confronted.
Knowing this was the case McGee requested from Wood's attorney several documents one of them being the original balance sheet. When Wood disputed Compass Bank's demand that she turn over a 250,000 dollar grant from the city of Chandler to Compass Bank before proceeding with the debenture of funding scheduled for March 12, 2008.
The grant money was intended as working capital in the initial loan worked out between all parties and as part of the SBA requirements for the loan being guaranteed. In a side deal that didn't involve the SBA nor Wood, Messick and McGee decided to violate those terms. Have Wood turn the grant over to Compass when Wood needed a loan modification.
Neither Messick nor McGee informed the SBA of the need for modification or of the material adverse changes to Wood's financial situation. Nor did they inform Wood that they would require the grant money in addition to the 50, 000 dollar cash injection she had already made for the deal to move forward at the signing.
When Compass made the demand for the grant money, Wood said she wouldn't violate the terms of what she had agreed to which was exactly what McGee and Messick had been hoping for. McGee reported the false balance sheet obscuring who actually created it. This gave Compass the ability to deny the scheduled debenture of funds and attempt to cancel the loan authorization.
When the OIG completed its investigation into the matter it determined that Wood had not committed fraud.
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