Request for SBA Purchase of Guaranteed Loan

A bank requested GAO to review the decision of the Small Business Administration (SBA) not to purchase a SBA-guaranteed loan made by the bank. SBA denied liability under the terms of the Guaranty Agreement on the basis of a GAO decision in which GAO held that if the required guarantee fee had not been paid by the lender before the loan went into default or if the lender had reason to believe default was imminent, SBA could not purchase a guaranteed loan. The bank modified the terms of the SBA guaranteed loan to allow the borrowers additional time to begin principal and interest payments. The modification was legally ineffective because the bank did not request SBA written approval as required by the Authorization and Guaranty Agreement between SBA and the bank. In the first payment made 8 months following the issuance of the loan, the borrowers paid all interest accrued on the monies disbursed by the bank during that period, but no payment on the principal was made until later when principal and interest payments were made regularly. The fact that no payments were made on the principal from the fourth through the eighth month as required constituted a default on the part of the borrowers. Nearly a year after the borrowers commenced principal and interest payments, the bank paid the SBA required guarantee fee on the loan. Three years later the bank notified SBA that the borrowers had filed for bankruptcy, leaving an unpaid balance. SBA denied the bank's claim on the grounds that it had not paid the guarantee fee on this loan prior to the borrowers' default. The borrowers' failure to make principal payments constituted the default, and the fact that the guarantee fee was not paid prior to the default is what relieved SBA of the loan guarantee obligation. GAO agreed that refusal by SBA to purchase the loan was correct, because it had no authority to accept payment of the guarantee fee after the default by the borrowers.