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092666 1 (1969-07-31)

handle is hein.gao/gaobacwne0001 and id is 1 raw text is: -1h~ UNITED STATES GENERAL ACCOUNTING OFFICE WASHINGTON, D.C 20548 cameor vsionJUL 31 7969 CIVIL DIVISION JL3.15 Dear Mr. Sandoval: The General Accounting Office has recently completed a survey at the Detroit Regional Office of the Small Business Administration (SBA). Our survey, limited to business loans authorized by section 7(a) of the Small Business Act, included inquiry into the reasonableness of the value placed on collateral, the care with which it is managed, and the manner in which it is disposed of when acquired through liquidation. Our review included an examination of 21 loans randomly selected from 118 loans in liquidation as of December 31, 1968, or charged off during the period January 1, 1964, to December 31, 1968. In our review we identified a weakness in the valuation of collateral which we are bringing to your attention for appropriate consideration. NEED TO ESTIMATE THE LIQUIDATION VALUE OF COLL4TERAL WHEN LOANS ARE PROCESSED FOR APPROVAL SBA's current practice of not estimating the liquidation values of collateral, in our opinion, does not provide responsible officials with sufficient information on the degree to which a proposed loan is secured, SBA procedures state that it is important that the collateral offered to secure loans be carefully evaluated, that the loan files contain documentary evidence of the value of collateral, and that loans be secured by collateral of a type, amount and value which, considered with other factors, such as the character and ability of the management and prospective earnings, will afford the required assurance of repayment. For 14 of the 21 loans we reviewed, we found that values provided by the borrower were used. These values were about 4 times greater than the values subseouently placed on the collateral at the time of liquidation. 4e believe that at the time of loan application a com- parison of the market value with the estimated liquidation value of the collateral should have been made to permit a reasonable assessment of the risks involved in making the loan. The difference between the market value and the estimated liauidation value of the collateral securing one of the loans included in our review is illustrated below. BEST DOCUMENT AVAILABLE 4'09*2

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