On July 13, SBA’s Inspector General (IG) issued a scathing audit criticizing Banco Popular for its underwriting procedures for the Huntington Learning Centers (HLC) franchise. The IG wrote that the bank failed to properly analyze and underwrite applicant projections. This failure warrants the denial of the SBA guaranty for all of the bank’s HLC franchise loans, according to the IG.
The SBA audit says Banco Popular did not adequately assess repayment ability for 12 SBA-guaranteed HLC franchise loans when approving the loans. In fiscal 2007, a total of 12 HLC franchises received SBA-guaranteed loans from Banco Popular for the acquisition of their businesses. The loans ranged in amounts from $196,500 to $379,900. Banco Popular approved these loans based on first-year projections that showed that the franchises would generate revenues ranging from $483,000 to $650,025. This level of performance is questionable given that the HLC, Inc. Franchise Offering Circular, which was effective April 1, 2006 and reviewed by the lender, showed that the average revenue of franchises in operation for one or more years was $468,442 in 2005. Nevertheless, the lender expected the newly formed franchises to not only meet this average, but to exceed it, with generally no explanation for how the businesses would achieve this level of performance.
“Lenders need to be extremely careful in the underwriting of SBA loans,” commented Jim Brett, senior underwriter at ValueXpress. “The SBA’s Standard Operating Procedures (SOP) is an intensive document of 400 pages, but it must be studied, understood and followed to ensure the SBA will honor the guarantee. Plus, following the SOP is just good credit practice that will result in fewer defaulted loans,” said Brett.