[Audit Report on the Small Business Development Agency, Government of the Virgin Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 97-I-257

Title: Audit Report on the Small Business Development Agency, Government
       of the Virgin Islands

Date: January 15, 1997

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United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

SUBJECT SUMMARY:     Final Audit Report for Your Information: - "Small Business
                          Development Agency, Government of the Virgin Islands"
                          (No.  97-I-257)

Attached for your information is a copy of the subject final report, which presents the results
of our review of the Small Business Development Agency, Government of the Virgin
Islands. The objective of the audit was to determine whether the Agency made loans only
to eligible applicants and made reasonable efforts to collect the outstanding loans.

We concluded that improvements were needed in the Small Business Development Agency's
loan application process and in the level of collection enforcement for delinquent loans.
Specifically, we found that the Agency: (1) did not always adequately verify and analyze
data in loan application packages to determine the applicants' credit worthiness, financial
stability, and ability to repay the loans; (2) did not always secure adequate collateral to
protect the Government's interest; and (3) did not maintain an up-to-date record of
outstanding loans, refer defaulted loans to a private collection agency or to the Virgin Islands
Attorney General in a timely manner, and provide technical assistance to borrowers to help
them better manage their business finances. As a result, the Agency had an overall
delinquency rate of 70 percent, which represented 295 active loans, totaling about
$6.1 million, that had become delinquent since May 1971. In addition, the Agency was
required to pay off at least 15 guaranteed loans, totaling more than $600,000, that were
defaulted on by the original borrowers.

The Governor's November 12, 1996, response to our draft report was sufficient for us to
consider all four of our recommendations resolved but not implemented.

If you have any questions concerning this matter, please contact me or Mr. Robert J.
Williams, Acting Assistant Inspector General for Audits, at (202) 208-5745.

Attachment


V-IN-VIS-004-95
United States Department of the Interior

OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

Honorable Roy L. Schneider
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802

Subject: Audit Report on the Small Business Development Agency, Government of the
Virgin Islands (No. 97-I-257)

Dear Governor Schneider:

This report presents the results of our review of the Small Business Development Agency,
which is administratively under the Department of Tourism. The objective of the audit was
to determine whether the Agency made loans only to eligible applicants and made reasonable
efforts to collect the outstanding loans.

Although the audit was completed prior to Hurricane Marilyn in September 1995, we
delayed issuance of the report because we believed that the Government would not be in
a position to respond during the immediate hurricane recovery period. In addition, we
focused on and gave priority to performing several hurricane-related reviews for the
Federal Emergency Management Agency. However, based on our reevaluation of the audit
findings and recommendations, we believe that, although some of the specific examples cited
in the findings are not current, the issues discussed in the report and the recommendations
are still valid.  The recommendations, if implemented, should result in long-term
improvements in the loan programs administered by the Small Business Development
Agency.

We concluded that improvements were needed in the loan approval process and in the level
of collection enforcement. Specifically, we found that:

  - The Agency did not always adequately verify and analyze data in loan application
packages to determine the applicants' credit worthiness, financial stability, and ability to
repay the loans. Even when such data were adequately reviewed, the Loan Policy Board
and/or the then-Commissioner of Economic Development and Agriculture approved loans
that the Agency's loan officer recommended be denied. Also, the Agency did not always
secure adequate collateral to protect the Government's interests. Therefore, loans were
sometimes granted to applicants who had questionable ability to repay the loans, resulting
in an overall delinquency rate of 70 percent, which represented 295 active loans, totaling
about $6.1 million, that had become delinquent since May 1971.

 


  - The Agency did not maintain an up-to-date record of outstanding loans, refer
defaulted loans to a private collection agency or to the Attorney General in a timely manner,
and provide technical assistance to borrowers to help them to better manage their business
finances. As a result, the Agency has been required to pay off at least 15 guaranteed loans,
issued during the period of 1971 to 1991 and totaling more than $600,000, that were
defaulted on by the original borrowers, and has another 134 delinquent loans, totaling
$1.4 million, that are awaiting collection action.

Your November 12, 1996, response (Appendix 3) to the draft report expressed concurrence
with all of the recommendations and indicated that corrective actions would be taken. Based
on the response, we consider two recommendations resolved and partially implemented and
two recommendations resolved but not implemented. However, additional information is
needed for all of the recommendations (see Appendix 4).

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary impact
of audit findings (Appendix 1), actions taken to implement audit recommendations, and
identification of each significant recommendation on which corrective action has not been
taken.

In view of the above, please provide a response, as required by Public Law 97-357, to this
report by March 14, 1997.  The response should be addressed to Mr. Arnold E.
van Beverhoudt, Jr., Director of Insular Area Audits, Caribbean Regional Office, Federal
Building - Room 207, Charlotte Amalie, Virgin Islands 00802. The response should include
the information requested in Appendix 4.

We appreciate the assistance of Agency personnel in the conduct of our audit.

Sincerely,

Wilma A. Lewis
Inspector General

L

 
 

CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PRIOR AUDIT COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

FINDINGS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. LOAN APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. COLLECTION ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

APPENDICES

l. CLASSIFICATION OF MONETARY AMOUNTS . . . . . . . . . . . . . . . . . . . . 11
2. LOANS INCLUDED IN OUR REVIEW THAT HAD DEFICIENCIES
RELATEDTO THE APPLICATION PROCESS . . . . . . . . . . . . . . . . . . . . . . 12
3. GOVERNOR OF THE VIRGIN ISLANDS RESPONSE. . . . . . . . . . . . . . . . 14
4. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . . . . . . . . . . 18

 
BACKGROUND



INTRODUCTION

The Small Business Development Agency was established under Title 11, Chapter 23, of the
Virgin Islands Code. The Agency is responsible for providing low interest direct and
guaranteed loans for the establishment of small businesses in the Virgin Islands. The
Agency is also responsible for providing managerial and technical assistance to applicants.
During fiscal years 1993 and 1994, the Agency had operating budgets of $444,000 and
$479,500, respectively, with a staff of seven employees during those two fiscal years.

The Agency administers five different loan programs: the Small Business Development Loan
Fund, with direct loans of up to $25,000 at an interest rate of 6 percent and guaranteed bank
loans of up to $ 150,000; the Farmers and Fishermen Revolving Loan Fund, with direct loans
of up to $17,000 at an interest rate of 4 percent; the Frederiksted Revolving Loan Fund, with
direct loans of up to $20,000 at an interest rate of 12 percent and guaranteed bank loans of
up to $30,000; and two Economic Development Administration Loan Funds, with direct
loans of up to $50,000 at an interest rate of 12 percent. The Agency will guarantee up to 90
percent of guaranteed loans. Each loan program has its own eligibility requirements,
including maximum annual gross income, number of employees, owner residency, and the
level of owner participation in the business.

Because the Agency was unable to provide us with data concerning the number and value
of loans that were approved, outstanding, and delinquent, we reconstructed information
based on our review of files at both the Agency's St. Thomas and St. Croix offices. Our
compilation disclosed that from May 1971 to April 1995, the Agency had issued 421 loans,
totaling about $8.1 million, of which 295 loans, totaling $6.1 million, became delinquent.
This represented an overall delinquency rate of 70 percent.1 Specifically, the Agency had
69 current direct loans, totaling about $600,000; 134 delinquent direct loans, totaling about
$1.4 million; and 15 guaranteed loans, totaling about $600,000, that the Agency was paying
off because the borrowers defaulted with the banks. The Agency also had 107 inactive
delinquent loans, totaling about $3.5 million, that had been submitted to the Virgin Islands
Attorney General and 39 inactive delinquent loans, totaling about $600,000, that had been
submitted to private collection agencies for collection. There were an additional 55 loans,
originally totaling $1.3 million, that had been paid in full by the borrowers, and 2 loans,

lThe 70 percent delinquency rate stated in this report was computed by dividing the total number of
loans that
became delinquent (295) by the total number of loans issued (421). Agency officials did not agree
with our
computation because it was their opinion that only active loans should be considered in computing
a
delinquency rate. As of April 1995, the Agency had 203 active loans, totaling $2.0 million, of which
134,
totaling $1.4 million, were delinquent. Using the Agency's criterion, dividing the number of active
delinquent
loans (134) by the total number of active loans (203) results in a delinquency rate of 66 percent (only
slightly
lower than our computation). However, we believe that excluding inactive loans, such as those
referred to the
Attorney General or to collection agencies, loans considered to be uncollectible, and loans that were
completely
paid off by the borrowers, results in an understatement of the true delinquency rate over a given
period of time.

1

 
 

totaling $100,000, for which the files did not contain sufficient information for us to
determine their current status.

OBJECTIVE AND SCOPE

The objective of the audit was to determine whether the Small Business Development
Agency made loans only to eligible applicants and made reasonable efforts to collect the
outstanding loans. The scope of the audit included a review of loans that were outstanding
at the time of the review (regardless of when they were originally issued) and of Small
Business Development Agency operations that occurred during fiscal years 1993, 1994, and
1995. The audit was performed during the period of May through September 1995.

Our review was made, as applicable, in accordance with the "Government Auditing
Standards," issued by the Comptroller General of the United States. Accordingly, we
included such tests of records and other auditing procedures that were considered necessary
under the circumstances.

As part of our review, we evaluated the Agency's internal controls related to loan approvals
and collection enforcement to the extent that we considered necessary to accomplish our
audit objective. Internal control weaknesses in these areas are addressed in the Findings and
Recommendations section of this report. Our recommendations, if implemented, should
improve the internal controls in these areas.

PRIOR AUDIT COVERAGE

The Office of Inspector General has not issued any audit reports on the Small Business
Development Agency during the past 5 years. However, our May 1989 report "Small
Business Development Loan Fund, Government of the Virgin Islands" (No. 89-73)
concluded that the Agency did not: (1) effectively administer the direct and guaranteed loan
programs; (2) adequately analyze the loan applications; (3) provide technical assistance to
borrowers; and (4) aggressively pursue the collection of delinquent loans. We found that
these problems still existed at the time of our current review.

 


FINDINGS AND RECOMMENDATIONS

A. LOAN APPROVAL

The Small Business Development Agency did not effectively administer the loan application
and approval process. The basic requirements for the loan programs are contained in Title 11,
Chapter 23, of the Virgin Islands Code. The Agency's Revolving Loan Fund Plan also
contains limited guidelines for analyzing loan application packages. We found that the
Agency issued loans without adequately verifying and analyzing the data in the loan
application packages to determine the applicants' credit worthiness, financial stability, and
ability to repay the loans and did not secure sufficient collateral after the loans were
approved to protect the Government's interests. Even when the loan application packages
were adequately reviewed, the Loan Policy Board and/or the then-Commissioner of
Economic Development and Agriculture approved loans that the Agency's loan officer had
recommended be denied. The deficiencies occurred because Agency personnel did not
supplement basic guidelines by establishing comprehensive policies and procedures for
analyzing loan applications and for determining the type of collateral that would be
considered adequate. Consequently, loans were granted to borrowers whose ability to repay
the loans was not adequately analyzed, resulting in 295 loans, totaling $6.1 million (out of
421 loans, issued from May 1971 to April 1995 and totaling $8.1 million), that were
delinquent. This represented a delinquency rate of 70 percent.

Loan Applications

Applicants are required by Agency policy to submit, with their loan applications, documents
such as a personal history, a sworn affidavit of eligibility, a personal financial statement of
the owner, financial statements of the business, a business plan, and a personal resume. The
Agency's field investigator is responsible for verifying the information submitted with the
loan application; obtaining other information, such as a credit history; and submitting a
written report on the findings to the senior loan officer. The senior loan officer then submits
a written report, with a recommendation to approve or deny the loan, to the Director. In turn,
the Director then submits a written report to the Loan Policy Board or the Commissioner of
Tourism, depending on the type of loan. In accordance with Title 11, Section 1255, of the
Virgin Islands Code, the Loan Policy Board is responsible for approving all loans under the
Small Business Development and Loan Fund. The Commissioner of Tourism approves all
other loans, with input from the Board.

Despite these procedures, the Agency did not establish formal, written guidelines on how to
analyze loan packages and did not always perform a thorough evaluation of the supporting
documents submitted with the loan applications. We reviewed the field investigators' reports
for a sample of 56 delinquent loans to assess the effectiveness of the proapproval analyses
conducted. We found that 23 of the 56 loan application packages, representing a total loan
amount of over $706,000, were not adequately analyzed by the field investigators (see
Appendix 2). The files for 8 of these 23 loan packages did not contain field investigators'

3

 
reports or documentation showing that the applicants' credit reports, resumes, and financial
information had been verified.

Even when the loan application packages were thoroughly reviewed, the recommendations
of the Agency's loan officer were sometimes ignored. For 5 of the 23 loan packages
included in our review, the loan officer recommended denial of the loans, but those
recommendations were overridden by the Commissioner of Economic Development and
Agriculture (the predecessor to the Commissioner of Tourism) or the Loan Policy Board.
In 14 other cases, the loan officer questioned the applicants' ability to repay the proposed
loans, but the loans were still approved by the Loan Policy Board. For example:

   In April 1992, the Agency issued a $50,000 Economic Development
Administration loan to an applicant, although the Agency was aware of the firm's financial
constraints and the loan officer questioned the applicant's ability to repay the loan. At the
time of the application, the firm had eight outstanding loans (none from the Agency), with
balances totaling about $621,000. Six of these loans, with balances totaling about $615,000,
were delinquent. (Two of the delinquent loans were from the U.S. Small Business
Administration.)  By the time of our review, the $50,000 Economic Development
Administration loan had also become delinquent.

   In May 1992, the Agency issued two separate $50,000 Economic Development
Administration loans to an applicant at an interest rate of 4 percent, although the loan
program requirements set a maximum loan amount of $50,000 to one borrower at an interest
rate of 12 percent. The loan officer's report indicated that the borrower had not submitted
annual reports or paid franchise taxes to the Lieutenant Governor's Office, as required by the
Virgin Islands Code. The loan officer's report also stated that the collateral offered by the
company was not sufficient to protect the Government's interests. Although the senior loan
officer recommended denial and questioned the borrower's ability to repay the loans, the
loans were approved.

  - In May 1994, the then-Commissioner of Economic Development and Agriculture
approved a $50,000 Economic Development Administration loan to an applicant, although
the loan officer had questioned the borrower's ability to repay the loan and recommended
denial because of the applicant's negative equity. The loan was approved under the
Economic Development loan program but was actually issued under the Small Business
Development loan program without the Loan Policy Board's approval, as required by the
Virgin Islands Code.

The approval of loans to applicants who either had not been adequately evaluated or had
been recommended for disapproval was one factor that resulted in the Agency's high
delinquency rate.  We believe that guidelines should be established to define the
circumstances under which the Loan Policy Board and/or the Commissioner of Tourism may
override the recommendations of the Agency's senior loan officers and the documentation
that should be placed in the loan case files to justify such overrides.

 


Collateral

Because the Agency made loans to applicants who, based on the loan packages submitted,
had questionable repayment ability, we believe that the Agency should have made more
efforts to protect the Government's interests by securing adequate collateral. Since adequate
collateral was not always secured, the Government was unable to obtain satisfactory
compensation.

The Agency routinely placed Uniform Commercial Code liens on collateral. These liens
were recorded at the Recorder of Deeds Office and were valid for a period of 5 years. For
the 56 delinquent loans included in our sample, we reviewed the case files to determine the
types of collateral accepted by the Agency and found that the Agency accepted business
inventory, third and fourth mortgages, and life insurance policies naming the Agency as
beneficiary. In regard to life insurance policies, the Agency paid the full amount of the
insurance premium for the term of the loan and prorated that amount to the borrower's
monthly payments. However, because the Agency could not collect on these insurance
policies until the borrower died, we do not consider this collateral to be adequate to protect
the Government's interests. Similarly, accepting third and fourth mortgages weakened the
Agency's ability to collect the loan balances through foreclosure proceedings because higher
priority mortgage holders would have a greater claim to the borrowers' assets. For example:

  - In May 1991, the Agency issued a $100,000 loan to an applicant and placed a lien
on the company's equipment. When the business later filed for bankruptcy, its assets, which
were valued at $62,000, were liquidated and the proceeds distributed on a prorated basis,
Because the company had a $440,000 outstanding loan from the U.S. Small Business
Administration and a balance of $98,000 on its loan from the Agency, the Agency was able
to collect only $12,000 (19 percent). The remaining $50,000 (81 percent) obtained from
liquidation of the company's assets was paid to the U.S. Small Business Administration.

   In October 1991, the Agency issued a $42,000 loan to an applicant to establish a
drafting business. In this instance, the borrower obtained a life insurance policy that named
herself, rather than the Agency, as the beneficiary. The borrower's loan became delinquent
when she died in March 1995, with $47,700 still due on the loan, including accrued interest.
There was no documentation in the case file to indicate whether the Agency tried to place
a lien on the borrower's estate.

  - In May 1992, the Agency accepted a fourth priority mortgage on a borrower's
personal property and a life insurance policy as collateral on the two $50,000 Economic
Development Administration loans discussed in the report section "Loan Applications." The
loans became delinquent; however, the Agency could not recover the past-due amounts
because of the type of collateral secured. At the time of our review, the borrower had paid
only $9,000 on the loans, and payments totaling $26,000, including interest, were overdue.

 
  



Recommendation

We recommend that the Governor of the Virgin Islands ensure that the Small Business
Development Agency establishes and implements comprehensive policies and procedures,
consistent with the underlying provisions of the Virgin Islands Code, which include the
following:

- The basic eligibility requirements for loan programs administered by the Agency.

- The review and evaluation of loan applications.

  - The circumstances under which recommendations of the Agency's loan officer can
be overridden by the Loan Policy Board and/or the Commissioner of Tourism and the
documentation that should be placed in the loan case files to justify such overrides.

- The types of collateral that will be accepted for approved loans.

Governor of the Virgin Islands Response and Office of Inspector General
Reply

The Governor's November 12, 1996, response (Appendix 3) to the draft report expressed
concurrence with the recommendation and stated that the Small Business Development

thereof and that the recommended policies and procedures would be established and
implemented as part of the Development Bank's Manual of Operating Procedures and/or its
Loan Policy Manual. Based on the response, we consider the recommendation resolved but
not implemented and request additional information in response to the recommendation (see
Appendix 4).

6

 
B. COLLECTION ENFORCEMENT

The Small Business Development Agency needed to improve its efforts in collecting and
servicing outstanding loans. The basic requirements for collecting and servicing loans are
contained in Section 310.8 of the Virgin Islands Government Accounting Manual and in
Title 11, Sections 1254 and 1258, of the Virgin Islands Code. We found that the Agency did
not: (1) maintain an up-to-date record of outstanding loan receivables; (2) refer loans in
default to the Attorney General or a private collection agency in a timely manner and
regularly follow up on the status of those loans; or (3) provide technical assistance to
borrowers to help them better manage their business finances. These collection deficiencies
occurred because Agency personnel did not supplement the basic guidelines by establishing
comprehensive policies and procedures for collection enforcement and did not always
comply with the guidelines that did exist. In addition, the Agency did not have sufficient
resources to pursue collection more aggressively and to provide technical and managerial
assistance that would decrease the likelihood that borrowers would become delinquent on
their loans. As a result, the Agency has been required to pay off at least 15 guaranteed loans,
issued during the period of 1971 to 1991 and totaling more than $600,000, that were
defaulted on by the original borrowers and has another 134 delinquent loans, totaling
$1.4 million, that are awaiting collection action. The Agency considers another 31 loans,
totaling $555,000, to be uncollectible. However, the Legislature did not give its approval
for the write-off of those loans.

Receivable Records

Although required by the Government's Accounting Manual and by its internal policies, the
Agency did not maintain an up-to-date listing of the status of outstanding loans. In addition,
the Agency's St. Thomas office did not perform periodic reviews of loan files and follow up
with debtors on delinquent loans. Under existing procedures, borrowers are required to make
loan payments by the first day of each month, either in person at the Agency's offices or by
mail. The Agency's St. Croix office had procedures in place to periodically review the status
of each loan account and to notify borrowers of any past-due amounts. These procedures
included maintaining a ledger to keep track of payments received on each account, issuing
delinquency notifications by the tenth of each month, and contacting delinquent debtors by
telephone. However, similar practices were not followed on St. Thomas because the field
investigator position had been vacant since August 1992. The field investigator is normally
responsible for monitoring the status of accounts.

Referrals for Collection Action

In accordance with Title 11, Section 1254, of the Virgin Islands Code, which became
effective in December 1993, the Agency's Director may assign, to a private collection
agency, all accounts that are inactive and delinquent for more than 180 days. The Agency
began using the services of two collection agencies in 1994. However, as of August 1995,
only 39 delinquent cases, representing about $600,000, had been referred to the collection
agencies, and the amounts recovered totaled only $15,930. At the time of our review, the

7

 


Agency had an additional 134 active delinquent loans, totaling almost $1.4 million. For
example:

  - In January 1972, the Agency paid a guaranteed bank loan that had a delinquent
balance of $7,500. As of May 1995, the loan was 23 years delinquent and had accumulated
interest of $14,366.

  - In January 1973, the Agency paid a guaranteed bank loan that had a delinquent
balance of $3,000. As of May 1995, the loan was 22 years delinquent and had accumulated
interest of $7,300.

  - In October 1982, a 2-month-old direct loan of $50,000 became delinquent. As of
May 1995, the unpaid balance on the loan of $45,000 was 12.5 years delinquent, and the loan
had accumulated interest of $68,000.

   In January 1987, a 4-year-old direct loan of $20,000 became delinquent. As of
May 1995, the unpaid balance on the loan of $15,500 was 8.3 years delinquent, and the loan
had accumulated interest of $12,900.

  - In October 1985, a 1-year-old direct loan of $31,000 became delinquent. As of
May 1995, the unpaid balance on the loan of $28,000 was 9.5 years delinquent, and the loan
had accumulated interest of $27,000.

In each of these cases, the Agency had not referred the delinquent accounts to a private
collection agency or to the Virgin Islands Attorney General for further action or made a
determination as to whether the loans were uncollectible.

Prior to being authorized to use private collection agencies, the Agency referred delinquent
accounts to the Attorney General for legal action. According to the Agency's records,
107 loans, representing about $3.5 million, had been submitted to the Attorney General
during the period of 1971 to 1984. However, we found that the Agency did not follow up
with the Attorney General and, therefore, did not know the status of the referred cases. We
also found that the Agency's Loan Policy Board recommended to the Legislature that
31 loans, totaling about $555,000, be written off as uncollectible. However, the loans had
not been written off because the Legislature did not approve such action. As an added
measure for collecting delinquent loans, we believe that the Government should consider
implementing legislation authorizing the Bureau of Internal Revenue to offset, against
income tax refunds, any delinquent amounts owed by taxpayers on loans from the Agency.

Defaulted Guaranteed Loans

As indicated previously, the Agency has been required to pay off 15 guaranteed bank loans,
totaling more than $600,000, that were defaulted on by the original borrowers. In such cases,
the Agency did not prepare any agreements with the debtors to formalize the debtors'
obligation to reimburse the Agency for amounts paid to the banks on their behalf. Further,

8

 
an Agency official told us that because the Agency did not have sufficient funds to pay off
defaulted loans in full, the Agency assumed the debtors' monthly payments, including
interest. Therefore, the ultimate cost to the Government was more than the amount of the
defaulted loan balances.

Technical Assistance

The Agency was required by Title 11, Section 1258, of the Virgin Islands Code to provide
managerial and technical assistance to borrowers to assist them in better managing their
business finances, thereby lessening the likelihood that they would default on their loans.
However, because of the lack of funding and staff, the Agency was not providing the
required technical assistance. Instead, the Agency referred loan applicants to the Small
Business Development Center, which was operated by the University of the Virgin Islands.
The Center prepared loan packages, business plans, market studies, and projections for
clients applying for small business loans. The Center also provided training and individual
counseling once the businesses were established. These services were at no cost to the
clients.

However, the effectiveness of the Small Business Development Center's efforts was
hindered because the Agency did not follow up with borrowers on the status of their business
activities and did not always inform the Center when loans were approved to former clients
of the Center so that the Center could contact the borrowers and offer further technical and
managerial assistance. We believe that if the Agency cannot obtain the resources necessary
to provide the technical assistance required by law, it should enter into a formal agreement
with the University's Small Business Development Center to provide that assistance on the
Agency's behalf. In our opinion, the availability of technical and managerial assistance
could result in a reduction in the number of loans made by the Agency that become
delinquent.

Recommendations

We recommend that the Governor of the Virgin Islands:

  1. Ensure that the Small Business Development Agency establishes and implements
comprehensive policies and procedures, consistent with the underlying provisions of the
Virgin Islands Code, for the collection enforcement actions that the Agency will take against
delinquent borrowers. Such collection actions should include periodically sending demand
letters to borrowers who are delinquent; referring accounts more than 180 days delinquent
to a private collection agency; and referring accounts that cannot be settled by the collection
agency to the Virgin Islands Attorney General for legal action, including foreclosure on
collateral.

  2. Submit legislation to the Legislature of the Virgin Islands to write off loans judged
by the Loan Policy Board to be uncollectible and to authorize the Bureau of Internal Revenue

9

 


to offset, against income tax refunds, any delinquent amounts owed by taxpayers on loans
from the Small Business Development Agency.

  3. Provide the Small Business Development Agency with the staff and other
resources necessary to aggressively enforce collection of delinquent accounts and to provide
the managerial and technical assistance required by Title 11, Section 1258, of the Virgin
Islands Code. As an alternative to providing technical assistance to clients, the Agency
should enter into a formal agreement with the University of the Virgin Islands Small
Business Development Center to provide such technical assistance.

Governor of the Virgin Islands Response and Office of Inspector General
Reply

The Governor's November 12, 1996, response (Appendix 3) to the draft report expressed
concurrence with the three recommendations and provided actions taken or to be taken to
implement the recommendations. Based on the response, we consider Recommendations 1
and 2 resolved and partially implemented and Recommendation 3 resolved but not
implemented. Additional information is requested for all of the recommendations (see
Appendix 4).

10

 
APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

                   Funds To Be Put
Finding                  To Better Use*

Collection Enforcement

  Loans Referred for Collection Action

  Defaulted Guaranteed Loans

  Active Delinquent Loans

   Total Delinquent Loans

$4.1 million

0.6 million

1.4 million

$6.1 million

* These amounts represent local finds.

11

 
LOANS

                         APPENDIX 2
                          Page 1 of 2
INCLUDED IN OUR REVIEW THAT HAD DEFICIENCIES

RELATED TO THE APPLICATION PROCESS

Small Business

Loan Amount
$11,133.10
$18,670.00
$25,440.00
$25,416.25
$19,210.00
$50,000.00

$40,000.00
$100,000.00
$5,000.00

$20,353.00
$25,707.50

$8,511.67

$18,250.00
$6,750.00
$50,000.00

$100,000.00

$6,216.50
$45,000.00

$5,000.00

$5,000.00

$25,000.00

Key to Loan Numbers:
AF = Active file

CA= Referred to collection agency

12

 


APPENDIX 2
Page 2 of 2

$706.141.27

13

 


  

APPENDIX 3
Page 1 of 4

Dear Ms. Lewis:

14

 


APPENDIX 3
Page 2 of 4

Draft Report
Small Business Development Agency
Government of the Virgin Islands
No. V-IN-VIS-004-95
Page 2

(4) The types of collateral that will be
  accepted for approved loans.

Response

  We concur with your findings and recommendations encompassing
the  loan  approval  process,  including  the  review of  loan
applications  and  the  adequacy of  the  collateral  accepted
heretofore.

  The recent amendment provides for the incorporation of the
Small Business Development Agency into the Bank as an integral part
thereof.  Accordingly,  the establishment and implementation of
comprehensive policies and procedures which you recommend are being
written into and will be part of the Development Bank's Manual of
Operating Procedures.  The areas addressed in the Draft Audit
Report, Namely: eligibility requirements; review and evaluation of
loan  applications;  circumstances  under  which  recommendations
relative to loans may be overridden; and the adequacy and types of
collateral will all be properly covered in the Development Bank's
Loan Policy Manual.

RECOMMENDATIONS PERTAINING TO COLLECTION ENFORCEMENT

Recommendation 1

  We recommend that the Governor of the Virgin Islands ensure
that the Small  Business  Development Agency  establishes  and
implements comprehensive policies and procedures, consistent with
the underlying provisions of the Virgin Islands Code, for the
collection enforcement actions that the Agency will take against
delinquent borrowers.  Such collection actions should include
periodically  sending  demand  letters to  borrowers  who  are
delinquent; referring accounts more than 180 days delinquent to a
private collection agency; and referring accounts that cannot be
settled by the collection agency to the Virgin Islands Attorney
General for legal action, including foreclosure on collateral.

15

 


APPENDIX 3
Page 3 of 4

Draft Report
Small Business Development Agency
Government of the Virgin Islands
No. V-IN-VIS-004-95
Page 3

Response

  With the incorporation of the Small Business Development
Agency into the Government Development Bank, the Bank's Manual of
Operating  procedures will contain  comprehensive  policies and
guidelines covering the areas indicated in the Draft Audit Report.

  In the interim period, however, the Agency has commenced
sending demand letters to delinquent borrowers, and referring
seriously delinquent accounts to the Attorney General for legal
action.

Recommendation 2

  We recommend that the Governor of the Virgin Islands submit
legislation to the Legislature of the Virgin Islands to write off
loans judged by the Loan Policy Board to be uncollectible and to
authorize the Bureau of Internal Revenue to offset, against income
tax refunds, any delinquent amounts owed by taxpayers on loans from
the Small Business Development Agency.

Response

  The Operating Policies  and Procedure of  the Government
Development Bank will address the issue of writing off delinquent
loans deemed uncollectible.  If legislation is  judged to be
necessary, I will consider submitting such legislation after all
possible efforts have been expended to collect these delinquent
loans. With respect to authorizing the Bureau of Internal Revenue
to offset, against tax refunds, any delinquent amounts owed by
taxpayers on loans from the Agency, I have already initiated such
action regarding all monies owed the Government of the Virgin
Islands.

 


APPENDIX 3
Page 4 of 4

Draft Report
Small Business Development Agency
Government of the Virgin Islands
No. V-IN-VIS-004-95
Page 4

  Response
  As part of the Government Development Bank,
Development Agency will have adequate staff and

the Small Business
other resources to

aggressively enforce  collection of  delinquent  accounts. In
addition, we  intend to provide  the managerial  and technical
assistance required to provide clients of the Bank with every
opportunity for success. One of our goals is to organize a cadre of
retired business executives such as is done by the Federal SBA, to
assist us in providing the needed managerial assistance. We will
also enter into a cooperative agreement with the University of the
Virgin  Islands  Small  Business  Development  Center  regarding
Managerial and Technical Assistance.
  If you have any questions regarding the foregoing responses,
please do not hesitate to contact me.

cc:  Mr. Arnold E. VanBeverhoudt, Jr.
  Regional Audit Manager
  Office of Inspector General

Mr. Elmo D. Roebuck
Special Assistant for Audit & Policy Evaluation
Office of the Governor

Mr. William A. Quetel
Director
Small Business Development Agency

17

 
                       APPENDIX 4

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
  Reference        Status

    A.1       Resolved; not
            implemented.

B.1

B.2

B.3

Resolved; not
implemented.

Resolved; not
implemented.

Action Required

Provide a copy of the policies and
procedures for the Government
Development Bank pertaining to the
application and approval process for
Small Business Development loans.

Provide a copy of the policies and
procedures for the Government
Development Bank pertaining to the
collection enforcement procedures for
delinquent   Small   Business
Development loans.

Provide a copy of the policies and
procedures for the Government
Development Bank pertaining to the
write-off of uncollectible loans.

Resolved; not  Provide a copy of the cooperative
implemented.  agreement with the University of the
      Virgin Islands regarding managerial
      and technical assistance to borrowers
      of Small Business Development
      loans.

18

 
ILLEGAL OR WASTEFUL ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:            Calling:

Within the Continental United States

U.S. Department of the Interior         Our 24-hour
Office of Inspector General           Telephone HOTLINE
1849 C Street, N.W.              1-800-424-5081 or
Mail Stop 5341                (202) 208-5300
Washington, D.C. 20240

TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region

(703) 235-9221

U.S. Department of the Interior         (700) 550-7428 or
Office of Inspector General           COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910

 
Toll Free Numbers:
1-800-424-5081
TDD 1-800-354-0996

FTS/Commercial Numbers:
(202) 208-5300
TDD (202) 208-2420

HOTLINE

1849 C Street N.W.
Mail Stop 5341
Washington, D.C. 20240