August 2012 Archives

Interest in Health Spending Accounts is growing for some fundamental and basic reasons. Today's reality is that governments in Canada and the United States are working to balance their budgets by reducing expenses.

Another reality is that health care expenditures take up a significant portion of government budgets and must be reduced if governments are to be successful in their efforts.

While this funding for services is declining, demand for health care is not likely to subside.

Who will pay for the services that are needed?

In this first of two parts, we explain the basics of Health Spending Accounts.  Part two of this article details the services covered.

1. What is Health Spending Account?

Health Spending Accounts are the government's way of helping Canadians pay for their medical expenditures. (Similar devices are available in the US.)

A Health Spending Account is a special bank account administered by a third party. This account can replace or complement other employee benefits.

Employers deposit funds into the account on behalf of their employees. Employees have access to these funds for reimbursement of health care expenditures.

These accounts are available to businesses of all sizes including self-employed individuals where the employer and employee may be the same individual.

Health Spending Accounts are suitable for businesses of ALL sizes.

These accounts must be used solely for reimbursement of medical expenses. Individual business owners channelling their medical expenses through a HSA can save thousands of dollars per year.

2. How does the HSA work? Here is a simple picture.

3. How does the HSA save Money?

This is a bit tricky, but Canada Revenue Agency provides a tax benefit to employers and employees who utilize HSAs for reimbursement of medical expenses. 

This week I turned 60.  And I am concerned and confused about the future of the hospitality industry.  I am concerned about where our future leadership will come from.  For those of us who are also pushing 60 or have already pushed through to the other side, here are some reminders of what we have lived through.  And for those of you who believe that 60 is ancient, here is an interesting history.

We were born before or right at the start of television, before polio shots, frozen foods, xerox, plastic, contact lenses, frisbees and the pill.  We were born before radar, credit cards split atoms, laser beams and ballpoint pens.  Before pantyhose, dishwashers, clothes dryers, electric blankets, air conditioners, drip-dry clothes and before man walked on the moon.

We got married first and then lived together.  How weird is that?  Having a meaningful relationship meant getting along well with our cousins.

We were here before househusbands, gay rights, computer dating, dual careers, and commuter marriages.  We were before day-care centers, group therapy, and nursing homes.

We never heard of FM radio, tape decks, artificial hearts, word processors, yogurt, and guys wearing earrings.

For us, time-sharing meant togetherness, not vacation homes and Facebook, hardware meant hardware, and software wasn’t even a word!

A keyboard came attached to a piano, a virus gave you a fever, to log on was adding wood to the fire.  A program was a TV show and a menu was something you ordered food from.

Made in Japan meant junk and the term “making out” referred to how you did on your exam. McDonald’s and instant coffee were unheard of.

When we hit the scene there were 5 and 10 cent stores where you bought things for 5 and 10 cents.  For one nickel you could ride a streetcar, make a phone call, buy a Pepsi or enough stamps to mail one letter and 2 postcards.

You could buy a new Chevy Coup for $600.00 but who could afford one?  What a pity too, because gas was 11 cents a gallon.

In our day, cigarette smoking was fashionable, grass was mowed, coke was a cold drink and pot was something you cooked in.

Rock music was a lullaby that grandma sang and aids were helpers in the principal’s office.

We made do with what we had.  And we were the last generation that was so dumb as to think you needed a husband to have a baby!

No wonder we are confused.  But we survived and we’re here and that’s reason enough to celebrate and to thank God for our adaptability.

Humor aside, the common theme that runs through all of these comments is change.  Change.  Think about it.  It surrounds us every day.  Change is us.

We don’t notice it every day but boy oh boy is it there - - receding hairline, expanding waistlines, pounding in your chest after you have run one block.

It’s there all right.

Sometimes I think that dealing with change is the fundamental human contradiction.  Rationally we understand that change is the law of life, the inevitability of our universe.  But emotionally, in the heart we really want everything to stay the same.

We really don’t want our babies, those beautiful 3 and 4 year olds to grow up and we don’t really want our teenagers to start to date. And secretly, we don’t really want any more new technology.  Heaven knows, we can’t even absorb or understand what we already have.

But we’re stuck.  Change is the law of life.  And it is here to stay.  Don’t fight change.  Embrace it.

Change in the business environment is rapid.  Something new, something different is coming into the marketplace every day.  Do you see it?  Are you looking for it?  This is serious stuff.  You have worked awfully hard, you have taken risks.  Don’t lose it all by making pretend that things will stay the same or burying yourself so deeply in the day to day details that the horizon is obscured.

There is an insightful story about a friend of mine who buys pampers for his son at Wal-Mart.  The information about his purchase is transmitted electronically from Wal-Mart to the Proctor Gamble warehouse and from there to the Proctor Gamble manufacturing facility so that production, inventory and delivery are totally integrated.

Now 10 -12 years ago there was a distributor who did all this.  And he was good, very good, the best.  He practiced total quality management, was loyal to his supplier, gave great service to his customers and guess what?  He’s out of business.  Finished.  Wiped out.  So you feel sorry for the poor bastard.  He didn’t do anything wrong. It’s just that while he was spending 60-70 hours a week running his business, the world was changing and he didn’t know it.

In reality, there are three types of managers.  One sees changes coming down the track.  Another sees changes just in time to take some adjustments before it’s too late.  The last type gets run over by change with the same result as a Mack truck running over a paper cup.

Look, I travel around the country, talking with owners and general managers, with desk clerks and bellhops, waiters and waitresses and something seems to be missing.  I think it is a sense of pride, a sense that you are proud of yourselves, proud of your employees and proud of your business, no matter what type of business it may be.  Pride is defined in the dictionary as pleasure or satisfaction taken in one’s work, achievement or profession.  Maybe what I sense is a lack of leadership, and without real leadership there is no pride.  We don’t instill it, because we don’t understand and maybe because we don’t care.

Maybe it is because we don’t understand what business we are in.  We are in the people business.  Not the hotel or restaurant business, not the real estate business.  Not the construction business, the people business.  Instead of machinery, we have people.  Instead of automated conveyor belts, we have people.  Instead of computers that hum and print stuff, we have people. 

We have not come to grips with this basic concept.  And without doing so, all the efforts, all the expenditures, all the marketing and sales efforts will not give you full return on your investment. 

It reminds me of an old, old story about Count Basie.  He told an owner he would never play in the guy’s nightclub again because the piano was so badly out of tune.  A month later the owner called Basie and said, “Come back! It’s fixed.”  Basie showed up, sat down, played a few bars and slammed the key cover down in disgust.  He said, “This is worse.  What did you do to this piano?”  “I had it fixed,” said the indignant club owner.  “What do you mean you had it fixed?  What did you do to it,” said the Count.  “I had it painted” was the answer.

There is an old expression freely translated as, no matter which way you turn, your rear end is still behind you.  No matter how much paint you use, it doesn’t help if the piano is out of tune.

You really want to know what I hear, wandering around the countryside.  Serious bitching.  Serious moaning and serious whining.  They say things like, “It’s hard to find good help these days,” and “Nobody wants to work anymore,” and “Why bother talking or teaching anything.  In two, three weeks, they’ll quit!”

Look, I am not going to go down this list of stupidity, item by item.  Wait a second, I have a better idea.  I agree with all of this.  I will stipulate to all 3 points.  The old days were better, nobody wants to work, kids are weirdoes.  I agree, okay?  I’m with you.  So?  What now?  You’ve gotten it off your chest.  What is your action plan?  More bitching?  More moaning? More whining?  Man, if there was ever a better example of that old adage that if you’re not part of the solution, you must be part of the problem...this is it.  The owners and general managers in the tourism business? 

It’s US who are often the problem, not the employees.  It’s us.  Forty to fifty years ago, there used to be a comic strip called “Pogo” drawn by a guy by the name of Walt Kelly.  Some of you graybeards probably remember.  Anyway, in a classic strip one of the characters says, “I have seen the enemy and they is us!”

We are sitting on a real opportunity to increase revenue, cut costs and bump profits.  The hospitality and tourism industry is the last major industry where a formal education is not a requirement for professional advancement or financial success.  Success in our business can be achieved with a simple formula:

1. Hard Work

2. Persistence

3. Desire for self-improvement

4. Willingness to watch, to listen, to learn.

It’s not complicated.  Whether you start out with a graduate degree from Cornell, or as a young person off the street as a night desk clerk or housekeeper.  Hard work and long hours are the pathway to a fulfilling and rewarding career.  Lots of people in this industry including general managers, owners and corporate vice presidents never graduated college.  Don’t bother to think about that statement. We can start right here with me. 

That’s right.  Steve Belmonte, former President & CEO of Ramada Hotels for 10 years and I never graduated college.  I started at 16 as a desk clerk in a Holiday Inn at the O’Hare airport.  My career has worked out pretty well.

So why, for heaven’s sake, why don’t we tell our people about the possibilities?  Why don’t we tell them about the abundance of success stories that are out there?  To these kids, you appear confident, secure, rich and successful.  They probably think you were born with a silver spoon in your mouth.  Why don’t you tell them the truth?  Why don’t you tell them your story?

What’s the point of all this?  I have been talking about change, leadership, pride and people.  It’s about our lives, our business, and our future.  It’s all about relationships.  You want some other interesting words?  How about trust and how about loyalty?  The very foundation of our industry is being able to count on others, dependability, allegiance, reliability, and obligation.  Think of the mix, the interdependence between you as the owner or manager, your employee, your customers and your franchisor.  We are talking about a positive feedback loop here.  People who are all intertwined and interconnected who benefit directly from each other.  And the benefits come directly from those simple words, trust and loyalty.

Okay, so you got the message.  Now let’s get down to specific cases.  Yours.  The owner and the general manager set the culture of the property.  You establish the tone, the environment in which your employees operate.  A friend of mine gave me two perfect examples of company cultures; two opposites.  

The first is about FedEx.  He needed to drop off a package downtown and got to the office 15 minutes before it opened.  While standing on the street corner with his back to the storefront, the young woman inside unlocked the door, came out on the street, tapped him on the shoulder and said, “May I help you, sir?”  She did that for only one reason.  That reason was because of Fred Smith, the Founder of the company.  Smith never met her.  He never talked to her.  But he established the policies and he created the atmosphere where employees want to go the extra mile. 

The other story is bad.  Real bad.  A similar thing probably happens at least once or twice a week to you.  The same guy goes into a well- known premier burger chain.  We’ll call it Ronnie Jockets, located right off Michigan Avenue in Chicago at 10:50 in the morning.  Just 10 minutes before eleven.  He pushes open the door, walks over to the front counter where there are three servers standing there in uniform with a manager-type wearing a tie.  Four people.  My friend says, “I’d like a cup of coffee to take out, please.”  One of the waiters looks at him and says, “I’m sorry, but we don’t open until eleven.”  The coffee is already made in the urn, four feet away and he’s “sorry we don’t open until 11?” 

And the manager stands there like a dummy.  Is that your hotel?  Is that the culture, the kind of employee you want?  Is that the attitude that is going to maximize your revenue and profits?

There’s a simple test I used to use at my hotel, which told me if I was doing my job and whether my properties were alive or dead, kind of like a doctor with a stethoscope.  It’s the pronoun test.  When I check in, I ask one of your people a couple of questions about policy or some aspect of the operations.  You know, something not complicated like, “How come the restaurant closes so early?” or “If you are not busy tonight, can I check-out at 3:30pm?”

If the answer comes back using the words “they” and “them”, I know that this place is dead as a doornail.  There is no heart, no soul and no leadership.  If the answer includes “we” or “us”, then I know something good happens at this property.

The bottom line will be determined by your willingness to help others and by your ability to mentor your employees and prepare them for supervisory and management positions.  Your ability to remain competitive in the most competitive of businesses is determined by your ability to give credit where credit is due and to praise your people for doing a good job.

All of this translates into dollars.  This is not some soft, fuzzy, do-good stuff.  Just maybe, if you assume a leader’s role and instill pride in your people, you will realize your financial and professional goals.  Your business depends on guest services.  Guest service depends on your leadership.  Your leadership instills pride in your people and they perform their tasks better than your competition and this will determine your profits.  It’s not complicated.

John Kotter in his book, “Leading Change” defined leadership as well as anyone ever has:  “Leadership defines what the future should look like.   It aligns people with that vision and inspires them to make it happen despite the obstacles.”

We have financial objectives.  We analyze the past year’s results department by department and create a budget, a forecast which will fulfill the financial requirements.  We understand that.  We do it.  Good.  Check it off.

Align people with that vision.  Do we do that?  Let me tell you something.  If you have not earned the respect of your people, go back to square one.  That’s right.  You have to EARN respect.  Just like you judge others by their actions, your managers, supervisors, and line employees are judging you by your actions.  And nobody is going to go that extra step, exert that degree of energy if you are not respected.  What creates that respect?  Nothing big, more so a lot of little things like: enthusiasm, courtesy, credit, recognition, praise, and affirmation.  It’s easy to criticize.  Any fool can do that.  What is hard is lifting your people up and making them feel good.  Now that takes skill, real skill.  The last part of Kotter’s statement was about leadership.

“Inspire them to make it happen despite the obstacles.”

For the word “inspire”, let’s substitute “incentivevise.”  General Eisenhower said, “There are no victories at bargain prices.”  Again, this is not complicated brainwork.  People respond to incentives.  Everything else is commentary.  All people.  All the time.  It’s human.  It’s natural.  Why would you believe your front line employees are any different from you?  You have incentives, which drive you, which motivate you!  You want my advice?  Provide dollars, lots of dollars, for performance and whatever it costs for bonuses and rewards.  You will get your investment back many fold through increases to your bottom line.  Notice that I refer to this as an investment because this is an ROI situation.

Let’s go back to the definition of pride:  “Pleasure or satisfaction in one’s work, achievements or profession.”  What’s our profession?  We are in the hospitality industry.  We are those people who from the beginning of time have provided a warm, safe haven for the traveler, and in the days gone by, companionship, conversation and food.  Do you feel that?  Do you believe that?  Do you communicate that to your people, that there is satisfaction, a joy that comes from service?  Do you communicate enthusiasm for your profession?

Henry Ford said, “Enthusiasm is at the bottom of all progress.  Enthusiasm is the spark that gives you the energy to execute your ideas.  With it, there is accomplishment.  Without it, there are only alibis.”  You can make a business come alive, creating its personality, but that happens through leadership, through some amalgamation of words and deeds.  Words are so strong.  Words give clear images.  We herd sheep.  We drive cattle.  We lead people.  That is our work as owners, operators and managers.  Leadership.  Leading people and giving our businesses character, personality.   Installing life into our business.

Pride and leadership.  Leadership and pride.  We are talking about revenues.  We are talking about profits.  We are talking about your career, your future. 

I don’t know how else to say it.  My children accuse me of repeating myself so I won’t.  I will let other people speak to you for me.

George Bernard Shaw said that, “The essence of inhumanity is to be indifferent to our fellow creatures.  That is the worst sin.”  Or to quote a famous Indian chief from the 1850’s:  “Humankind has not woven the web of life.  We are but one thread within it.  Whatever we do to the web we do to ourselves.  All things are bound together.  All things connect.”

There you have it.  That’s the message.  All things connect.  You, your customers, your employees, your franchisor, bound together by pride, trust, loyalty and wanting to succeed and complicated by having to adapt to a world which is in constant rapid change where something new, something different seems to come into the marketplace every day.

About Vimana Franchise Systems LLC & Hospitality Solutions LLC

Vimana Franchise Systems LLC is a hotel franchise company owned by CEO Steve Belmonte, President Neal Jackson and Vice President Cory Jackson Jr.  In May 2011, Vimana Franchise Systems launched the Centerstone brand as a three-segment franchise designed to create a fair and cost effective model for the hospitality industry.  In November 2011, Key West Inns was re-launched under the Vimana Franchise ownership umbrella as a fun and uniquely themed leisure brand.  

For more information on Vimana Franchise Systems LLC, contact Steve Belmonte at (407) 654-5540 [email protected].  Visit Vimana Franchise Systems online at www.VimanaFS.com.  Visit Centerstone online at www.centerstonehotels.com, on Twitter at @Centerstonehtls, or on Facebook at www.facebook.com/Centerstonehotels.  Visit Key West Inns online at www.staykeywesthotels.com, on Twitter at @StayKeyWest, or on Facebook at http://www.facebook.com/staykeywest.  

 Belmonte is also Founder & Chairman Emeritus of Hospitality Solutions LLC, which offers experience and expertise in a wide range of areas including negotiation of license agreements, negotiation of termination agreements and furnishing solutions.  For more information please visit www.franchisenegotiation.com.

Last week a man shot a former co-worker in the head five times, killing him, before being killed himself by police. A number of bystanders were wounded during the exchange of gunfire that took place in front of the Empire State Building in New York City during the morning rush hour.

Apparently, the victim had previously filed a complaint against his assailant which had said he believed the man would try to kill him. The shooter, a clothing designer, had been fired from his job about a year ago and is said to have been upset that the man he shot had not sold enough of his designs.

On the heels of a shooting spree during a Batman movie showing in Colorado late last month and in a Sikh temple in Wisconsin earlier this month, we continue to be reminded of the possibility of extreme violence erupting during such every day activities as seeing a movie, attending religious services and going to work.

Not every tragedy can be prevented. However, risks can be reduced and sometimes the extent of a tragedy can be minimized.

Here are some basic steps employers can take to reduce the risk of violence in their workplace:

• Take proper care when hiring and always check references;
• Perform background checks of new hires if lawful and appropriate for the position;
• Create an emergency plan that includes evacuation and communication strategies;
• Institute a workplace violence policy.

Your workplace violence policy should let employees know of your commitment to providing a safe and intimidation-free workplace and that violent or harassing behaviors will not be tolerated.

It should prohibit weapons in the workplace and give examples of prohibited behaviors (such as shoving, pushing, threats of violence, harassing phone calls or emails, arson, etc.)

The policy should require employees who experience or witness violence or threats of violence to report them immediately. Always provide more than one reporting avenue in case one person is not available or in case the employee is uncomfortable reporting the problem to that individual.

It should be noted that a number of states have recently instituted laws whereby employers may not prohibit firearms and ammunition from being on their property, i.e. if they are locked in an employee’s vehicle in the parking lot, so check your state law. That said, you do have the right to prohibit guns or other weapons from entering the actual work space.

Subscribers to HRSentry may access workplace violence policy samples and many other samples and best practice recommendations among its thousands of helpful HR resources. Although not every tragedy can be averted, employers should do all they can to minimize their risks.

Are your I-9 forms in order? Are you sure? Performing a self-audit isn’t hard; it just takes a little time and attention to some details. It’s a great project to delegate to that new HR assistant or eager intern. But even if you have no earnest assistant, the good news is that the self-audit can be broken down into manageable steps.

Form I-9, of course, is the federal form that must be completed by all new hires and the employer within three business days of the start date in accordance with the Immigration and Control Act (IRCA) of 1986. The form is used to verify and document the eligibility of individuals to work in the U.S.  Note that it is not required for employees hired before November 6, 1986, when the law was passed.

The form’s instructions provide lists of acceptable forms of identification that serve as proof of the person’s identity and eligibility. Remember, you must examine the original documents, not copies. An excellent resource for everything you need to know about properly completing I-9s can be found in HRSentry’s I-9 Kit, including the U.S. Citizenship and Immigration Services’ (USCIS) Handbook for Employers:  Instructions for Completing the Form I-9.

It’s helpful to break the audit into two main sections: current staff and terminated staff. Here are the steps to take.

I.  For Current Staff:

Create a master list of all current employees with name and hire date and check to see if you have an I-9 on file for every employee (except those hired before 1986.) If you find no employees missing a properly completed I-9, you’re in luck! If you do find employees without I-9s or find documentation errors, create audit lists of these current staff members.

For rehired staff note that if the date of rehire is more than three years from the original hire date, a new Form I-9 is required.  If rehired within three years, the rehire date must be documented at the bottom of the original I-9.

If You Discover Missing forms

Contact each person individually and in writing (email is fine.) Your communication should be clear and firm. Ask him or her to provide document(s) from List A or Lists B and C of the I-9 form by a certain deadline. (The Handbook for Employers suggests requiring that the employee bring in the documents the next work day.) You may wish to offer an apology that the documentation was either misplaced or not collected when it should have been; however, be clear that it is vital to comply with federal law and that the employee will not be able to continue working for you without providing these documents. Keep a copy of the email or written request to document your efforts.

Some employees may not be able to locate the requested documents. Certain receipts for documents requests are acceptable for a 90-day period. For example, an employee who has lost her social security card may request a new one from the Social Security office. The request receipt serves as appropriate documentation for 90 days, giving her time until the new card arrives.

When you complete I-9s based on these newly produced documents, you should still use the employee’s actual hire date even though it is more than three days prior to the date of the I-9. Attach a note that explains the discrepancy, indicating the date of your self-audit.

Looking for I-9 errors

Under Section One:

• Check that all fields are complete: name, maiden name if applicable, address and date of birth.
• Did the employee check their status box?
• If the employee checked “lawful permanent resident” – did they include their alien number?
• If the employee checked “alien with work authorization” – did they include their work authorization expiration date and alien number?
• Is the form signed and dated? If translator was used is that information filled out?

Under Section Two:

• Did a company representative examine the actual documents and complete this section?

Under Section Three:

• If a work authorization form was used for documentation, did a company representative review the updated documents and complete Section Three?

The Handbook for Employers indicates that the best way to correct Form I-9 is to put a line through the incorrect portions, then enter the correct information along with your initials and the date. If you have previously made changes with White-Out, the USCIS recommends attaching a signed and dated note explaining what happened.

II. For Terminated Employees:

Keep I-9s for terminated staff in a separate file. These should be retained for three years after the employee’s date of hire or for one year following his or her date of termination, whichever date is later.

Create a list of terminated employees that includes their name and dates of hire and termination.

Review date of hire; add three years to that date. Review date of termination; add one year to that date. Whichever date is later is the date through which you must keep the I-9 on file.

I-9s past their retention period should be destroyed.  For those that remain, check for the same errors as noted above for current employees.

Unfortunately, obtaining documentation or making corrections for terminated employees is difficult and unlikely. Document your efforts and all of your audit steps. This way, if your I-9s are ever inspected by the federal government, you can demonstrate your good faith efforts to comply.

One last thing: you may have noticed that the current form has an expiration date of August 31, 2012. No worries; the USCIS recently announced that employers may continue to use it beyond that date.  As soon as there’s a new form available, HRSentry will let you know.

Clearly, franchises (especially nationally recognized ones) can be a huge asset to any development due to their ability to generate traffic, visibility and, hopefully, juicy percentage rents.

However, if you have ever had the opportunity to work on a lease or development agreement with a franchisee or franchisor of a national powerhouse, you quickly realize that there are numerous issues (other than leverage) which are unique to this type of business and, if addressed correctly, will prove to be a benefit to both the landlord and tenant over the long haul. I think the most complex issue I ever addressed was the unfortunate demise of the franchisee.

This gets really ugly especially when the franchise is a good one with a stellar reputation but failed primarily due to the incompetency of the franchisee. The last thing the franchisor wants is a very visible and public closing which could be a publicity nightmare.

I represented the developer in that case and fortunately I was lucky enough to have astute parties involved so, while it took some time to get a new franchisee on board, both the developer and the franchisor absorbed some of the costs to resolve the matter. They both took a long-term approach to the viability of the project and it worked out well.

This is not always the case, so both parties need to address, at the outset, as many contingencies as possible to assure a favorable outcome. Here is my list of important issues in a franchise lease, I am sure that you will find it useful.

The SBA has made it a priority to improve quality control and scrutinize defaulted loans, especially early-defaulted loan for fraud, waste and abuse.

The Office of Inspector General ("OIG") has released several reports detailing areas of repeated patterns found in early-defaulted loans.  

Loan agent and borrower fraud, eligibility, and use of proceeds are just some areas where material deficiencies have been found in early defaulting SBA loans.

Early defaulting loans are reviewed carefully for material deficiencies at the National Guaranty Purchase Center. Lenders should be aware of the most common reasons for SBA loan early-defaults and implement policies and controls to protect against those issues in their own SBA lending practice.

Loan Agent Fraud. If you are using loan agents, make sure you have a Lender Service Provider agreement in effect, approved by the SBA. Before you start working with a new loan agent, get references from other lenders to determine if the agent has a history of early defaulted loans. While almost all loan agents are ethical, OIG findings on early-defaulted loans found loan agent fraud to be a factor in many cases.

Issues to consider when working with loan agents in order to minimize fraud include: control of communications by the loan agent; whether a loan agent threatens to "shop" the loan elsewhere in an attempt to pressure the lender to close the loan; submission of a high number of "qualified" borrowers in a short period of time; difficult questions/issues are easily resolved (i.e., missing documents are quickly generated as the result of an inquiry or ledgers created to document a pre-existing debt); the loan agent wants to use specific appraisers or title companies; and whether the loan agent charges excessive fees.

Prudent lending practices when dealing with loan agents include tracking the loan agent's participation in the lender's portfolio to determine whether that individual is bringing in an unusually high number of early-defaulted loans or the loans have other material issues.

Borrower Fraud. Examples of borrower fraud include misrepresentation regarding the original purpose and use of refinanced debt; false equity injection, gift letters or affidavits, promissory notes and standby agreements (i.e. no intention of putting the obligation on standby), false financial statements; overvaluation of assets; failure to disclose outstanding debts; overstating income, failing to disclose true ownership of a business or common ownership between a seller and buyer; submitting altered tax returns; and misrepresentations regarding affiliate size.

OIG found many instances of fraud in Change in Ownership transactions. Lender due diligence must include obtaining copies of all relevant purchase documents. For example, in a stock redemption transaction, obtain a copy of the stock ledger and copies of all issued stocks pre and post closing. The stock certificates should be redeemed and retired, and not transferred or reissued to an individual. Selling shareholders should resign as an employee/officer/director of the company. Resolutions are also required showing the appointment of any new officers/directors.

Lenders are expected to comply with the equity injection verification requirements contained in SOP 50-10-5(E) Chapter 4 and SOP 50-51(C) Chapter 13. OIG investigations have repeatedly found that the cash injection was actually borrowed. Further, Lenders should verify gift money with at least two (2) months prior bank statements from the giftor. Lender should also obtain evidence of the transfer of the funds to the Borrower and an affidavit that no repayment is due to the giftor.

Fraud by loan officers and other lender employees. The SBA has recommended Lenders implement internal controls to both deter and detect suspicious lending activity, including: development of sufficient management oversight of loan approvals; policies (such as a Code of Conduct) to require business development officers and other lender personnel to disclose the involvement of brokers and loan agents in generating or packaging loans; limits on commissions and other internal inducement that incentivize loan officers to concentrate on loan volume rather than loan quality; internal review and auditing functions to analyze patterns of early defaulted loans or other material issues and the personnel involved; and policies to require a higher level of review on change of ownership transactions.

By originating and closing loans in accordance with the SOP, and using prudent lending standards applicable in any commercial transaction, a lender's risk of processing a fraudulent or early defaulting loan can be greatly reduced. 

 All instances of fraud should be reported to IG immediately. Contact the OIG hotline at 1-800-767-0385 or[email protected].