This is a reprint of a news article about the billions of dollars of SBA loan default amounts and who ended up bearing the brunt of the problem loans. Sound familiar? Yes….bank bailout, auto industry bailout, home mortgage and collateralized debt obligations (CDO) bailout. Now…SBA loan bailout. SBA and AIG, as notorious acronyms actually share a common phrase – TAXPAYER BAILOUT.
According to an independent investigation, lax federal oversight allowed lenders to repeatedly make bad loans to small businesses under a government program that has cost taxpayers $1.3 billion since 2000 on defaulted loans.
Some borrowers in the Small Business Administration’s largest federally guaranteed loan program defaulted so quickly that they paid nothing on their loans. Operators of national franchises such as Quiznos and Cold Stone Creamery collectively received millions of dollars in loans through the program despite extensive default histories by the franchises.
“Should we say the fox got distracted and quit watching the hen house?” said Pat Newcomb, director of the Ohio Small Business Development Center at the Entrepreneur Center in Dayton, Ohio.
“There were an awful lot of people who got small-business loans during this period 2004 to 2007 who should not have gotten them,” she said. “They were a bad loan when they were made. They just got worse.”
Since the beginning of 1990, lenders made more than 1 million loans guaranteed under the SBA’s 7(a) program, the agency’s largest, according to third-party analysis of SBA loan data. Excluding the 280,948 loans that are still active, more than 1 in 5 of the remaining 769,242 loans were discharged to the U.S. Treasury after they defaulted and the lender and SBA were unable to collect the money owed.
Those 168,324 charged-off loans totaled $8.6 billion in payments to lenders by the SBA. Once discharged, there is little chance the money will be recovered by the government. According to the SBA, the U.S. Treasury’s average annual recovery rate between 2010 and 2012 was 0.63 percent of all referred loans.
Default rates and taxpayer subsidies soared in the wake of the 2008 financial crash, the nation’s worst economic crisis since the Depression. But an independent investigation found that practices by the SBA and lenders made the already-risky small-business lending program a bigger gamble.
The independent investigation revealed:
• SBA loans were made by lenders who sometimes relied on inflated real-estate values, used lax lending standards or didn’t follow SBA requirements, according to SBA financial reports and the agency’s Office of the Inspector General.
• A large chunk of the bad loans resulted from lenders providing loans to franchisees for national companies despite histories of the franchise defaulting on SBA loans. The corporate franchisor is not held financially responsible for the operator’s loan failure.
• Many of the borrowers paid little on the discharged loans. More than half of the 168,324 charged-off loans failed before 20 percent of the loan was repaid. More than 1 in 3 repaid only 10 percent or less of the loan . More than 7 percent did not reduce the principal on their loan at all.
• In the Dayton, Ohio region alone, 4,419 SBA loans were made from the beginning of 1990 through the end of February of 2012. Of the closed loans — meaning those paid in full or charged off to the U.S. Treasury — 1 in 5 ended in failure. The SBA paid $36.4 million to the lenders for the defaults.
• Lenders had little to lose when loans went bad. Not only did the government guarantee up to 85 percent of the loan amount, the loans also could be sold on the secondary market, which further reduced lender risk.
“There were a lot of lenders that got into the SBA business and just grew it really fast. They took their eye off the ball,” said John Moshier, KeyBank’s senior vice president in charge of SBA lending. “They felt like because they had the guarantee, everything was good. The government was going to take care of it.”
Reacting to the independent investigation, Newcomb said it’s a huge red flag that one-third of borrowers paid 10 percent or less on the guaranteed loans that defaulted and were discharged.
Clearly those borrowers and their business plans were not thoroughly vetted by lenders, and the borrowers had “no commitment to making the lender whole,” said Newcomb, a former banker.
Steve Budd, president of City Wide Development Corp., a nonprofit development organization, said, “I think it’s fair to say that when a business hardly makes a payment, they probably shouldn’t have gotten a loan .”
By definition, the SBA 7(a) program involves more risk than a conventional loan. The program’s goal is to provide capital for small businesses, including those owned by minorities and women, that have had trouble getting conventional loans.
It is not meant, however, to be a license to write bad loans. Most borrowers repay their loans, and supporters call the government’s guarantee a crucial economic-development tool that helps fuel small businesses.
“The good news is, the SBA has helped lots of good businesses, particularly in the early stage of development, that have gone on to be successful and paid back their loans,” said Mike Van Buskirk, president and chief executive of the Ohio Bankers League. “The bad news is, because they are in a risky area, they will have, by definition, more defaults.”
What does that mean for you? It means that if you have defaulted on your SBA loan, your administrative window to file an SBA Offer in Compromise closes post-60 days from the due process 60 day referral letter warning. Once that 60 day period has expired, your SBA loan will be transferred to the United States Treasury Department.
From there, the Treasury Department, through the Bureau of Fiscal Service (a/k/a the Financial Management Service), will step up its collection efforts against your delinquent or defaulted federal agency debt.
So, before you are sacked with federal collection tactics by the DOT’s special Bureau of Fiscal Service – i.e., a TOP (Treasury Offset Program), AWG (Administrative Wage Garnishment) or, worse, DOJ (Department of Justice) collection litigation, you need to contact us at 888-756-9969 or through our contact Form in order to schedule a complimentary Case Evaluation to discuss your options.