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07/30/08 S.3362, A bill to reauthorize and improve the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs Markup
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Press Room: Statements
November 13, 2007
Kerry Opening Statement on Lender Oversight and Fraud Prevention
Good morning. I thank you all for being here. Before we begin, I want to emphasize that this hearing is not a “gotcha” hearing. The purpose of today’s hearing is to figure out how -- with the help of the SBA’s Office of Inspector General and SBA’s lending partners -- our Committee and the SBA can improve the Agency’s lender oversight and prevent fraud in the SBA’s small business lending programs.
The timing of this hearing couldn’t be more important. We’ve all heard about the credit crunch caused by the mortgage sub-prime crisis that has many in this country losing their homes. Small businesses are also feeling that impact, because many get their credit from their homes. At least one in three small business owners say they are being adversely impacted by this credit crisis. Secondary market premiums are down 25 percent, so banks are tightening up their loans for everyone, including entrepreneurs.
That means that the government-backed loans offered through the SBA are even more important today. SBA loans provide capital to small firms that can’t access credit through normal channels. They provide an incentive for banks to offer loans to minorities, women, and veterans.
Yes, we are here today to discuss the scheme of fraud carried out by a bad actor working for one of SBA’s largest small business lenders, Business Loan Express, in their Troy, Michigan, branch. It is important because it resulted in $76 million in fraudulent SBA loans. We need to know what happened, how it happened, and what is being done to prevent it in the future. The hearing is not intended to hurt Business Loan Express. That’s not to say the company gets a pass, because they do need to answer for their employees. They need to explain how no one noticed or reported a high number of bad SBA loans coming out of one branch. Today’s hearing is an opportunity for the company to tell its side of the story, including their rationale for cutting back on small business lending, which they announced recently
I greatly regret the loss of jobs that go with the company’s announcement. The SBA lending community is close, and I know it has created a real air of sadness. I hope that everyone lands on their feet soon.
Another aspect of today’s hearing is the SBA’s Inspector General’s report generated by its audit of lender oversight procedures and resources. SBA requested that much of the IG’s report be redacted before it was made public, including most of the IG’s recommendations and the agency’s plans to address the IG’s findings. This is highly unusual. The SBA and BLX have based their requested redactions on claims of trade secret protections, the deliberative process privilege, and the bank examination privileges. Even if they had the legal right, I question whether all of the information they blacked out needed to be redacted. It seems over-reaching and has probably caused more problems than it solved. We should have more transparency of SBA’s oversight activities, not less. Mr. Administrator, I have been largely complimentary of you, but SBA has not handled this as well as it perhaps could have. The agency needs to improve its lender oversight and have more transparency in the process.
The BLX report is not the only report relevant to SBA’s oversight. In the past 5 years, the SBA IG has issued more than 60 reports on general lender oversight issues and SBA’s procedures related to justified payments of guarantees on defaulted SBA loans. Also, the IG has examined the transfer of the purchase responsibility from the 69 district offices to the Herndon Center. Some of the problems we will discuss here today demonstrate that the Agency was harsh and irresponsible in dismantling the loan functions in the district offices so quickly. They did not have the Herndon Center adequately established to take on centralization and they under-estimated the necessary staff and training requirements. It came at a personal cost to the almost 200 people who lost their jobs or were uprooted in haste, which continues to contribute to the agency’s low morale. It has created unnecessary instability over the last couple of years for lenders on liquidation and purchases of loans.
Furthermore, the Administration’s budget requests are unreasonable and insufficient for staffing and funding the centralized offices and district offices. Simple logic says you can’t go from a budget of almost $1 billion to $600 million while nearly doubling your loan portfolio from about 51,000 loans in 2002 to almost 100,000 loans in 2006. You aren’t saving money if, by scrimping on staff responsible for loan oversight, you end up enabling sloppy lenders to do poor underwriting and allow the agency to make improper or inaccurate payments on defaulted loans. In fact, an audit by the IG issued in May states that SBA’s lax review of purchase requests of defaulted loans resulted in $36 million in erroneous payments on unjustified purchases on bad loans.
To round out the discussion, we will hear from Jim Baird and Tony Wilkinson, representing the 504 Certified Development Company lenders and the 7(a) lenders. The lenders have a stake in this process and should be part of the discussion. Part of the discussion is information sharing. As the SBA tries to predict and identify problem loans, they should share with the lenders which ones are at risk so that they can take action to prevent a default or even lapse in currency.
Senator Snowe got at some of these issues in the lender oversight legislation that she introduced recently. I appreciate her work, and I was glad to join her in introducing it. With that, I turn the hearing over to Senator Snowe.