SBA's 'Cookie Jar Capitalism' Still Flourishes in Wake of Scandal

Loan fraud has been a long-standing, widespread problem within the Small Business Administration and has cost taxpayers literally hundreds of millions of dollars. But when a senior executive of Business Loan Express (BLX), a subsidiary of Allied Capital, engineered a particularly brazen $76 million loan scam early last year, it was widely thought the SBA had finally learned its lesson.

The caper was dubbed "Cookie Jar Capitalism," but two years later it appears the cookie jar is still wide open and unguarded. Indeed, the agency has done little if anything to protect taxpayers from losses on bad loans, according to a new report by the SBA's Office of Inspector General (OIG), the agency's quasi-independent investigative arm.

In more than 60 OIG reports over the past five years, the SBA has been hammered about poor lender oversight and the potential for loan fraud. But in an outcome that's all too familiar, the agency has failed repeatedly to follow up on OIG recommendations. To the contrary, in the face of withering Bush administration budget cuts (reducing SBA staff by 25 percent), the agency has delegated almost all oversight to the major lenders themselves, or to third parties, and dragged its feet on reforms.

When problem loans did surface, OIG investigators found that preferred lenders such as BLX received favorable treatment. In addition, the reports detailed a litany of other bureaucratic snafus from mismatched priorities and potential conflicts of interest, to a backlog of more than 4,000 unprocessed requests from lenders seeking SBA guarantees on defaulted loans. They date back anywhere from "12 months to over 6 years."

As Inspector General Eric M. Thorson noted back then, the BLX fraud case was "symptomatic of broader systemic issues that have restricted the effectiveness of SBA's oversight."

As a result of the scandal, the OIG conducted yet another investigation. This time it looked at four other SBA lenders that, like BLX, are also considered "high risk." The new report, released earlier this month, discovered that the lenders had cumulatively cost the government $329 million as a result of bad loans. Although the SBA was aware of problems, the agency once again failed to "take sufficient enforcement actions" to address them, the report said.

To the contrary, it noted, the SBA continued to expand the lenders' authority to make loans through the agency's flagship 7(a) program without prior SBA approval. "Such occurrences are simply unacceptable, especially at a time of growing uncertainty in our credit markets," fumed Sen. John Kerry, D-Mass., in a scathing letter to SBA Administrator Steven C. Preston.

Congressional leaders have every right to be upset. At a hearing before the Senate small business committee last January following the BLX scandal, Preston promised lawmakers steps would be taken to correct problems. "At the time, you assured us that the new lender oversight process being implemented by the SBA would vastly improve enforcement efforts," wrote Kerry, who chairs the Senate small business committee. "Unfortunately, that has apparently not happened."

How is it possible for lenders with such bad track records to not only continue writing loans, but to receive even more unsupervised lending authority from the SBA? That question can't be answered because the SBA is refusing to release the names of the lenders. Although they were initially included in the OIG report, the SBA excised them from copies released to the public.

But if those lenders are anything like BLX, it's easy to understand how they get away with it. Federal campaign finance reports showed a web of campaign contributions linking key lawmakers and the top BLX and Allied executives who were supposed to be safeguarding SBA loans. BLX and its executives, for example, are House Small Business Committee Chairwoman Nydia Velázquez's largest campaign contributors.

Like two previous OIG reports, the latest report criticizes the SBA for housing the agency responsible for lending oversight within the office that is responsible for promoting the agency's loan programs. "As a result of this inherent conflict, significant problems like those highlighted in the new OIG report continue to undermine the integrity and credibility of the SBA's new lender oversight program," Kerry wrote.

The Massachusetts lawmaker also took issue with a proposed SBA rule to codify the SBA lender oversight procedures. The rule would actually take powers from the lending oversight office and shift them to the office that promotes loans. "As a recent string of OIG reports have indicated," Kerry added, "[the office] is not capable of performing adequate lender oversight because its primary responsibility is to promote loan production."

The OIG report noted that the SBA did not have clear policies describing the circumstances under which it would take enforcement actions against lenders in the event of continued noncompliance. It also concluded that conflicting loan production goals made it difficult to maintain a balance between the SBA's advocacy and oversight roles.

For their part, SBA officials have acknowledged some problems but remain at loggerheads over the OIG's general conclusions. Kerry's letter includes a number of questions he would like to have answered before the SBA proceeds any further. But whether lawmakers will do anything more this time -- other than round up the usual suspects and hold a hearing -- remains to be seen. The latest OIG report, however, gives them plenty of new recommendations to work with. All they need is the political will to finally staunch this unending hemorrhage of taxpayer dollars.