Lax federal oversight dating back years 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, a Dayton Daily News
Some borrowers in the Small Business Administration's largest federally guaranteed loan program defaulted so quickly they paid nothing on the loan, the investigation found. Operators of national franchises like 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.
"There were an awful lot of people who got small business loans during this period 2004 to 2007 that shouldn't 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 a Dayton Daily News analysis of SBA loan data. Excluding the 280,948 loans that are still active, more than one in five 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 rates between 2010-2012 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 the Dayton Daily News investigation found that practices by the SBA and lenders made the already-risky small business lending program a bigger gamble.
The Dayton Daily News found:
-- 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 one in three 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 nine-county Dayton region, 4,419 SBA loans were made from the beginning of 1990 through the end of February of this year. Of the closed loans -- meaning those paid in full or charged-off to the U.S. Treasury -- one in five 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 could also be sold on
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