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
investigation found.
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
