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 newspaper's 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 CityWide Development Corp., a Dayton non-profit 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."
The SBA 7(a) program by definition 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 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 the small businesses that are viewed as the engine of the nation's economy. About 97 percent of American businesses are eligible for the loans.
"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."
One of the failed loans went to Cafe Boulevard in Dayton's Oregon District. The restaurant and bar, which closed last year under the name Boulevard Haus, received a $50,000 SBA loan in December 2006 from Capital One National Association. The owner, Eva Brcic-Christian, who last May was sentenced to prison for nine years on charges stemming from insurance fraud involving another restaurant, managed to pay back less than $9,000 of the loan, according to SBA data. After collection of collateral, the SBA had to pay Capital One $20,755 for the default.
The SBA sets the rules for the 7(a) loans made by lenders but gives lenders great freedom in determining whether the borrower is credit-worthy and what will be counted as collateral. Most loans are approved with zero SBA oversight under the preferred lender program designed to streamline the lending process. Currently, the SBA portfolio for all its loan programs totals $103 billion.
In its 2010 financial report, the SBA acknowledged an increase in the number of bad loans. The report said between the fiscal years of 2005-2008, lenders used overvalued real estate as collateral. The losses were "magnified because of looser underwriting procedures and credit standards by lenders prevalent in that time period," the report says.
By fiscal year 2010, the default rate on 7(a) loans increased to 5.59 percent of the active unpaid balance -- up from 1.38 percent in 2005, the first year in the
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