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Tip of the Month for May 2014

Small Business Administration's Loan Programs Attract More Criticism

Sen. Jeff Sessions of Alabama pulled no punches in his recent criticism of the multibillion-dollar loan program administered by the Small Business Administration. He is concerned that lack of oversight in providing loan guarantees puts taxpayer money at risk. The senator sits as the ranking Republican on the Senate Budget Committee, which oversees the funding efforts for the SBA’s loan programs. His concerns and questions were outlined in a 17-point letter to Maria Contreras-Sweet, the new head of the SBA, and they come on the heels of a bill introduced in December 2013 by Sen. Richard Burr, R.-N.C., to eliminate the SBA as a stand-alone entity.

Questioning Loans to Franchises

Specifically, Sen. Sessions targeted the 7(a) loan program, which guaranteed almost $18 billion in general purpose loans in the 12-month period ending September 2013. Citing press coverage and reports from the SBA’s Inspector General, the senator referred to high default rates in this program – alluding to operators of certain nationally known franchises. According to Sen. Sessions, “the lender still makes a profit while taxpayers shoulder the cost of the default.” He denounced such lending policies by saying, “This is what economists call moral hazard.”

Pointedly, he asked SBA Chief Maria Contreras-Sweet to explain whether or not the SBA has excluded specific franchises because of a high rate of defaults, and to reveal the percentage of defaults that would cause a franchise to be denied a loan. In pointed questions, he inquired further whether the SBA disregards default rates when providing loans to franchises and, if so, whether the SBA has the authority to do so. The senator was also critical of policies that allow banks to sell part of 7(a) loans to outside investors, asking if “lenders would take more care in issuing loans if guaranteed loans were not transferable?”

The letter sent to the new SBA chief suggests that more risk should be shifted directly to the banks. He also asked the agency to provide information on banks that have been excluded from SBA programs for making bad loans.

More Calls for Scrutiny

The senator’s scrutiny of the agency is the latest in a series of calls for better oversight at the SBA. The Government Accountability Office and the agency’s inspector general have both called for more transparent accounting of loans made by the SBA. In September, the GAO red-flagged the SBA’s habit of launching new programs with insufficient data to properly judge their performance. Discussions on Capitol Hill at the end of 2013 about reining in the agency’s autonomy attracted interest because they echoed an earlier proposal floated by the President, and because the SBA lacked a permanent leader for an extended time period. This latest round of criticism indicates that concerns are not limited to new SBA ventures, and that established programs also need more and better oversight.

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