Bush Administration Failing to Safeguard Taxpayer Dollars Targeted to Small Businesses

Today, Sen. John Kerry [D-Mass., pictured] called on the Bush administration to protect taxpayer investments in government-backed small-business loans, and reinstate a program that uses lenders to recoup losses from defaulted loans.

There is currently an estimated $404 million in fixed asset loans through the U.S. Small Business Administration’s [SBA] CDC/504 Program in default. Yet, the Bush administration has failed to request $2 million to fund the program that reimburses 504 lenders for loan-recovery costs and, last Friday, the Bush administration announced it intends to suspend the program.

“The Bush administration’s willingness to stick taxpayers with a $400 million bill is just bad business,” said Sen. Kerry, chairman of the Committee on Small Business and Entrepreneurship. “The choice is clear: Spend $2 million today to help recover up to $404 million in defaulted loans, or continue on the current course of failed oversight and inadequate liquidation staff.”

Last week, the Bush administration admitted it made a mistake in the agency’s 2008 and 2009 budgets to cover costs incurred by Certified Development Companies [CDCs] that liquidate the defaulted 504 loans. However, instead of working with Congress to reprogram funds or seek additional funding in the budget, the SBA has changed the rules for lenders currently liquidating loans, and is working to get rid of the program. At the same time, the agency does not have enough resources to liquidate almost 1,000 defaulted 504 loans worth an estimated $404 million, currently in some stage of liquidation.

In 2000, Congress passed a law to delegate liquidation authority to CDCs because the SBA did not have a good track record for maximizing recoveries. After seven years, the SBA finally established reimbursement rates in April 2007. Then, on Friday, April 4, 2008, the SBA announced it would no longer provide those incentives to CDCs for future liquidations, and would reduce the reimbursement rate for CDCs for loans they were in the process of liquidating.

In 2003, SBA eliminated almost 200 staff from across the country who were responsible for overseeing loan liquidation, leaving only about eight full-time staff to oversee 504 loans in default.

Last year, Sen. Kerry introduced bipartisan legislation that would strengthen liquidation aspects of the 504 loan program. The Small Business Lending Reauthorization and Improvements Act, S. 1256, passed out of the committee, but Republican leadership in the Senate has blocked full Senate consideration.


Below, are Senator Kerry’s two letters to the Small Business Administration:

April 7, 2008

The Honorable Steven C. Preston
Administrator
U.S. Small Business Administration
409 Third Street, S.W.
Washington, D.C. 20416

Dear Administrator Preston:

Last week I wrote to you and asked if you would delay publishing a notice in the Federal Register that would interfere with the liquidation of defaulted 504 loans. The notice is controversial, and I wanted to work with you to pursue what I believed, in talking to the SBA and the SBA’s lending partners, would be a better solution to address your lack of funding for reimbursements and the overall liquidation problem. Unfortunately, you went forward and published the notice despite my objections.

Because the underlying problem was caused by the SBA’s accounting error, I have a hard time understanding why the Administration has refused the Committee’s suggestion to seek a reprogramming or amend its budget request in order to correct the agency’s own mistake. Moreover, preservation of the 504 liquidation reimbursement program will save the SBA money in the long run.

If SBA estimates it will need about $2 million for reimbursements, that seems like a wise investment -- as opposed to continuing with the current liquidation system, in which SBA has let more than 200 of the almost 1,000 defaulted loans languish for so long that, in SBA’s words, there is “little or no remaining residual value” to recover, and therefore expects to charge them off.

The Committee has been told those loans are worth as much as $100 million. If the reimbursements were to continue, and CDCs were to continue to liquidate loans, even if they recovered a mere $4 million, the SBA would still be ahead.

Please provide the Committee with the total number and dollar amount of 504 loans to be charged off, and how that will affect the subsidy rate and fees on the borrowers and lenders who pay to participate in the 504 Loan Guaranty Program.

Please also provide the Committee with the estimated funding SBA would need to continue the reimbursements, instead of permanently suspending the practice, and explain why you will not pursue the funding in order to reimburse CDCs for their liquidation efforts and help protect the SBA’s 504 loan program.

I ask that you please provide the Committee with a response by Monday, April 14, 2008.

Sincerely,

John F. Kerry
Chairman

***

April 3, 2008

The Honorable Steven C. Preston
Administrator
U.S. Small Business Administration
409 Third Street, S.W.
Washington, D.C. 20416

Re: Compensation to CDCs for 504 Loan Liquidation Expenses

Dear Administrator Preston:

I am writing to urge the Small Business Administration to delay publishing a notice in the Federal Register that would interfere with the liquidation of defaulted 504 loans. Specifically, I am referring to the Agency’s intention to publish a notice tomorrow that would reduce the compensation rates for costs incurred by authorized Certified Development Companies to liquidate defaulted 504 loans, and then 90 days after the publication of that notice to suspend all compensation for any 504 loan debenture not yet purchased.

I understand that the Agency made a mistake in not requesting funding to reimburse authorized Certified Development Companies for these purposes in its FY2008 and FY2009 budgets, and I appreciate your leadership in admitting that mistake to our Committee. Nevertheless, I do not believe the solution is suspending reimbursements, which will exacerbate SBA’s liquidation problems.

We are told that SBA has nearly 1,000 loans, worth about $404 million, in some state of liquidation spread among the Little Rock, Fresno and district offices -- with only about eight staff dedicated to 504 liquidation, supported by district counsel who have many responsibilities. The growing number of loans in liquidation validates my concern and opposition to the Agency’s elimination of the almost 200 liquidation staff in the districts more than four years ago.

If the Agency stops compensating authorized Certified Development Companies that are currently helping liquidate defaulted loans, it will reduce their activities and exacerbate the SBA’s existing problems.

A better solution is for the Agency to right its budget mistake by seeking permission from the appropriators to reprogram funding to cover the estimated amounts needed -- a modest $1 million or $2 million by SBA’s estimates -- or send up an amended budget request for FY2009, as the President did in July 2005 for the FY2006 budget, requesting the appropriate funding. Otherwise, the longer SBA takes to liquidate loans, the less ability it has to recover funds through the property or from the guarantors, increasing the risk of writing off loans that average about $500,000.

It would be far more cost-effective to seek the modest amounts for compensation than to increase the number of loans SBA must write off. The Administration should also consider requesting additional funding for the now obvious shortage of liquidation staff.

Further, there is a question as to whether the SBA even has the right to change the maximum compensation rates that were published in the final rule on April 12, 2007, without putting the change out for public comment.

We understand from conversations with staff that the SBA is relying upon a provision in the Administrative Procedures Act to take the action in question. Before publishing this notice, please submit to the Committee an explanation, in detail, with statutory and regulatory references, of what legal justification the Agency is relying upon to suspend the notice and comment procedure its proposed action would normally require.

Last, my staff sought information from the SBA regarding this issue a month ago, on February 29th, 2008. The Agency never responded until it requested a briefing for yesterday, in which the Committee was informed that the Agency would publish the notice in less than 48 hours. Given the Agency’s silence for a month, and then the very short notice, I would hope that you would delay publication of the changed and suspended compensation fees, at the very least until the Committee receives the Agency’s legal justification for moving forward.

Sincerely,

John F. Kerry
Chairman


GoodBiz113's take: Once again, Sen. Kerry has stepped up to speak truth to power, to protect small-business owners' interests. We're fortunate to have his advocacy -- especially, during these challenging economic times.

SOURCES: GovTrack.us, U.S. Senate Committee on Small Business and Entrepreneurship
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