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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Kerry Questions Bush Administration’s Decision to Withhold Fraud Findings; Seeks Explanation on Agency’s Decision to Heavily Redact IG's Report

Today, Sen. John Kerry [D-Mass.] called on the Bush administration to provide a detailed explanation as to why they chose to withhold from public scrutiny large portions of a recent Inspector General’s report on fraudulent loans made by Business Loan Center, LLC. The Small Business Administration [SBA] took the highly unusual step of requesting that the Inspector General redact large portions of its report -- including the majority of its recommendations, the agency’s responses to those recommendations, and the Inspector General’s comments on the agency’s response.

“The Bush administration’s failure to provide proper oversight of this lender, or take wise action when they detected problems, resulted in years of undetected fraud,” said Kerry, who serves as chairman of the Committee on Small Business and Entrepreneurship. “We can’t get to the heart of the problem if the administration keeps hiding the facts from public view.

“The administration must explain their rationale for suppressing the Inspector General’s recommendations and their response. In order to combat future fraud and protect the integrity of this vital small-business loan program, the American people need access to all the relevant information.”

According to the Inspector General’s report, 19 individuals -- including a former executive vice president of the Business Loan Center [BLX] -- were charged with fraud for allegedly making more than $76 million in fraudulent loans to unqualified borrowers. After the SBA Inspector General conducted an audit of the agency’s oversight of BLX from 2001 to 2006, the SBA asserted that the Inspector General can’t fully disclose parts of the report because of exemptions in the Freedom of Information Act [FOIA] that protect trade secrets, deliberative process privilege, and banking examinations.

In his letter to the SBA Administrator Steven Preston, Sen. Kerry requested that the agency provide their “handbook,” or documents, that guide the agency on FOIA exemptions; fully explain the basis of each redaction; and give details about how the agency will respond to the report’s recommendations. In the near future, Kerry will also hold a hearing on this issue.

***

The full text of Sen Kerry's letter to SBA Administrator Steven Preston follows:

October 23, 2007

VIA FACSIMILE & FIRST-CLASS MAIL

The Honorable Steven C. Preston
Administrator
U.S. Small Business Administration
409 Third Street, SW, Room 7000
Washington, DC 20416

Re: U.S. Small Business Administration’s Inspector General’s Report No. 7-28 on SBA’s Oversight of Business Loan Center, LLC

Dear Administrator Preston:

As you know, the U.S. Small Business Administration’s Office of Inspector General issued Report No. 7-28 on SBA’s Oversight of Business Loan Center, LLC [OIG’s report] on July 11, 2007. The report resulted from an audit performed due to an OIG investigation of allegations regarding fraudulent loans originated by Business Loan Center, LLC. The OIG report was posted last week on the OIG Web site so the public could have access to it, but was heavily redacted at the request of SBA. In response to the redacted report, I am writing to request the following documents:

* Any Freedom of Information Act [FOIA] handbook or guidance that SBA utilizes;

* A detailed explanation of the FOIA exemption and basis of the assertion of such exemption for each redaction made to the IG’s report.

I understand that SBA is asserting three exemptions — trade secrets, deliberative process privilege, and banking examination — to deny full public disclosure of the IG report. The OIG has stated that it does not necessarily agree with the extent of the redactions, and I am inclined to agree. For example, it is surprising to see that the first three of the OIG’s recommendations, and both the agency response to the OIG recommendations and the OIG’s comments on the response, were redacted. What is the justification for those redactions?

Other examples of questionable redactions include: large portions of the “Results in Brief” section; the titles of some sections in the full “Results” portion of the report; and the entire Chronology of Events [Appendix III]. Please provide the exemptions you are citing and detailed justifications for those and all other redactions in the report.

Furthermore, please explain what the SBA is doing to respond to the recommendations in the report to improve lender oversight in order to mitigate any further fraud.

I request that you provide these documents no later than October 30, 2007. Thank you for your timely attention to this matter.

Sincerely,

John F. Kerry
Chairman

GoodBiz113's take: Thank you, Sen. Kerry, for holding federal agencies' feet to the fire. Please keep doing so until all agencies and the Bush administration “get it”: When the 110th Congress gavelled into session in January, a “new sheriff” suddenly took the reins; i.e., one that will boldly speak truth to power in the interest of promoting transparency, integrity, accountability and fairness for all.

Source: U.S. Senate Committee on Small Business and Entrepreneurship
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Sens. Kerry, Snowe Demand Timeline for Implementation of Women’s Contracting Program

Yesterday, Sens. John Kerry [D-Mass.] and Olympia J. Snowe [R-Maine, pictured], chairman and ranking member of the Committee on Small Business and Entrepreneurship, demanded that the Bush administration provide a timeline for implementing a 2000 law which requires that women-owned small businesses receive 5% of federal government contracts. For seven years, the Bush administration has failed to create the Women’s Procurement Program, which mandates that women have equal access to federal contracts. In 2006, only 3.4% of federal contracts were awarded to female-owned businesses -- far short of the federal requirement, costing women-owned businesses an estimated $6 billion in potential revenue.

“When it comes to leveling the contracting playing field for women entrepreneurs, Congress threw the first pitch in 2000, but the Bush administration still refuses to step up to the plate,” Sen. Kerry declared. “After seven years of delays, I am tired of listening to excuses. Sen. Snowe and I want to see a timeline for implementing this program now, so that women small business owners aren’t denied another $6 billion in contracts.”

“The end of Fiscal Year 2007 has come and gone, and the Women’s Contracting Set-Aside Program has not been implemented as promised,” said Sen. Snowe. “Our nation’s women-owned small businesses have waited long enough, and I call on the SBA to set this program in motion as expeditiously as possible.”

The Bush administration testified at a July 2007 hearing that the Women’s Procurement Program would be implemented by Sept. 30, 2007. When it became apparent that the deadline would not be met, Sens. Kerry and Snowe pressed the administration in a hearing in September to provide a time frame for implementation. After seven years of delays, the administration again refused to commit to implementing the program within a certain period of time.

***

Following, is the full text of the letter sent to Small Business Administration [SBA] chief Steven C. Preston:

October 17, 2007

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

Dear Administrator Preston:

As chairman and ranking member of the Senate Committee on Small Business and Entrepreneurship, we would like to express our deep concerns about the long-delayed implementation of the Women’s Contracting Set-Aside Program. The Small Business Administration [SBA] recently released Fiscal Year 2006 small-business “goaling” results that continue to illustrate just how far the government is from reaching its women-owned and agencywide small-business goals. Women-owned small businesses only achieved 3.4% of the 5% statutory goal.

The women’s set-aside program enacted in December 2000 authorized, on a discretionary basis, contracting officers to “set aside” competition for federal contracts to women-owned small businesses. The program required SBA to conduct a study determining which industries would be characterized as underrepresented. The study was finally completed and made available to the public in April of this year. Regrettably, nearly seven years after enactment, women-owned small businesses are still waiting for the program to be implemented.

During a committee hearing on July 18th, the SBA pledged to implement the women set-aside program by the “end of this fiscal year.” Also, in a September 20th hearing on expanding federal contracting opportunities for women business owners, we strongly urged you to follow through on your earlier commitment to implement the program by the end of the fiscal year. The end of Fiscal Year 2007 has come and gone, and the program has not been implemented, as promised. We hope that you would agree that women-owned small businesses have waited long enough.

We cannot emphasize enough the importance of your immediate attention to this vital issue. Please provide a response with a specific timeline for implementation of the women’s contracting set-aside program within 10 working days of receipt of this letter.

Sincerely,

John F. Kerry
Olympia J. Snowe

Source: U.S. Senate Committee on Small Business and Entrepreneurship
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Sens. Kerry and Snowe to Press Administration on Women’s Business Center Funding, Contracting Program

Today, Senators John Kerry [D-Mass., pictured] and Olympia J. Snowe [R-Maine], chairman and ranking member of the U.S. Senate Committee on Small Business and Entrepreneurship, outlined specific questions about Women’s Business Center funding they expect the Bush administration to answer at a hearing on Thursday.

Kerry and Snowe have called on the administration to comply with the law, and to fund established and successful Women’s Business Centers as soon as possible. The committee is holding a hearing on women’s business issues on Thursday, Sept. 20, 2007, featuring testimony from female entrepreneurs, the Small Business Administration [SBA], the agency’s inspector general, and the Government Accountability Office [GAO].

“The law was meant to help these successful centers train and assist women entrepreneurs, not starve them of the resources they need to complete their mission,” said Kerry. “I’m disappointed that the SBA is stalling to implement this important program, and at Thursday’s hearing we will demand answers and accountability. I strongly urge Administrator Preston and the rest of the agency to do what’s in the best interest of Women’s Business Centers and their clients, and make these grants available as soon as possible.”

In addition to Women’s Business Center funding, Thursday’s hearing will also focus on the Women’s Procurement Program which was signed into law in 2000. Despite repeated, bipartisan calls, the Bush administration has failed to implement this program over the last seven years.

“We hope it’s the intention of the SBA to come to this hearing prepared to provide detailed answers on how they plan to implement this crucial new grant program,” Sen. Snowe said. “It’s imperative that these centers who are aiding dedicated and successful women entrepreneurs get the funding necessary to their cause.”

Sens. Kerry and Snowe sent a letter to the SBA in August to encourage the agency to temporarily tailor its grant-making process so that Women’s Business Centers could receive renewal grants by Jan. 1, 2008. Instead of taking the advice of Congress, the SBA contends that they are not able to do so under present law. In May, Kerry also asked the Inspector General to investigate funding delays to some Women’s Business Centers.

The Women’s Business Center Renewal Grants program was passed as part of the emergency appropriations bill signed by President Bush in May, and builds on the Women's Business Center Sustainability Pilot Program introduced by Sen. Kerry in 1999. Since then, Congress has worked in a bipartisan way to ensure that centers with a proven track record of success continue to receive matching funding from the SBA.

* * *

Following, is the text of the letter that Kerry and Snowe sent to SBA Administrator Steven C. Preston:

Dear Administrator Preston:

Thank you for replying to our letter regarding Women’s Business Centers and implementation of the Renewal Grants program. We are concerned with your response to specific issues, and would like your agency to come prepared to fully answer questions outlined below at the hearing, “Expanding Opportunities for Women Entrepreneurs: The Future of Women’s Small Business Programs,” on Sept. 20, 2007.

The hearing will partly focus on the management and benefits of the Women’s Business Center program, including renewal grants for graduated and graduating centers. Please be prepared to address the following issues and further explain some of the statements in your letter:

* Implementation and authority. On May 25, 2007, the President signed into law a bill that created the Renewal Grants program. The program became effective immediately and, therefore, the SBA had the authority to provide grants under sub-section [m]. Nevertheless, the reply says, “The SBA cannot operate under the newly legislated guidelines until the date to repeal the old guidelines [October 1, 2007] has passed.” What is preventing the SBA from using this authority?

* Funding and the Grant Process. The SBA contends that it cannot implement the program because, “Until the agency is funded for FY2008, grant disbursement is not possible.” We understand that the SBA cannot obligate or disburse funds until it has appropriations. However, it is our understanding that the request for proposals could be published and responses accepted, with the caveat of being subject to funding, before this time. This would give the SBA additional time and allow for the funds to be awarded immediately after the appropriations bill is enacted, thus helping established centers receive their funding more quickly. Is there anything precluding the agency from requesting proposals before the FY2008 appropriations bill is signed into law?

* Selection criteria. The reply correctly notes that the new law gives graduated centers “funding priority,” but then incorrectly contends that “The graduated center priority implies that all graduated centers would qualify based on years in the program, and not on performance.” This amendment requires grant approval to be based upon criteria developed by the SBA. These criteria are required to be based on the same conditions that are currently being used in awarding grants under the Sustainability Pilot program. Centers must meet those criteria in order to receive a grant. Please explain where the legislation states that centers should receive funding based on years in the program, “regardless of their performance.”

* Funding of New Centers. The SBA contends that the priority funding for graduated centers will preclude the funding of new centers. This is not the case. The amendment states that if funding is limited, established centers should be funded before new centers. We want to see access to counseling for women business owners expanded through new centers. At the same time, it is fiscally responsible for the government to continue building on its investment instead of losing those investments and starting new funding commitments that it might need to abandon later. Women’s Business Centers would receive a significant increase in the Senate appropriations for FY2008 -- $16.88 million, or $4 million more than last year. That should be sufficient to fund existing, graduated, and new centers. Please tell us how much the SBA requested for FY2007 and FY2008 for Women’s Business Centers, and on what appropriation the SBA based its conclusion that it could not fund new centers.

* Implementation. Please describe, in detail, the plan the SBA expects to follow in implementing the new renewal grant program. Please be prepared to tell us when [with specific dates] the SBA expects to publish the announcement, how soon the awards would be made after enactment of SBA’s appropriations for FY2008, and when the actual funds will be disbursed.

It is the intent of this legislation that successful, established centers begin receiving grants as soon as possible. We recognize for this to occur, that it will require everyone to work together, and we assure you that we are fully committed to working with you. Women business owners are an integral and vital part of our economy, and Women’s Business Centers play an important role in supporting them.

We look forward to your response at the hearing this week.

Sincerely,

John Kerry
Olympia Snowe

Sources: Peace Corps Online [photo], U.S. Senate Committee on Small Business and Entrepreneurship
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