Kerry Pushes for Increased Lender Oversight in Wake of $76 Million Loan Fraud Scheme

Today, Sen. John Kerry [D-Mass.] pushed for more aggressive oversight of small-business lenders, and called on the Bush administration to strengthen its commitment to preventing future fraud. The hearing was prompted by $76 million in fraudulent loans originated by Business Loan Center LLC [BLX], one of the Small Business Administration’s [SBA] largest lenders. Kerry raised concerns that the SBA’s oversight had been ineffective or nonexistent due to staffing shortages, insufficient funding and a lack of other necessary resources.

“Government-backed small-business loans for minorities, women and veterans are more important than ever as we brace for the full fallout from the subprime mortgage loan crisis,” said Sen. Kerry, chairman of the Committee on Small Business and Entrepreneurship. “The Bush administration’s lax oversight of these important loan programs ultimately costs the taxpayers money. It’s crucial that the agency fixes these problems in the light of day and works to make sure that these failures don’t happen again.”

Last month, the SBA Office of Inspector General publicly released a report summarizing its audit of the SBA’s oversight of BLX. The SBA requested a large amount of the report to be redacted, including many of the Inspector General’s recommendations and the agency’s plans to respond to those recommendations. Kerry pressed SBA Administrator Steven Preston to increase transparency and make changes to the agency’s lender oversight procedures publicly.

Inspector General Eric Thorson testified that, “Whether SBA has effective safeguards, and a means of overseeing lenders that facilitates the prevention and detection of fraud, has been an area of concern and focus for my office for a number of years.

“Our audits and investigations have identified significant weaknesses in the agency’s oversight of its lenders and, since 2000, we have identified lender oversight, guaranty purchase reviews, and loan agent fraud as major management challenges facing the agency. SBA has been slow to develop its lender oversight program and, only in recent years, has the agency made progress in addressing longstanding weaknesses.”

Sens. Olympia Snowe [R-Maine] and Kerry recently introduced legislation to measure the economic outcomes and improve the oversight of SBA’s 7[a] [working capital] and 504 [fixed assets] lending programs. The Small Business Lending Oversight and Program Performance Improvements Act [S. 2288] will ensure that the SBA fully assesses the quality and performance of lender portfolios so that these loan programs remain strong and benefit small businesses to the greatest extent possible.

The National Association of Government Guaranteed Lenders and the National Association of Development Companies – trade associations for the 7[a] and 504 programs, respectively – both support the bill.

GoodBiz113's take: Once again, Sen. Kerry and his colleagues are moving federal agencies -- in this case, SBA, supposedly our nation's small-biz watchdog -- closer to full accountability and transparency. Small-business owners and all U.S. citizens deserve nothing less.

SOURCES: GovTrack.us, Library of Congress, 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.

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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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Kerry Calls for Investigation Into Women’s Business Center Funding Delays

On Wednesday [May 9], Sen. John Kerry [D-Mass.] asked the Inspector General of the Small Business Administration to conduct a thorough investigation into the agency’s onerous grant disbursal process to Women’s Business Centers [WBCs] nationwide.

“I want to know why Women’s Business Centers are receiving federal grants months and even years late,” said Kerry, chairman of the U.S. Senate Committee on Small Business and Entrepreneurship.

“Each year, WBCs -- such as the Center for Women & Enterprise in Boston, Worcester and Providence -- help tens of thousands of women, minority and veteran entrepreneurs turn dreams into reality by providing critical business development assistance," Kerry noted. "These centers should be allowed to focus on providing these services, instead of worrying about how to get their funding from Washington.”

Leaders from WBCs around the country have charged that the application process for grants is arduous, with circuitous procedures that result in delayed grant disbursals for qualified centers.

Last year, WBCs assisted more than 197,000 businesses nationwide. In Massachusetts, WBCs served almost 2,500 women in 2006. Since 1995, the Center for Women and Enterprise, which serves Massachusetts and Rhode Island, has trained more than 13,000 entrepreneurs and helped them secure nearly $30 million in business loans, generating more than 15,000 jobs and $430 million in wages.

Following, is the text of Kerry’s letter to SBA Inspector General Eric M. Thorson:


May 9, 2007

Dear Mr. Thorson:

I have repeatedly heard from the leaders of Women’s Business Centers [WBCs] around the country that they are experiencing problems receiving their grants from the Small Business Administration [SBA], and I request that you immediately undertake an investigation into this matter.

For a number of years, the Committee on Small Business and Entrepreneurship has received complaints from WBCs about the process of applying and receiving grants from the SBA’s Office of Women’s Business Ownership. According to their stories, the process is unnecessarily lengthy and arduous. Information is repeatedly requested from WBCs and then lost. There have been cases where the same information is requested 10 or even 12 times. In addition, the process lacks clear guidelines and transparency. A WBC may believe that they supplied all necessary information, only to be told months later that they must supply additional documentation.

As a result of these and other shortcomings, the grants are often disbursed months or even years after the quarter in which the expenses were incurred. Since most WBCs rely on SBA funding as a major source of funding, this delayed reimbursement can be disastrous, especially for new or small WBCs.

It is simply unacceptable that WBCs continue to struggle to receive funding from the SBA. Therefore, I request that you undertake a full and complete investigation to determine the extent of any problems with the grant disbursal process and make recommendations on how to improve it.

If you have any questions or need additional information, please contact Karen Radermacher on my staff at 202-224-5175. Thank you for your attention to these matters.

Sincerely,

John Kerry


GoodBiz113's take: We're very pleased that Sen. Kerry is holding SBA's Office of Inspector General accountable for achieving its stated mission, "To improve SBA management and effectiveness, and to detect and deter fraud in the Agency's programs." Kerry's bold efforts are bound to have positive and far-reaching ripple effects on all small businesses and our myriad stakeholders.

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