October 22, 2014

Newly Sworn SBA Chief Must Deal With Lending Defaults

Maria Contreras-SweetEDIT

Newly sworn-in Small Business Administration Chief Maria Contreras-Sweet may want to give small businesses access to more loans. But a bigger challenge may be adding some oversight to the administration’s current troubled loan guarantee program. Critics like the Government Accountability Office (GAO) say the program is already costing taxpayers billions.  And that’s bad for everyone, small businesses included.

Contreras-Sweet was formally sworn in to her post earlier this week after being confirmed in a vote by the U.S. Senate in May. She replaces former SBA head Karen Mills, who resigned as administrator in February 2013.

During her confirmation hearings, Contreras-Sweet stressed the importance of getting small businesses access to more financing. That would include SBA guaranteed loans in which the agency backs about 85 percent of the money put up by private lenders. If a borrower defaults, the SBA will still pay the private lender up to the amount of the guarantee to reduce the overall risk.

For example, the SBA saw a 28 percent default of franchise loans backed by the agency between 2003 and 2012 costing taxpayers at least $1.5 billion, Bloomberg reports. Over that same period, bad loans granted through the Patriot Express program have cost taxpayers $31 million. The program is designed to speed the loan process for military veterans. The SBA’s own inspector general even noted that the agency doesn’t properly assess risk when granting loans.

In a separate report, the GAO says that many of the loans granted through Patriot Express may not even be going to veterans or their families. The GAO expressly criticized the SBA’s oversight of this program. It said that a lack of oversight will continue to direct loan money to non-veterans.

The SBA’s ability to bring financing to small businesses is an important function to be sure, as is the agency’s advocacy for the small business community.

But it is also imperative that the agency get its own lending programs under control for the benefit of all taxpayers, including the small business community it seeks to serve.

6 Comments ▼

Joshua Sophy - Staff Writer


Joshua Sophy Joshua Sophy is a staff writer for Small Business Trends, covering technology and business news. He is a journalist and editor with 15 years experience in media. A former newspaper reporter and editor, Joshua also serves as President of the Board of Directors of a curling club and is editor of a regional newsletter focused on the sport of curling in the Eastern U.S.

6 Reactions

  1. I think it is a matter of balancing the amount of loans that can be given away in such a way that will not hurt the taxpayer’s pockets. While more loans can generate more business, being too generous is not the right way to do it. Limits must still be implemented.

  2. Okay so there are some losses on loans, what about the ones increase the economy because of this, if analysis
    was done against loss, it would proablly be very small. Gov. dollars well spend on small compaines. THis is what makes our us increase.

  3. The reality is. Fannie Mae and Freddie Mac did the SAME LOANS as most if not all of the Subprime Mortgage lenders. They were “bailed out” on a regular basis by Joe tax payer. Don’t kid yourself that the GSE’s were run any more effectively than the subprime lenders. The SBA really isn’t any different. The SBA is absolutely needed by the US SME’s. The SBA should seriously consider looking at ALL online alternative lenders to form a conglomerate to deliver capital to SME’s at a lower cost of capital while simultaneously reducing the overall burden on the US Taxpayer. The reality is lending ISN’T “risk free” – businesses go under and that is just a fact of life. The SBA can’t lend money at prime + rates and cover defaults. The truth is the LGF portion of SBA loans has to increase – or SBA’s will always be a drag on the taxpayer. It’s a math problem not a tax problem. Companies like IOU Central, Quarterspt and several others can help deliver capital in a more cost effective manner.

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