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SBA program skewered by Senators on fraud oversight

The alleged fraud involved faking the creditworthiness of would-be recipients of loans.

A massive fraud in a Small Business Administration loan program sparked stinging criticism Tuesday from senators who charged that SBA was lax in oversight to prevent abuses. The criticism came as the Senate Small Business Committee scrutinized a scheme involving $76 million in SBA-guaranteed loans made by Business Loan Express, also called BLX, one of SBA's 10 largest lenders.

Patrick Harrington, a former BLX vice president in the Troy, Mich., office and 18 others were arrested in a federal law enforcement sweep in January. Harrington, facing up to 10 years in prison, has pleaded guilty and is expected to be sentenced in January to one conspiracy count and another of lying to a federal grand jury. The alleged fraud, which could be the biggest in SBA history, involved faking the creditworthiness of would-be recipients of SBA-backed loans.

Senate Small Business Chairman John Kerry, D-Mass., said SBA officials "need to explain how no one noticed or reported a high number of bad SBA loans coming out of one branch." But there were no clear answers to his concerns during the hearing.

Kerry also criticized a recent SBA inspector general's report on BLX because it was heavily redacted, including most recommendations for improvements. "The agency needs to improve its lender oversight and have more transparency in the process," Kerry said. He also called SBA's budget requests "unreasonable and insufficient" for staffing and oversight.

The budget, Kerry noted, went from almost $1 billion in fiscal 2002 to $600 million in fiscal 2006 while the loan portfolio doubled from 51,000 to 100,000 business loans. Small Business ranking member Olympia Snowe, R-Maine, said she feared "escalating losses" in loans unless oversight is strengthened.

"Not enough is being done," she said. Similarly, Sen. Benjamin Cardin, D-Md., told SBA Administrator Steven Preston that he is "not satisfied the agency has conducted oversight and outreach" to various communities. Preston told the panel that oversight is being improved and that progress has been made in recent years, adding that he takes the BLX case very seriously.

Some of the strongest criticism came from SBA Inspector General Eric Thorson, who testified that BLX had a history of defaulted loans that had to be honored by the federal government.

"Quite simply, SBA did not hold the lender accountable for its performance problems," Thorson said, and he added that SBA "has been slow to develop its lender oversight program."

On the redactions in his BLX report, Thorson said that "I'm still having a hard time" understanding why his recommendations were excised. He said the SBA general counsel recommended the cuts, stating that public release could harm the agency. The general counsel, Frank Borchert, was not at the hearing, but Thorson said that he had great respect for him and that he went along with the redactions. "Although we do not necessarily agree with the reasons for the redactions, the safest path was to accept, for now, those redactions and post the report."

So far, BLX has repaid SBA $18 million of the $76 million in fraudulent loans and in his testimony BLX Chairman Robert Tannenhauser promised "to make the SBA whole for any losses" from fraud by current or former employees.