Senators call on Bush to improve lender oversight

On the heels of the second Inspector General report issued in seven months that is critical of the Bush Administration’s oversight of small business lending institutions and the Administration’s failure to take sufficient enforcement measures against high risk lenders, Senators John Kerry (D-Mass.) and Olympia J. Snowe (R-Maine) today called on the Small Business Administration (SBA) to fix the agency’s capital access programs.

In a letter to the SBA, Kerry and Snowe questioned the wisdom of placing the Office of Credit Risk Management within the Office of Capital Access which promotes lending programs. Kerry and Snowe also criticized the SBA for moving forward with a proposed rule that the Senators believe is insufficient to improve lender oversight.

“This is just the latest in a string of reports that show the Administration is asleep at the wheel when it comes to preventing fraudulent and risky loans. Most alarming is the fact that the Administration has empowered those charged with promoting loans to stifle risk management actions, essentially letting the fox guard the hen house,” said Senator Kerry, Chairman of the Committee on Small Business and Entrepreneurship.

“This pattern of weak or non-existent oversight is undermining the critical lending programs that are the largest source of long-term capital for small businesses.”

“Although the SBA last November assured the Small Business Committee that it was taking steps to bolster lender oversight, the agency’s Office of Inspector General has for the second time in less than a year reported that efforts are falling far short,” said Senator Snowe, Ranking Member of the Committee on Small Business and Entrepreneurship.

“In one instance, the SBA unacceptably expanded the authority of a lender with a staggering percentage of its portfolio at risk of default. Given that 100,000 small business borrowers benefit from the SBA’s lending programs each year and that the nation’s credit markets are facing growing uncertainty, I call on the SBA to promulgate final regulations that ensure lenders are appropriately balancing risk mitigation with loan oversight.”

The Inspector General report found that the SBA had “major weaknesses” in four crucial oversight activities, specifically: untimely reviews of loan purchases, insufficient examinations of lenders’ loan portfolios, inconsistent and inadequate implementation of corrective action plans, and poor remediation of bad loans.

As a result, the Inspector General’s review of four of the SBA’s highest risk lenders found that the agency purchased over $239 million in guaranties on loans made by those lenders that failed to meet the performance benchmarks established by the SBA. In one case, a lender with a high risk portfolio was actually granted expanded lending authority, which Kerry and Snowe wrote was unacceptable in their letter.

Senators Kerry and Snowe held hearings in November 2007 and January 2008 pressing the Administration to strengthen lender oversight in the wake of a $76 million fraud scheme involving loans originated by one of the SBA’s largest lenders, Business Loan Center, LLC.