Authored by Jeremy Portnoy via RealClearInvestigations,
The Small Business Administration potentially made $11.5 million in improper payments to banks after overruling its own employees who had recommended reducing or denying government guarantees on 16 failed small-business loans.
For another 13 failed loans, SBA took so long to review them that the six-year statute of limitations expired, wasting another $5.4 million, according to an Aug. 27 inspector general report.
Key facts: SBA's 7(a) program helps startups with a risky business model get loans, but it does not generally lend taxpayer money directly. Private banks make loans of up to $5 million, and the government promises to cover as much as 85% of the loss if the borrower defaults.
But taxpayers only have to honor that guarantee when the bank follows SBA rules. If a bank failed to properly determine whether a borrower could repay the loan, verify required investments or follow other safeguards, SBA can reduce or deny the payout to the bank.
Auditors reviewed 32 failed loans where SBA employees recommended reducing or denying the payouts to banks, but higher-level reviewers later overturned those decisions.
For 16 of the 32 loans, auditors found insufficient evidence to justify the reversal, resulting in $11.5 million worth of potential improper payments. That included almost $4.9 million loaned to borrowers who never showed evidence they could repay the money.
One small business defaulted within 18 months. The bank argued that the small business had a sound strategy, but it failed due to the unforeseen loss of a major customer. The bank provided no evidence for its claim, but the SBA paid the guarantee anyway.
The SBA is also taking far too long to review high-risk loans, the audit found. The agency has only six years to sue a bank for violating the loan terms, but auditors found 13 loans where impropriety was not discovered until that deadline had passed. Two of them were not reviewed for more than 20 years after the loan guarantee was paid.
The SBA legally could have withheld other federal payments to the banks even after the six-year time limit expired, but the SBA has no process for doing so, the audit found.
SBA guaranteed $37 billion through 77,600 new 7(a) loans in fiscal year 2025.
Summary: A government loan guarantee is supposed to protect lenders from legitimate business failures, not protect them from following the rules. Taking 20 years to decide which is which leaves taxpayers holding the bag.
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