Our View
A guaranty to protect our money
Published on Wednesday, Nov 20, 2002 at 12:12 am | Last updated on Wednesday, Oct 14, 2009 at 4:04 am
There is an American business owner who has cost taxpayers $1 million in unpaid loans.
Default might be excused once, or even twice, if the owner fell victim to economic disasters or the market fell under whatever he was peddling. But this particular owner cannot be excused. Neither can the loan guarantor: the Small Business Administration.
Of the lost $1 million, $440,000 is the tally of three defaulted loans and one defaulted disaster loan. After four defaults, the SBA guaranteed another $667,500. And the borrower defaulted again.
These defaults, and others like them, are the reason the SBA's losses have nearly doubled from 1995 to 2002.
A private bank would never consider loaning $667,500 to an applicant who had already defaulted four times. But the publicly-funded SBA, which doesn't actually loan money but guarantees loans made by private lenders, isn't so shy.
The agency, which had been warned last year by its own inspector general to be more diligent about identifying previous defaults before guaranteeing new loans, considers defaulters - and its own obligation to meet their payments - "a minor problem."
When loan losses climb from $516 million to more than $1 billion in seven years, it's a major problem.
The half-billion dollar loss may be insignificant to the federal budget, but if we compare it to Maine's budget it would be a healthy bit of cash. And, if we compare it to individual small businesses, it could mean the difference between establishing a business, staying in business or folding.
SBA guarantees are offered to shore up the confidence of a direct loan from a bank. Part of the deal is that the bank, or other lender, must certify that it cannot "provide funding on reasonable terms without a SBA guaranty." That means that the lender is not sure enough about repayment to go it alone, but requires a guarantee for payment.
When borrowers don't pay, the SBA is forced to cover defaults, spending money that might have been available to help other applicants.
The SBA can do more to guard taxpayer funds.
It doesn't regularly search its database for prior defaults on applicants, and it should, just like a credit check on private loans.
Private lenders have asked for access to the SBA database to check for themselves, but the SBA fiercely guards borrowers' privacy.
The solution would be for the SBA to search for defaults for every loan applicant and, if there is a history of defaults, simply decline to guarantee the loan. That doesn't compromise privacy, and it better protects funds from repeat defaulters.
Small businesses are the backbone of this country, and the support of the SBA is worthy and necessary. But the agency has a responsibility to the public, and potential entrepreneurs, to guaranty smart money.
jmeyer@sunjournal.com
Default might be excused once, or even twice, if the owner fell victim to economic disasters or the market fell under whatever he was peddling. But this particular owner cannot be excused. Neither can the loan guarantor: the Small Business Administration.
Of the lost $1 million, $440,000 is the tally of three defaulted loans and one defaulted disaster loan. After four defaults, the SBA guaranteed another $667,500. And the borrower defaulted again.
These defaults, and others like them, are the reason the SBA's losses have nearly doubled from 1995 to 2002.
A private bank would never consider loaning $667,500 to an applicant who had already defaulted four times. But the publicly-funded SBA, which doesn't actually loan money but guarantees loans made by private lenders, isn't so shy.
The agency, which had been warned last year by its own inspector general to be more diligent about identifying previous defaults before guaranteeing new loans, considers defaulters - and its own obligation to meet their payments - "a minor problem."
When loan losses climb from $516 million to more than $1 billion in seven years, it's a major problem.
The half-billion dollar loss may be insignificant to the federal budget, but if we compare it to Maine's budget it would be a healthy bit of cash. And, if we compare it to individual small businesses, it could mean the difference between establishing a business, staying in business or folding.
SBA guarantees are offered to shore up the confidence of a direct loan from a bank. Part of the deal is that the bank, or other lender, must certify that it cannot "provide funding on reasonable terms without a SBA guaranty." That means that the lender is not sure enough about repayment to go it alone, but requires a guarantee for payment.
When borrowers don't pay, the SBA is forced to cover defaults, spending money that might have been available to help other applicants.
The SBA can do more to guard taxpayer funds.
It doesn't regularly search its database for prior defaults on applicants, and it should, just like a credit check on private loans.
Private lenders have asked for access to the SBA database to check for themselves, but the SBA fiercely guards borrowers' privacy.
The solution would be for the SBA to search for defaults for every loan applicant and, if there is a history of defaults, simply decline to guarantee the loan. That doesn't compromise privacy, and it better protects funds from repeat defaulters.
Small businesses are the backbone of this country, and the support of the SBA is worthy and necessary. But the agency has a responsibility to the public, and potential entrepreneurs, to guaranty smart money.
jmeyer@sunjournal.com
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