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Loan Arrests Train Light on Packagers : Lending: SBA blames fraudulent applications submitted by unscrupulous consultants for a recent rash of defaults.

August 24, 1994|DON LEE | TIMES STAFF WRITER

This week's arrests of six people indicted on allegations of making false statements on their income tax forms to obtain Small Business Administration loans has thrown light on the fast-growing but unregulated business of loan packagers.

Many loan packagers--independent consultants who help put together SBA applications for a fee--are legitimate and perform a useful service, officials say. But some unscrupulous operators are being blamed by the agency for many fraudulent loan applications that have led to a rash of SBA loan defaults--particularly in Southern California.

"The majority of the problems we have with (phony) tax returns are with loan packagers," said Steve Marica, assistant inspector general for the SBA in Washington, whose investigation of loan packagers and fraud in California has extended to other states.

SBA investigators say that a slender middle-aged man from Westminster put together SBA applications on behalf of the six defendants. Those six people--who have not been available for comment--borrowed a total of almost $1 million worth of government-backed loans. SBA investigators now say that false tax returns--with inflated income figures and false invoices--were used to apply for the loans, all of which ultimately went into default.

Officials say the Westminster man is just one of eight loan packagers on the West Coast who are at the center of the SBA's three-year investigation, which involves more than 100 troubled loans.

No one knows how many packagers of SBA loans operate in California or elsewhere, because the industry is unregulated and anyone can do it. In fact, accountants, financial planners, unemployed bank employees and even real estate brokers--working to supplement their incomes--have long helped potential borrowers assemble parts or all of the voluminous materials that must accompany an SBA application, which the federal agency estimates would take on average about 21 hours to complete.

But in the past few years, as the volume of SBA loans surged while conventional lending dwindled, the number of people specializing in packaging SBA loans has swelled and so has the suspected fraud.

Many of the loan packagers under investigation allegedly drew customers from ethnic communities where business people have language barriers and are unfamiliar with U.S. lending practices and thus more likely to seek out such consultants. All six of the people indicted this week, and the Westminster loan packager, are Southeast Asians. And government officials say most of the other packagers who are under scrutiny also worked in immigrant communities.

The troubles with some loan packagers have cast a cloud on others who are operating legitimately.

Steve Stultz, a Newport Beach consultant who has been packaging SBA loans for 20 years, says he knows of 20 people in Southern California whose main business is packaging SBA loans.

Bankers and SBA officials agree that there is a need for such loan packaging consultants because most people can't put together the applications on their own. Loan packagers "have done a lot more good than bad," said Steve Mattern, senior vice president of Truckee River Bank in Northern California, one of the state's largest SBA lenders.

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