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SBA OKs Risky Loans, Watchdog Says

November 19, 2002|Larry Margasak | Associated Press

Despite warnings that it is risking millions in bad debts, the Small Business Administration has approved dozens of loan guarantees annually for borrowers who should have been disqualified because they previously defaulted.

The agency designed to help America's small businesses rejected a recommendation in May from its inspector general to implement a system of intensive checks to screen applicants. SBA officials say they consider the failure to identify previous loan defaulters a minor problem.

"This is more the tip of an ice cube rather than the tip of an iceberg," said Jim Hammersley, director of the office of loan programs for the SBA.

The amount of bad loans the SBA has been forced to cover has almost doubled, from $516 million in 1995 to more than $1 billion in fiscal 2002, which ended Sept. 30. An agency spokesman said the increase reflects expansion of the overall lending program from $3 billion in 1990 to $12 billion last year.

Under agency rules, borrowers with defaults in any federal lending program should be ineligible for SBA-backed loans, unless an exception is granted.

The inspector general's report last spring identified as many as 166 loan guarantees the agency made to companies with federal loan defaults. It was unclear whether any of the 166 had received official exceptions.

"Providing loan guarantees to such applicants caused SBA to honor or be at risk to honor guarantees totaling about $22.4 million," the inspector general reported after reviewing loans approved from October 1995 to April 2001.

The agency does not lend money directly to small-business owners but issues loan guarantees, or promises to pay commercial lenders if the borrower defaults. The SBA tries to recover money from a defaulted borrower.

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