SBA lending program for veterans is troubled, GAO reports

September 19, 2013

A Small Business Administration loan program meant to help hasten the flow of loans to
veteran-owned companies has cost taxpayers millions in default payments and does not adequately ensure that loans get to former service members, according to a government watchdog report.

Started as a pilot program in 2007, Patriot Express allows the federal government to guarantee loans for veterans and their families for up to $500,000. It’s been part of an agency push to spur entrepreneurship among returning service members.

Defaults on the loans, however, have cost taxpayers $31 million, according to a Government Accountability Office report, with the default rate consistently exceeding those of other SBA programs.

“Given the losses in the Patriot Express program since inception, if the program continues on its current trend, Patriot Express costs will likely continue to exceed fees collected and recoveries,” the GAO report said.

SBA spokeswoman Emily Cain said in an e-mail that the Patriot Express report “contains a number of recommendations that we will further review to determine what modifications are appropriate.” She added that the agency has supported more than $7.9 billion in loans to more than 17,000 veteran entrepreneurs since 2009.

The report also suggests that limited oversight means some program loans may not be reaching veterans. The report notes that the agency rarely conducts reviews with lenders to ensure “loans are only made to eligible members of the military community.”

“Without greater review of Patriot Express transactions . . . there is an increased risk that the proceeds of Patriot Express loans will be provided to or used by borrowers who do not qualify for the programs,” it said.

The GAO report suggests that Patriot Express problems “follow a pattern for SBA pilot programs.”

Government watchdogs have repeatedly cited instances in which the agency failed to review the success of new programs.

“SBA’s past experience with pilots raises questions about its commitment and capacity to fully implement pilots that include a rigorous evaluation,” the GAO’s new report states. “Without evaluations of pilot initiatives, SBA lacks the information needed to determine if a pilot program is achieving its intended goals.”

The agency has already come under fire this year from Republican and Democratic lawmakers for delays in issuing disaster loans to victims of Hurricane Sandy and for shifting attention to helping mid-size businesses rather than genuinely small employers — even as the agency posted record loan-volume years in 2011 and 2012.

Meanwhile, the SBA Office of Inspector General (OIG) has reported that the agency may be vastly understating the amount of improper loan-default payments it issues to banks as part of its signature lending platform, the 7(a) program. The program guarantees a portion of loans granted to small-business borrowers.

In 2011, for instance, the SBA’s internal reviews showed it mistakenly issued default payments to lenders 1.73 percent of the time, totaling about $40.7 million. In November, however, an audit by SBA OIG officials found the improper payment rate may have been as high as 20 percent, for a loss of $472 million.

SBA officials have denied that the rate is that high, but OIG officials stood by their calculations and faulted “methodological and conceptual errors” by SBA statisticians for the agency’s conclusions.

The SBA is without a top administrator. The Obama administration has yet to nominate a replacement for Karen Mills, who resigned in February. Mills remained until the end of August and appointed Jeanne Hulit, head of the SBA’s Office of Capital Access, to take over until the vacancy is filled.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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