With Scrutiny on Lender, Questions on Oversight

By Gilbert M. Gaul
Washington Post Staff Writer
Wednesday, December 5, 2007

By all appearances, Bill Russell Oil Co. did not seem like a good candidate to get a multimillion-dollar loan guarantee from the U.S. Department of Agriculture. The Rector, Ark., company owned by Bill and Sandra Russell had been locked in costly lawsuits with distributors. It was being investigated for its leaky underground storage tanks. Several of its gas stations were in disrepair, including one that had been leveled by a tornado.

Yet in June 2000, the USDA made it possible for the company to get a $3 million loan by agreeing to cover up to 80 percent of the loss if the loan went bad.

And the loan quickly went bad, costing taxpayers millions.

The fall of Bill Russell Oil sheds light on questionable lending practices and spotty oversight in the USDA's Business and Industry Guaranteed Loan Program, which seeks to foster development by backing loans in rural areas.

Bill Russell Oil's loan was arranged by a New York-based lender, now known as Business Loan Express, or BLX, a holding of Allied Capital and one of the biggest players in government-guaranteed loans. BLX earned fees for arranging and servicing loans and could make even more money reselling the federally guaranteed portions of its loans to other lenders. If the loans went bad, the government paid most of the cost of the cleanup, as it did in the case of Bill Russell Oil.

A Washington Post analysis found that from 2001 to 2006, the USDA had to pay $34 million to buy back 13 BLX loan guarantees -- representing one of every five USDA-backed loans made by BLX. The 13 loans included some to companies that were in and out of bankruptcy, saddled with tax bills, or struggling in declining industries.

A Maryland gas station operator received a $3 million guaranteed loan but soon lost its license for failing to pay millions in gasoline taxes. It defaulted on the loan and filed for bankruptcy two years later. A Pennsylvania mushroom farm received a $3.4 million loan while in bankruptcy and a loan of $1.7 million a few years later. It filed for bankruptcy again this year and is now defunct. A Hanover, Pa., wallpaper manufacturer with mounting losses got a $3 million guaranteed loan in November 2000. It filed for bankruptcy in 2005 and closed.

In each case, USDA officials relied on BLX employees to investigate the borrowers, conducting little due diligence on their own. Now, with questions being raised about BLX loans to Bill Russell Oil and others, USDA officials have turned to their inspector general to audit the company's entire portfolio of loans. BLX could be asked to pay back millions.

In January, an executive in the firm's Troy, Mich., office was indicted on charges of loan fraud involving more than $70 million in Small Business Administration-guaranteed loans. He later pleaded guilty, and BLX agreed to reimburse the agency up to $10 million in losses while undergoing independent review of any new loans.

Last month, Allied Capital announced that BLX was "significantly de-emphasizing" its government-guaranteed loan business to focus on conventional small-business and real estate loans. It cited "the difficulties BLX has experienced."

BLX referred a Post reporter seeking an interview to a public relations firm, which stopped returning calls after an initial conversation.

The USDA's Business and Industry Guaranteed Loan Program is the largest of the agency's economic development efforts in support of rural development. It is available to businesses in areas with populations below 50,000. The maximum loan is $25 million, and most loans carry an 80 percent government guarantee.

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