Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New Epilogue (44 page)

Just as with the 7(a) loans, the new policy of further “streamlining” and “expediting” SBA loan guarantees led to widespread fraud and corruption. A report in December 2006 by the SBA’s OIG found that of the forty-five defaulted loans it audited in the Community Express and SBA
Express
programs, forty-four were improper. “Our audit disclosed that SBA purchased SBA
Express
and Community Express loans without obtaining information needed to assess whether lenders verified borrowers’ use of loan proceeds, determined eligibility and creditworthiness, or verified borrower financial information. . .” the audit report said. “Based on the high rate of deficiencies, we estimate that $128 million to $130.6 million in disbursements on the 2,729 loans approved after January 1, 2000, and purchased before February 1, 2005, were not properly reviewed by SBA.”

It should come as no surprise, of course, that BLX became an eager participant in the SBA
Express
and Community Express programs. In 2005,
The Miami Herald
described BLX as a “specialist” in Community Express loans, having issued more than $26 million in loans the prior year—more than double its budget. “We haven’t pushed [our services] that hard in South Florida because of the hurricanes—so we’re really just getting started,” said Fred Crispen, executive vice president of BLX.

Wheeler had already spent time reviewing the BLX situation after Harrington was indicted. She was familiar with Allied’s version of the story that a single rogue employee caused the fraud, that BLX was the victim and so forth. At one point, she even asked me whether I had a personal relationship with anyone at the SBA’s OIG. I replied, “I know you are asking this because Allied has been telling people that I am personal friends with the SBA OIG in Michigan.” She nodded. I was surprised that Allied had extended this fiction to the Senate staff. I told her the answer is “No,” and that I didn’t even know the name of the Michigan SBA OIG.

Brickman and I said we would be willing to testify, if asked. Wheeler asked who should testify from BLX. I suggested Tannenhauser. She said he might not be available (this meeting came a week before Allied announced it had replaced Tannenhauser) and BLX had suggested Deryl Schuster. She continued by saying, “We have heard enough from Schuster.” He was the BLX executive quoted encouraging the SBA lending industry to raise money for Senator Kerry’s presidential bid, while trumpeting Tannenhauser’s membership on Kerry’s fundraising committee.

On November 7, 2007, Senator Kerry announced there would be a hearing the following week to press for more oversight of small business lenders. With the announcement, we learned that Tannenhauser would testify, after all. Brickman and I were offered the opportunity to submit written testimony (which we did) as part of the hearing record, but were not invited to testify in person. Senator Kerry’s office told our counsel the Senator had promised SBA officials that they would not face an “investigative hearing,” pledging it would not turn into a game of “gotcha.”

Senator Kerry repeated this promise at the opening of the hearing, “So the purpose of this hearing is not politics, the purpose of this hearing is not ‘gotcha,’ the purpose of this hearing is to figure out how, with the help of the SBA’s Office of Inspector General, which was created in order to have transparency and accountability and effectiveness, how the SBA’s lending partners and our committee can improve the agency’s lender oversight and prevent fraud in the SBA’s small business lending programs.

“No one is here to suggest that this is somehow pervasive or that it’s more. We don’t know that. We are here to explore the one situation that we know, and those things that have been talked about by the Inspector General over a course of time.”

Senator Kerry, sounding like he was almost apologizing to BLX, adopted a deferential tone toward the company throughout the hearing. He referred to the fraud as being caused by “a bad actor and small groups of people.” He added, “The hearing is not intended to hurt Business Loan Express or any other entity. But that’s not to say also that there isn’t a legitimate standard of accountability because people need to answer for their employees. That’s just a normal course of business, and this should be no different.

“We need to understand how no one noticed or reported a high number of bad SBA loans coming out of the branch. And today’s hearing is an opportunity for the company to tell its side of the story, including their rationale for cutting back on small business lending, which they announced recently. And let me just say, I greatly regret the loss of jobs that is going to go with the company’s announcement.”

It was hard not to roll my eyes.

Senator Olympia Snowe, the ranking minority member of the committee, took a harder line toward both the SBA and BLX, saying, “It’s my hope this morning that we will probe how and why the government has inappropriately allowed loan fraud and poor loan underwriting to occur at the business loan corporation BLX. . . .We’ve had numerous hearings, numerous reports, as the chairman cited, and yet we still find ourselves at this juncture where we’re finding fraudulent loans to the magnitude and degrees of millions and millions of dollars, and just BLX alone was more than $200 million.”

Senator Snowe declared the SBA’s lender oversight “unacceptable” and joined Senator Kerry in criticizing the SBA for the unnecessary redactions in the OIG report. She clearly understood the consequence of allowing lax or even non-existent oversight, stating: “I fear that unless the SBA is able to dramatically improve its lender oversight, escalating losses and fees will drive lenders and borrowers away from these key loan programs, not only seriously hampering and even harming the ability of small businesses to access capital to grow, but also regrettably reversing the very mission of these programs.”

After these opening statements from the Senators, the first witness was Steven C. Preston, administrator of the SBA. He spoke in broad generalities about the importance of improving the effectiveness of SBA lender oversight. In an attempt to show pro-activity in the face of the increased scrutiny, the SBA had proposed new rules for lender oversight and processes for enforcement actions two weeks before the hearing.

Preston was silent about the redacted OIG report in his opening remarks but referred to his written testimony, which indicated the SBA had provided an un-redacted copy of the report to the Senate committee. The written testimony explained that the public had to remain in the dark to protect “the integrity of the Agency’s duties as a financial regulator,” where “public disclosure of such information would severely damage the Agency’s ability to obtain sensitive or adverse information from its lenders.” While it is hard to see how disclosing BLX’s loan performance, the chronology of the fraud, the OIG recommendations and the SBA response would cause this sort of harm, the Senators seemed to accept this tortured logic and
did not ask Preston a single question about the redactions.

Senator Snowe challenged Preston over BLX: “Why didn’t you take remedial steps with respect to BLX? I mean, why weren’t there any remedies or any penalties? I mean, why didn’t you revoke their preferred lender status, for example? Because, as the Inspector General’s report indicates . . . lenders can essentially ignore SBA’s delegated lending authority requirements without suffering any material consequences.” Unfortunately, this question came as part of a much longer statement that included questions on other topics. When Preston answered, he picked his way through the other topics in her question without answering the ones about BLX.

Senator Snowe persisted, probing the large default rate in BLX’s portfolio. Preston didn’t seem concerned and drew a distinction between portfolio quality “and fraud, which certainly in the case of BLX was a highly sophisticated group of people within that institution. . . .”

Senator Kerry asked how the agency first flagged the fraud. Preston could not say, responding, “Senator, I don’t specifically recall.”

Senator Kerry then asked what the SBA was doing to prevent this from happening again and inquired what lessons were learned. Preston again pushed his (and Allied’s) view that BLX was the victim, not the villain, saying that “when fraud is perpetrated of this type, although it’s bad for all of us and none of us like it, the one who ends up losing financially is the lending institution.” Preston said he was satisfied with the settlement from BLX, somehow accepting the arithmetic that the few million dollars of reimbursements from BLX to SBA actually covered the nearly $77 million of allegedly fraudulent Michigan loans. Apparently confident that the SBA fraud stopped at the Michigan state line, Preston had no thoughts or plans to offer about looking for problems anywhere else in the country.

Senator Kerry: “When you found out about the scheme . . . you talked at the time about the tough disciplinary measures that were going to be taken against BLX and then ultimately the agency entered into closed negotiations with the companies and really kept the details of any disciplinary actions confidential. What happened between . . . the tough-stance and the private negotiations?”

Preston: “Right, I’m not aware of—of the chronology and unfortunately I don’t—I can’t comment on that.”

Senator Kerry asked whether Preston had been personally involved in resolving BLX.

Preston: “Early on, I was actively involved in the discussion on what I thought the next step should be. My view was a couple of things. Number one, I want to absolutely ensure that the taxpayer was protected . . . let’s leave it at that. I think the other issue is . . . trying to balance our judgment is when you look at something like this, at what point is the issue behind you? And at what point is the issue continuing? And how do you weigh that against . . . restricting capital to small businesses?” Was he as anxious as Allied to declare the issue “behind”?

The next witness, Eric M. Thorson, inspector general of the SBA, was tougher on BLX and the SBA. “We believe this is the largest 7(a) loan fraud scheme in SBA history. Both Mr. Harrington and Ms. Lazenby have pled guilty. So far, our investigation has resulted in the indictment of twenty-seven individuals of which three are currently international fugitives. This criminal investigation is continuing with further indictments expected.”

He told the committee that the agency had been aware of recurring performance and compliance issues with BLX, but the company had suffered few consequences. “We believe that the high rate of default and other problems with BLX loans presented undue financial risk to SBA, and therefore, merited in-depth reviews of the defaulted loans, as well as possible suspension of BLX’s preferred lender status, which allows BLX to approve loans with virtually no prior review by SBA.”

He continued: “Despite problems with BLX’s loans however, SBA continued to renew the delegated PLP lending authority, and to honor guarantee purchase requests without taking any additional precautions, paying out $272.1 million in guarantees between 2001 and 2006. Quite simply, SBA did not hold the lender accountable for its performance problems . . . SBA has focused on the quantity of loans, not the quality. SBA sets goals for loan production, but not for loan quality or lender performance. . . . We believe SBA may have been reluctant to take enforcement action against BLX because it is among SBA’s top ten lenders in the value of loans disbursed.” Stating the sad, obvious truth, Thorson concluded his indictment of SBA “oversight policies” with an understatement: “SBA is not focused on fraud detection.”