Backed a $1 million loan to Lamborghini Ohio, a dealership selling cars that cost as much as $500,000–cars most Americans can’t even dream of owning.
Two years later, the federal agency doubled down on its investment in Italian sports cars, guaranteeing a $1.5 million loan to Lamborghini Chicago.
Maria Contreras-Sweet thanks members of the audience as U.S. President Barack Obama speaks during a ceremony where she was sworn in as Administrator of the Small Business Administration. (Photo by Win McNamee/Getty Images)
Within five years, private lenders determined they couldn’t collect on the balance of either loan, a practice the SBA calls a charge-off, potentially leaving taxpayers on the hook for more than $1 million, according to a Small Business Administration database I obtained and reviewed for a series of Watchdog.org stories.
Supercar dealerships were a drop in the $8.7-billion bucket of questionable taxpayer-backed loans that apparently went bad in recent years and were detailed in the database. I found that since 2008, SBA-backed lenders charged off $25 million in loans for country clubs, about $21 million for boat dealers and $4.5 million for wineries were.
Additionally, the SBA guaranteed more than $140 million in defaulted loans for liquor stores, bars and tobacco retailers–businesses that sell products other government agencies are spending hundreds of millions of taxpayer dollars to fight.
In an era of ballooning national debt and out-of-control federal spending, there are real questions about whether the SBA serves a purpose that taxpayers can’t live without.
And the agency is its own worst enemy. Its own spokespeople refuse to answer basic questions about SBA activities, and its inspector general and the Government Accountability Office charge the SBA has failed to exercise oversight of its lenders and doesn’t track what impact the loan guarantees make on the economy.
Reconsidering the SBA
“It seems to be a good time to reevaluate the mission and purpose and existence of the SBA,” National Taxpayers Union president Pete Sepp told me for stories on the SBA loan charge off database. “It is a questionable function of government to underwrite or guarantee many of these loans.”
The SBA was founded in 1953 out of the ashes of the Reconstruction Finance Corporation, which was started in 1932 to alleviate the impact of the Great Depression on businesses. In 1952, there was a push to eliminate the RFC but instead President Eisenhower proposed the SBA to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns,” according to a history on the agency’s website.
Currently the SBA’s main function is to guarantee up to 90 of loans from private lenders for small businesses to build facilities, buy property, and run operations, providing more favorable terms than many of the businesses could get from private lenders without the backing.
Since April, I tried to get the SBA to justify its existence, provide figures showing the number of jobs created by the program and explain why taxpayers should back loans for Lamborghinis, golf courses and California wineries.
Except one stock statement–saying the SBA is a good steward of taxpayer money–their public relations staff have repeatedly said officials there are working on a response. They have yet to provide that response.
To try to get a justification for the program, I approached trade associations for lenders who benefit from the guarantees, allowing them to issue loans with little risk:
“We have to fund women-owned, vet-owned, minority-owned businesses,” said National Association of Development Companies president Barbara Vohryzek. “We fund businesses in distressed zones that the statistics show have higher poverty levels.”
Where SBA supporters fail
SBA supporters point out that the biggest loan programs, the 7a for business operations and the 504 for property and equipment, have default rates in the low single digits. That still translates into billions of dollars over the years, the database shows.
And even the SBA’s staunchest supporters had trouble justifying some of the loans to businesses catering to the rich and famous, including the SBA-backed Chicago Lamborghini dealership, which according to court records got into a dispute with rapper Missy Elliott after the business failed to deliver a $400,000 Lamborghini Aventador they promised her in 2011.
The examination of the program is particularly timely: Since 2009, taxpayers have been backing some of the loans. That wasn’t supposed to happen.
The policy was to have any defaults repaid from a pool funded by fees on lenders, but since the Great Recession that pool hasn’t had enough money to back all the bad loans, requiring taxpayers to shell out more than $800 million.
That subsidy ends in the next fiscal year’s budget because defaults have dropped as the economy revved up but nothing would stop the SBA from going back to taxpayers if the lender fees weren’t sufficient to pay back defaulted loans. On top of that, taxpayers annually pony up the $700 million or so the SBA needs to run its operations.
What about oversight concerns?
Government watchdog complaints about the agency’s weak oversight of lenders is apparent while looking at the hundreds of thousands of lines in the charge-off database the SBA released under a Freedom of Information Act request.
“There is of course the question why an average taxpayer, who could never afford many of these goods and services, should be forced to underwrite the businesses,” Sepp notes after reviewing some of the luxury loans the database says were charged off.
And interviews and public records searches found many of the former business people whose companies couldn’t pay back the taxpayer-backed loans are still open for business. One of them bought a nearly $7-million ocean-front home in Florida a couple years before the loan was charged off.
The National Association of Development Companies’ Vohryzek concedes it’s very difficult to go after the principals in a company that didn’t pay back the loan, especially if the company goes into bankruptcy. And the SBA does not track how much–if any–of the money is recovered after the charge off.
In fact, the SBA inexplicably couldn’t even provide a database of taxpayer payments to back loan guarantees. The best they could do is provide a database of lender notifications that a loan has gone bad, with a FOIA officer adding the caveat that he can’t vouch for the accuracy of the database.
Why does the SBA still exist?
Given all this, you might wonder how the SBA has survived demands for its swift end.
Of course once a program exists and has a constituency, it’s very difficult to reform–let alone to kill it. Barring major reform, Sepp suggests at least limiting taxpayer exposure in loan defaults with a law that says no taxpayer money will go into the default pool.
The SBA could also more aggressively screen loan guarantees both to make sure they support businesses useful to the general public and that the potential borrowers increase jobs and boost the economy. Currently, the program looks only at whether a company is in a legal business, the business isn’t too big to fit liberal small-business standards, and is credit worthy and will likely repay the loan.
Of course any reforms would require Congress to step up and act. That seems unlikely as I couldn’t even get Ohio Rep. Steve Chabot, who chairs the House Committee on Small Business, on the phone to discuss what I found in the SBA database.
Sepp is skeptical that politicians will do the proper oversight but urges them to prove him wrong.
He says, “Congress has a special responsibility to reevaluate the program as well as protect taxpayers from the liability of loans that the private sector would not accept.”
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