Red Flags Sends SBA Community Express Program to Audit
WASHINGTON -- A loan program designed for small businesses in disadvantaged communities is being referred to the Small Business Administration's Office of Inspector General for an audit after a number of recent, relatively high credit risks were spotted.
"As we review the program's pilot status and make decisions about its future, we want to ensure that the program minimizes fraud, waste and abuse," SBA said in a May 22 statement. "However, due to relatively higher credit risk in the program to date, the agency has referred the matter to SBA's Office of Inspector General for audit."
The Community Express pilot program assists small businesses owned by women, veterans and minorities that are located in underserved areas. Of the 337 Community Express lenders, 12 are credit unions, according to SBA.
Congress has mandated that not more than 10% of the total number of loans guaranteed in any fiscal year may be awarded. Large Community Express lenders have been aware of the cap issue for many months, the agency reminded. SBA said it encouraged lenders to diversify their product portfolios, advised them of its many other programs, and offered to do training on other agency loan products that could be used to assist qualified lenders.
Janet Tasker, SBA's deputy associate administrator for capital access, met with major Community Express lenders in late February to highlight the cap issue and encourage them to shift to other SBA products and reduce their Community Express output, the agency said.
In April, SBA said Eric Zarnikow, associate administrator for capital access, met with major lenders and communicated that they had a per month loan cap beginning that month. Zarnikow said SBA would work with lenders on their loan pipelines if they had alternatives they wanted to propose and that the agency would work with them on other SBA products. With only one exception, SBA did not receive any alternative proposals, the agency reported.
Rather than moderating per SBA's instruction, some lenders' loan production increased for the month of April, and one lender's production dramatically exceeded the cap that had been communicated, SBA said. The agency went on to reset targets based on the actual production and current 7(a) loan volume and communicated the revised cap of loans per month.
Community Express loans account for about 2% of total SBA loan volume. In fiscal year 2007, 7,000 loans, all under $35,000, were approved.
"Rather than work with SBA to manage to the cap, some Community Express lenders continued to make loans in excess of the cap, pushing SBA to impose the cap in a way that cooperation would have made unnecessary," the agency said. "It's important to understand that the Community Express pilot program was created to complement SBA's main loan programs, and not to become the entire focus of a lender's business."
CUNA had previously requested permanent authorization and expansion of the Community Express program saying that in additional to providing a "logical vehicle" for increasing credit union participation in 7(a) lending, the initiative also ties in to the movement's mission of meeting the unique needs of individuals and groups not served by other financial institutions. The trade group also sought expanding the program to community development credit unions and other qualified credit unions that serve underserved areas.
At a March 8, 2007 hearing, Jeff Rodman, president/CEO of Actors FCU, testified on CUNA's behalf about the constraints of the SBA lender approval process. At the same hearing, CUNA once again threw its support behind permanently reauthorizing the Community Express loan program.