The SBA's Office of Inspector General has confirmed it is reviewing a sample of 300 American Recovery and Reinvestment Act loans as a usual oversight measure and not because those loans have a tendency for a higher number of defaults.

Glenn Harris, counsel to the SBA OIG, confirmed to Credit Union Times that since April, the office has looked at about 300 loans, including Recovery Act 7(a) loans using the 90% guaranty and those with fees waived as well as America's Recovery Capital loans. Harris said the findings of the loans will not be discussed until the OIG issues its reports. He did not provide a date of publication.

SBA spokesman Michael Stamler said, “From the outset, SBA and the Office of Management and Budget anticipated that there may be a higher rate of default in the ARC program than we traditionally see in our other SBA loan programs because the assistance is for businesses experiencing financial hardship.”

“The Recovery Act provided funding to the inspector general for increased auditing of loan programs under the act, so an audit could well be part of the planned auditing schedule,” Stamler said.

Under the legislation that authorized the program, ARC loans were built for small businesses having difficulty meeting their debt costs but could demonstrate a likelihood of survival if they could get help under ARC, Stamler said. The ARC loans, which are available up to $35,000 with deferred payments and are interest free, have a 100% guarantee from the SBA, rather than the 90% authorized for other SBA-guaranteed loans.

According to the SBA, 1,243 lenders have made 7,416 ARC loans amounting to $240 million as of May 7. The program is authorized through Sept. 30 or until the funds are exhausted. About $97 million in loan authority remains available.

Kent Moon, president/CEO of Member Business Lending LLC in Salt Lake City, said he had heard that the SBA would be looking at Recovery Act loans, including the “validity of the structuring.” He's not a big fan of the ARC loans and advised the CUSO's credit unions not to engage in them. While payments on the ARC loans are not due until 12 months after issuance, Moon theorized that the SBA may be taking a proactive view.

“I guess there's some concern that although they haven't really started the repayments, there is a higher propensity for potential defaults from other outside conditions,” said Moon, a former SBA Utah district director. “Not because of nonpayment but because of insolvency proceedings I'm guessing, primarily bankruptcies that are occurring on other outside debts that are pushing them into a nonpayment status.”

Harris said, “Just to clarify, we are not looking at these loans because we think there is a 'high propensity for defaults.' [We're] just reviewing them as part of our oversight of Recovery Act lending.”

But Moon is skeptical and said some small business lenders were a little dubious of the ARC program because of the propensity for conflicts of interest. “One of SBA's parameters is you cannot lend funds that would have an apparent conflict of interest. So if I'm the lender, and the borrower is paying one of my other loans current that is non-SBA, then by nature it has an appearance of a conflict.”

The ARC program review reminded Moon of the SBA's Supplemental Terrorist Activity Relief loan program established in January 2002 to provide capital to small businesses affected by the Sept. 11, 2001 terrorist attacks. A report from the SBA's OIG found that eligibility for 85% of STAR loans reviewed could not be determined and criticized the program for sloppy lender documentation. Of the 7,086 lenders that participated, only four credit unions were involved and all of their loans had either been paid off or were active at the time of the review, according to the SBA (CU Times, Jan. 11, 2006). Congressional leaders, including Sen. Olympia Snowe (R-Maine), ranking member of the Senate Committee on Small Business and Entrepreneurship, also criticized the STAR program's documentation.

Moon surmised that when some lenders saw the ARC program, they were not as eager to embrace it, leery of “future criticisms that it may have hoisted against it,” similar to those with the STAR loan program.

“So today, there's an attitude of skepticism and not as many ARC loans extended as what had been hoped by the SBA and that has caused some to question the validity of the program,” Moon said.

For the $231 million First U.S. Community Credit Union, the ARC loans have helped some of its members save their small businesses and spawned bigger loans with those same owners. Despite being “deluged with applications,” the Sacramento, Calif.-based cooperative is treading cautiously, funding only 13 loans to date, said Gordon Gerwig, business services manager. The CU has a $750,000 loan in the pipeline to finance a firm's building as the result of an ARC loan relationship.

“We're happy we did them. They've done some good things and kept people from losing their businesses. We're probably among the only ones in Northern California doing the loans.”

The down-side is even though the ARC loans are small, it still takes as much work to process loans 10 times their size, Gerwig said. Ideally, he would have liked to see the loans go up to $100,000. One offset is the SBA pays the CU monthly interest checks for participating in the program.

A representative with a CU in the Midwest who did not want to be identified said no new ARC loans have been funded over the past nine months there. The CU started offering the loans last summer. That's because the person heading up the effort left the CU and no one was available in-house to take over the program.

“The loans are complicated. You have to have some good training. We have some on the books, but our activity has been nonexistent recently.”

–[email protected]