February 29, 2024

You’re the Boss: A.R.C. Loans Gone But Hardly Forgotten

The Agenda

The Small Business Administration’s special stimulus-funded loan program, known as America’s Recovery Capital, may be gone, but the controversy surrounding it lingers. In March, the agency’s independent Inspector General released a report estimating that of the 4,559 A.R.C. loans made through January 2010, nearly half “were not originated and closed in compliance with S.B.A.’s policies and procedures, resulting in approximately $66.5 million in inappropriate loan approvals.” If those loans default, the report warns, the banks that made them should not expect to be fully repaid by the S.B.A.

The A.R.C. loan program was conceived as a lifeline for sound businesses navigating the ragged shoals of recession. Companies could borrow up to $35,000 to retire existing debt, defer payments on the new loan for a year, and then take five more years to repay the obligation — with no interest or fees charged to the borrower. (The government would pay those.) The S.B.A. estimated that it had enough money to fund about 10,000 loans, and some observers predicted the program would be fully subscribed within a few months.

But many bankers were wary from the outset, and within two months of the program’s inauguration, it became clear that lenders were not eager to participate. In part that was because all of the required underwriting work made the loans not very profitable, if not unprofitable. But bankers also worried that standards for determining eligibility were untenable — businesses had to be both, in the language of the law, “viable” yet “experiencing immediate financial hardship” — and that the government would try to wrangle out of its obligation to make good on defaulted debt. “While the loan is 100 percent guaranteed, it’s only 100 percent guaranteed if you follow all of the underwriting guidelines, and some of those guidelines are very fuzzy,” Bob Seiwert, of the American Bankers Association, told The Times in August 2009. “If you miss one, you put your whole loan at risk.”

By the time the program expired at the end of last September, only 8,869 loans for $287 million had been made, well short of the amount of money available for lending.

Now the bankers’ fears appear well-founded. The inspector general’s audit found that among what it called “material origination and closing deficiencies,” one in four loans went to borrowers who could not adequately show they were viable. One in 10 loans went to businesses that could not prove hardship — in some cases, the investigators found, “the financial information actually contradicted the claimed financial hardship.” And, the report noted pointedly, “the S.B.A. is released from liability on the guaranty, in whole or in part, if the lender fails to comply materially with any of the provisions of the regulations” or does not otherwise act “in a prudent manner.”

The S.B.A., responding to the audit, defended its lenders and insisted that the law gave the agency the flexibility to waive the procedures so long as “the intent of the provision was met” and making the loan “did not violate the law.” And because the inspector general did not give banks the opportunity to correct mistakes, the agency said, “the true extent of the deficiencies is not known.”

Regardless of whether the inspector general’s estimates of errors prove accurate — and mistakes in underwriting don’t necessarily lead to a default — the report shows just how fraught efforts to intervene and save small businesses from the jaws of recession can be. Bob Coleman, who publishes a newsletter for the S.B.A. lending industry, noted that the S.B.A. inspector general received additional funding to investigate regular 7(a) loans that were made with 90 percent guarantees and reduced fees that, like the A.R.C. loans, were also funded by the Recovery Act. “More audits like this one will continue,” he warned readers recently.

Meanwhile, the S.B.A. continues to try to burnish A.R.C.’s reputation. Recently the agency named tiny Peoples Bank of Mississippi of Mendenhall, Miss., one of its Lenders of the Year in the agency’s flagship general business, or 7(a), loan program. (There are two awards, one for large lenders and one for smaller institutions.) The award, according to the nomination guidelines, recognizes “lenders that have used S.B.A. loan programs to help the maximum number of small-business owners obtain financing that they need to grow their businesses.” Among the criteria for selection are growth in overall loan volume and reaching “underserved” (read: disadvantaged) borrowers.

Peoples Bank saw decent growth in the dollars it lent last year, but it was hardly among the biggest gainers, and at the end of the year ranked only 156th among 7(a) lenders. What distinguishes Peoples Bank from the rest of the pack, as alert Agenda readers may remember, is its prodigious  A.R.C. loan lending. By the time the program ended, Peoples had funded 292 loans — more than any other bank save giants Wells Fargo and JPMorgan Chase and West Coast regional powerhouse Zions First National Bank.

So far, said Dennis Ammann, Peoples president and chief executive, the portfolio seems to be holding up well. True, fewer than 40 borrowers have begun repaying their A.R.C. loans, but only two borrowers have shuttered. “The others seem to be doing well,” Mr. Ammann said. “They’re all current on this debt, if they’ve started making payments, or if they have other debt, they’re current on that.

“Most of these folks just needed that cash-flow help. That was the biggest thing.”

Article source: http://feeds.nytimes.com/click.phdo?i=7c88938a20d7a1da56003ac8824f889c

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