Smart Borrower Blog

Inspectors Find Lenders Abusing Small Business Lending Program

Apr 21st, 2010 @ 1:08 PM by Amber Nelson

Somebody’s in trouble! Government watchdogs came out with a report Wednesday that says private lenders have been misusing or at least poorly using funds from the Small Business Administration.

The SBA was granted $730 million in February 2009 to provide additional funding to small businesses to help the economy recover and has received another $305 million in money extensions since the program ran dry in November. But the inspector general for the SBA says private lenders have made very weak loans and have been using too much of the money for executive pay.

Inspector General Peggy Gustafson told the House Small Business Committee Wednesday that roughly two-thirds of the SBA-backed loans it examined were weak, being made to people who don’t meet the eligibility rules, or those who have a poor chance of repaying the loans. She said that private lenders have sunk $255 million worth of funds into these type of loans, which would put significant pressure on the SBA should these loans fail.

And eight of the lenders examined spent more than 20 percent of their gross receipts on executive compensation, and one lender even funneled 44 percent of its excess funds into bigwig salaries and bonuses. SBA loan requirements state that excess funds must be reinvested into other lending or money making activities, not to line CEO pockets.

The indiscretions of some private lenders is now costing the country even more, as the Obama Administration has asked for another $2 million to pay for increased lender oversight.

House Small Business Committee Chairwoman Nydia Velazquez feels this kind of beefed up review is necessary.

“Given the challenges entrepreneurs face finding affordable credit, it is imperative that the Small Business Administration’s capital access programs function correctly,” she said in a statement.

And SBA Administrator Karen Mills added “I know we moved in the right direction this past year and we’ll continue to take even bigger steps in the future.”

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to and

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