IFA Lead Lender Indicted in SBA Loan Fraud

Some Question Why IFA Rushed to Partner with Outside Lender BLX

WASHINGTON, D.C. (Blue MauMau) - The U.S. Department of Justice announced that 19 persons in connection with the lead entity of the International Franchise Association’s new Franchise Diversity and Development Initiative (FDDI) have been indicted in federal court with fraud in connection with over $76 million in loans guaranteed by the Small Business Administration. The unsealed indictments charged five persons, and another 14 were charged in criminal complaints, all connected to BLX, owned by Allied Capital Corporation, one of the largest lenders participating in the SBA 7(a) Loan Guaranty Program.

With such revelations some are now questioning why IFA rushed to judgment in partnering with the outside lender that had no prior involvement in its minority programs. And some wonder why BLX wasn’t closely scrutinized before allowing it to represent IFA’s best interest in the new entity.

Prior to the Department of Justice’s indictment (pdf), IFA Educational Foundation Chairman Steven Greenbaum had stated in the December issue of Franchising World magazine that the Foundation had asked representatives from Allied Capital and BLX, who were spearheading the effort, to help introduce the FDDI program at a Franchise Update conference in Atlanta last October.  David Nayor, vice president of BLX, told the audience that their goal was to assist franchisors in taking advantage of growth opportunities in urban locations to provide a one-stop shop for financing, location, tax credits and operational support. Foundation President John Reynolds had described the program as one that would offer financing and technical assistance to women and minority franchisees. At IFA’s convention in February, Nayor, listed as partner for BLX, again introduced the FDDI program with Steve Greenbaum and Donald Graves, Jr., chairman of Metropolitan Business Collaborative, who is also a partner of Graves & Horton law firm.

SBA Applicants’ Qualifications Falsified

But the federal charges soon cast a black cloud over the initiation of FDDI. The former executive vice president of Business Loans Express, LLC, Patrick J. Harrington, was charged with a 14-count indictment of conspiracy, wire fraud, tampering with witnesses, making false declarations before the grand jury and making false statements to a bank. According to the indictment, he was head of the Troy, Michigan BLX office and was part of a scheme whereby he and others conspired to fraudulently qualify loan applicants for SBA-guaranteed loans, primarily for the “purchase” of gas stations. The indictment claims that loan applicants were “qualified” for the loans by overstating or misstating the applicants’ financial and other qualifications, and by falsifying the amount of money being contributed to small business by its owners.

Four others were also named by the U.S. Attorney, including a former assistant vice president of Huntington National Bank in Michigan.  Deborah J. Lazenby participated in the alleged scheme by supplying one of the loan brokers with false verifications of loan applicants’ bank accounts, and by giving cashier’s checks to be used at loan closings for loans provided by BLX. Three others in Michigan were also charged in obtaining a SBA-guaranteed loan from BLX subsidiary.

The names of fourteen others appear in the indictment, all of whom were borrowers and who allegedly obtained SBA-guaranteed loans from BLX fraudulently. They were charged by complaints with conspiracy to defraud the United States and with making false statements within the jurisdiction of the SBA.

The U.S. Attorney stated in the indictment, “There is a strong federal interest and public concern whenever federally-guaranteed loan programs, such as the Small Business Administration’s loan program, are made the target of fraudulent schemes. This is particularly true when the schemes involve high level officials from lending institutions and tens of millions of dollars in fraudulent loans.”

IFA Questioned From Beginning Why It Chose Undesirable Partner

C. Everett Wallace, chairman of the Minorities in Franchising Committee for the IFA Educational Foundation, said he could not understand why IFA had chosen people for its new program who had not been supportive until now. Wallace had approached IFA from the beginning about BLX and Allied Capital, saying, “I called IFA and asked, what about the other people who have been actively involved in our committee who are not even being given the opportunity to be part of it.” But he said he did not get an answer. He feels IFA needs to do a better job of vetting the people they have representing the franchise industry.  He said, “IFA is known by the company it keeps.”

Rob Bond, Wallace’s partner in the National Minority Initiative and author of The Minority Franchise Guide, agrees. He also said that IFA is giving its imprimatur to a company that has one of the worst records of lending in the industry, one that takes loans that no one else wants.  He feels that many of the people trying to get loans through this IFA program will be the very ones that BLX has preyed on. He said BLX has a very high failure rate, especially among those with low-incomes.

IFA’s Response to BLX Indictment? No Problem

Miriam Brewer, director of IFA’s Development and Diversity Initiatives, explained the current situation, in light of the recent federal charges against BLX.  She said that IFA was making changes regarding its leadership, so it would no longer be a lender.  She said, “The leadership is being removed to make sure it is clear that the Metropolitan Business Collaborative is serving as the lead entity.  It will have oversight of FDDI.”  Brewer said there will also be a board of directors, which has unofficially been appointed, but it will not be announced for 30 days or so. Regarding the information on the FDDI flyer that was handed out at IFA’s convention booth, Brewer said it remains current, as BLX will continue to take care of the contact center where the calls come in from people requesting information. 

But Brewer said BLX will remain as a partner in FDDI, even though there has been an indictment by the Department of Justice.  She said, “In the United States people are innocent until proven guilty.  At this point, the charges are just allegations.”