Franchise Small Business Admin Loans Equal Large Taxpayer Losses

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<img alt="Flushing money down the toilet" src="/sites/default/files/MoneyToilet.png" style="width: 330px; height: 330px;" /></div>
<p>Journalists Lynn Hulsey and Ken McCall look into the world of franchising via Small Business Administration lending and uncover a universe of bad loans, shoddy underwriting practices and non-existent oversight. <!--break-->&nbsp; Lending standards were so poor on SBA franchise loans that &ldquo;Some borrowers in the Small Business Administration&rsquo;s largest federally guaranteed loan program defaulted so quickly they paid nothing on the loan, the investigation found.&rdquo;</p>
<p>Working with SBA staffers, the writers were able to obtain &ldquo;an accurate database of more than one million loans made since 1990 under the SBA&rsquo;s 7(a) program&rdquo; after having discarded multiple databases that were deemed &ldquo;fraught with problems and inconsistencies.&quot; The results? Taxpayers subsidized the&nbsp;SBA to a tune of over $1 billion while losses overwhelmed the self-insured lending program.&nbsp;</p>
<p>The story is not complete but&nbsp;it does bring a fresh view to this problem.&nbsp; While some readers of Blue MauMau may believe its staff writers are too &lsquo;franchisee friendly&rsquo; in their reporting, the same cannot be said for the Dayton Daily News&nbsp; that comes in with no such bias.&nbsp; In fact, how often do we see the media attack a government program . . one that is designed to help families attain the American dream?&nbsp;</p>
<p>Read the entire investigative story at&nbsp;<a href="… Daily News</a></p>
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<p><strong>Related Reading on SBA Franchise Liar Loans</strong>:</p>
<a href="">Loan Broker: &quot;SBA Liar Loans a Problem&quot;</a>&nbsp;| BMM</li>
<a href="… Liar Loans Spread among Banks</a>&nbsp;| BMM</li>
<a href="">S… Rebukes Banco Popular for Liar Loans</a>&nbsp;| BMM</li>
<a href="… Franchise Lenders Hit</a>&nbsp; | BMM</li>
<a href="… loans: Different Books for Different Folks</a>&nbsp; | BMM</li>
<a href="… on SBA Liar Loans</a>&nbsp;| BMM</li>
<a href="… Kept Out of Earnings Forecasts for Their Own Loans</a>&nbsp;| BMM</li>
<a href="… Studies Say Franchises More Likely to Fail than Small Businesses</a>&nbsp;| BMM</li>
<a href="">SBA Franchisee Failure Rates by Brand, 2012</a>&nbsp;(interactive table) | BMM</li>
<a href="… 25 Franchises to Buy with the Highest Failure Rates, 2012</a>&nbsp;| BMM</li>
<a href="… Best 10 Franchises to Buy, Lowest Loan Default Rates</a> | BMM</li>

Dayton News story

The Dayton Daily News "investigation" (sic) is irresponsible and totally without context. While aggrandizing loan losses totaling $1.3 billion, they ignore the fact that during this same period, the SBA guaranteed or funded debentures for about $200 billion. I'm sure there are hundreds of banks that would jump at the chance to match that loss ratio during this period.

Also lost in their rush to judgment was the fact that Taxpayers spent $0 for these losses. Borrowers and lenders contribute fees to a credit loss fund that covered all these losses. Unlike Fannie Mae, Freddie Mac, BOA, Citibank, GM, AIG et al.... SBA did not need a bailout.

Dayton Daily should retract this misrepresentation and be embarrassed at what they tried to pass for journalism.

Dayton News and Mr. Green's Misrepresentation

Mr. Green your analysis is incorrect.  If 10 people in the United States are exposed to a toxin and 5 people die do you say 'well, the toxin isn't terrible because only 5 people died out of 350 million Americans' (even though 50% of the people exposed died)?

That $200 billion is for ALL SBA lending not just franchise lending (which is what the story was addressing).  That $1.3 billion loss was against a much smaller universe of loans than what you are trying to claim.  It was a nice try to distort the information . . . unfortunately you failed miserably. 

Second, the taxpayers did, in fact, have to bailout the SBA because the fees that you mentioned were not enough to cover all the defaults over the last few years.  Unreimbursed 7a loan losses (where the assigned assets did not cover the principle amount owed) rose from around $300 million per year in the early 2000's, to around $750 million per year in the mid 2000's, to over $1 billion per year in the 2008, 2009 and 2010 periods.  That 'self insurance' was overwhelmed by the defaults experienced by the SBA due to banks closing their eyes and underwriting every and any SBA loan they could find because they were guaranteed a profit.  Even though historical data showed that franchises were failing at significantly high rates and their loans should not have been approved based on SBA underwriting standard operating procedures.


SBA and lenders outfoxed

<p>&quot;Operators of national franchises like Quiznos and Cold Stone Creamery collectively received millions of dollars in loans through the program despite extensive default histories by the franchises. &#39;Should we say the fox got distracted and quit watching the hen house?&#39; said Pat Newcomb, director of the Ohio Small Business Development Center at the Entrepreneur Center in Dayton.&quot; &mdash; excerpt from the Dayton Daily newspaper</p>
<p>What we should say is the farmer&#39;s watchdog &nbsp;was taken in by the fox while the fox blamed any&nbsp;<strike>fowl</strike> foul dealings on the hens. Meanwhile, taxpayers were stuck with the bill. Eventually, the watchdog was replaced by the fox, who has been amptly rewarded whether the hen lives or dies.</p>

Lenders, the technical phrase

<p>The technical phrase for what happened to lenders and their watchdog is called &quot;cognitive capture&quot;. Franchisees and tax payers, get used to it and just pay the bill.</p>

SBA Loan Purchase Amount After Default

I thought the readership would be interested in seeing the dollar amount the SBA paid out to purchase their guaranteed portion of the defaulted loans in each of the years since 2004.  (Click here for the chart