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GAO Reveals SBA’s $1.5B Franchise Loan Headache!

Huntington Learning Centers

2011 OIG audit of Huntington's SBA loans started series of audits. photo/bmm

Audit after government audit is showing major problems with SBA-backed 7(a) franchise loans.These uncollectable bad loans to franchise owners are $1.5 billion, costing U.S. taxpayers. The latest, issued by the Government Accountability Office on Wednesday, is putting more egg on the Small Business Administration's face. These audits are not only putting lenders on a stricter regiment but in some cases actually disbarring them from lending.

Bloomberg BusinessWeek writes:

The SBA paid out after borrowers defaulted in 28 percent of all the franchise loans it approved from 2003 to 2012, costing the agency $1.5 billion, according to the report, published on Wednesday by the Government Accountability Office.

… The GAO's report is the latest in a series of watchdog warnings about lax oversight of SBA loan programs. In July the SBA's inspector general found that the agency "had not implemented a program or process to effectively monitor risk in its loan portfolio." The review found SBA loans made from 2002 to 2009 to operators of three franchise brands—Planet Beach, Petland, and Cold Stone Creamery—defaulted at rates above 46 percent. In that period, almost 1,000 SBA loans totaling $199 million went to these three franchises. More than half of them defaulted, costing the SBA $39 million in guarantees.

…Inflated revenue projections aren't a new allegation. A 2011 inspector general report (pdf) found that "Banco Popular (BPOP) used unrealistic revenue projections" in underwriting loans to buyers of Huntington Learning Center franchises. The cost to taxpayers for 12 defaults: $2.1 million, according to the inspector general.

Other loan programs have faced scrutiny as well. In September a GAO report (PDF) found that the SBA's Patriot Express loan program, intended to speed loans to veterans, has cost taxpayers $31 million since 2007 because of high defaults.

More to come…

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email