Default rate high for veteran loan program
Stars and Stripes September 13, 2013
A federal program providing business loans to veterans has lost $31 million through defaults since it began in 2007, according to a watchdog report.
The Small Business Administration’s Patriot Express program, which lent $703 million to veterans from 2007 to 2012, saw a higher rate of default than the federal agency’s other loan programs, according to a report released Thursday by the Government Accountability Office.
For example, the program’s default rate for loans approved in 2009 was 17 percent, or about three times higher than two other general SBA loan programs.
“Given the losses in the Patriot Express program since inception, if the program continues on its current trend, Patriot Express costs will likely continue to exceed fees collected and recoveries,” the report said.
The report criticized the SBA for insufficiently overseeing private lenders that verify and document the eligibility of borrowers.
“SBA’s internal controls over lenders may not provide reasonable assurance that Patriot Express loans are only made to eligible members of the military community and that only these members benefit from loan proceeds,” the report said.
The Patriot Express program allows lenders to use their own underwriting criteria and documentation to determine a borrower’s eligibility. The loans, available up to $500,000, are for working capital and other general business purposes. A veteran or other qualifying borrower must own and control at least 51 percent of the business.
Other eligible borrowers include active-duty servicemembers in the military’s Transition Assistance Program; members of the Reserve and National Guard and their spouses; a surviving spouse of a servicemember who died in service; and a surviving spouse of a veteran who died of service-related disability.
The SBA made 8,511 Patriot Express loans from 2007 through 2012, the majority of which were under $150,000. About half were under $25,000 for which the borrower provided no collateral.
Low-amount, no-collateral loans from one unidentified lender had a significantly higher default rate compared with other Patriot Express loans, the report said. The lender accounted for about 40 percent of Patriot Express loans approved in 2009, for example. In May, the SBA stripped that lender of authority to make loans on behalf of the agency, the report said.
Patriot Express has continually operated in the red.
The SBA “guarantees” loans made by private lenders through Patriot Express. Thus, when a borrower defaults, the SBA “purchases” the loan from the lender, paying 85 percent for loans less than $150,000 and 75 percent for larger ones.
The SBA had to purchase $45.3 million in defaulted loans from 2008 through 2012. It only recovered $1.3 million of those funds – a “low recovery” rate of 2.9 percent, the report said.
In addition, the SBA has possibly been “making guarantee payments that should not have been made,” the report said. It cites a November 2012 analysis by the SBA Office of Inspector General that calculated the “improper payment rate” could be as high as 20 percent for Patriot Express and similar SBA loans.
The report said the SBA had not conducted an evaluation of the program to assess whether it was achieving its objectives.
GAO analysts, however, met with 24 Patriot Express borrowers and almost all of them said “the loan had enabled them to start their business, expand operations or keep their business open during challenging times.” Most said they were satisfied with the loan application process.
“Finally, borrowers, lenders and veteran service organizations we met with said that having a dedicated program solely for those in the military community was a benefit,” the report said.