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The report continued: “Although SBA personnel believe they took appropriate actions, in our opinion, more stringent steps should have been taken to hold BLX accountable for its noncompliance with SBA regulations and to mitigate risks posed by the lender’s portfolio. We believe SBA took limited action because:

“it lacked clear enforcement policies describing circumstances under which it would suspend or revoke delegated lending authority and did not have procedures directing how suspension or revocation would be done.

“the lender oversight responsibilities of OLO [SBA Office of Lender Oversight] and OFA [SBA Office of Financial Assistance] are not compatible with OCA loan production goals which presented a potential conflict or at least the appearance of a conflict, between the desire to encourage lender participation in PLP and the need to evaluate lender performance and take enforcement action.

“discontinuing BLX’s participation in PLP and other delegated lending programs would have significantly increased the volume of loans to be processed by SBA field offices at a time when SBA was reducing its loan processing staff in field offices. Also, SBA was attempting to establish the Standard 7(a) Guaranty Loan Processing Centers in Hazard, Kentucky and Sacramento, California, and may not have believed that sufficient staffing would be available to manage the increased loan volume.”

The report said that since the SBA rarely punishes poorly performing lenders by removing them from the PLP program and barely has removal procedures in the first place, lenders have little incentive to behave. “SBA has not developed policies and procedures that describe when it will suspend or revoke PLP authority or how it will do so,” the report said. “Although the current version of Title 13 of the Code of Federal Regulations and SBA’s SOPs contain some enforcement actions, the guidance does not provide direction concerning when and under what circumstances the enforcement actions should be implemented.”

In a damning assessment, the report continued, “Because terminations and non-renewals have not been frequent, lenders can essentially ignore SBA’s delegated lending authority requirements without suffering any material consequences. Therefore, without consistent implementation of enforcement policies, lenders cannot be certain of the consequences of certain ratings; and in addition, they may not take SBA’s oversight seriously.” Seriously.

Besides, the report noted, the SBA has an inherent conflict because enforcement, such as revoking PLP status, hampers the agency’s core function of issuing loans to small businesses. Moreover, kicking a large producer like BLX out of the program would also reduce the SBA’s loan portfolio. “Because BLX has been among the top 10 SBA lenders since 2001, any actions that would appropriately mitigate BLX’s risk, such as suspending its delegated lending authority, also would have been detrimental to achieving SBA’s loan production goals,” the report said.

A week after the OIG published the report, Dow Jones Newswire ran a story by Carol Remond, saying that Senator John Kerry, chairman of the Senate Committee on Small Business and Entrepreneurship, was bothered by the redactions. Senator Kerry said in the article: “It is highly unusual for an agency to attempt to withhold the Inspector General’s recommendations and their response from public scrutiny, and the SBA must explain their rationale fully and completely.”

The article said Senator Kerry was “concerned that the SBA is not taking the Inspector General’s recommendations seriously and that it’s not adequately addressing its ‘failed oversight of a small business lender that resulted in years of undetected fraud.’” Remond reported that Senator Kerry said he would soon hold a hearing on the issue.

The article continued, “A spokesman for SBA declined to comment on the extent of the redactions. SBA said in an e-mail statement: ‘Because so much of the material covered in the Inspector General’s report is, by law, privileged and confidential, there is very little we can say about it.’” Remond said Allied also had no comment.

Senator Kerry issued a press release headlined in an extra-large, bold font, “Kerry Questions Bush Administration Decision to Withhold Fraud Findings.” According to the release, “We can’t get to the heart of the problem if the Administration keeps hiding the facts from public view. . . . The Administration must explain their rationale for suppressing the Inspector General’s recommendations and their response. In order to combat future fraud and protect the integrity of this vital small business loan program, the American people need access to all the relevant information.” Senator Kerry didn’t seem that interested in ensuring that proper action be taken to demand full restitution and shut down BLX, but he had no trouble finding his voice to blame the Bush Administration for redacting the audit.

On November 2, 2007, Brickman and I flew to Washington to meet with Ms. Kevin Wheeler, deputy Democratic staff director of the Senate committee, and Angela Ohm, the general counsel for the committee. Though she scheduled us for only a half hour in a conference room, Wheeler was sufficiently interested to transfer us to the cafeteria to complete the discussion when our time expired and the room was needed. We gave them a binder of our BLX findings, including the Kroll report, and explained that we had been complaining to the SBA and SEC for years about BLX. Brickman and I showed her that the fraud far exceeded the Harrington loans, extending nationally and even beyond the SBA to the USDA lending program. We spent time discussing the SBA’s ineffective oversight of its delegated lenders, particularly non-bank lenders. Despite lax SBA oversight, bank lenders perform better than non-bank lenders because more stringent bank regulators review them separately.

We discussed the fact that SBA has faced criticism for years from those who have argued for shutting the agency down outright. The critics argue that in today’s marketplace, small businesses simply don’t need the government to provide subsidies. The original inability of small businesses to obtain loans has long since disappeared, with any number of private lenders ready to finance worthwhile enterprises of any size.