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high number of bad SBA loans coming out of the branch. And today’s hearing is an opportunity for the company to tell its side of the story, including their rationale for cutting back on small business lending, which they announced recently. And let me just say, I greatly regret the loss of jobs that is going to go with the company’s announcement.”

It was hard not to roll my eyes.

Senator Olympia Snowe, the ranking minority member of the committee, took a harder line toward both the SBA and BLX, saying, “It’s my hope this morning that we will probe how and why the government has inappropriately allowed loan fraud and poor loan underwriting to occur at the business loan corporation BLX. . . .We’ve had numerous hearings, numerous reports, as the chairman cited, and yet we still find ourselves at this juncture where we’re finding fraudulent loans to the magnitude and degrees of millions and millions of dollars, and just BLX alone was more than $200 million.”

Senator Snowe declared the SBA’s lender oversight “unacceptable” and joined Senator Kerry in criticizing the SBA for the unnecessary redactions in the OIG report. She clearly understood the consequence of allowing lax or even non-existent oversight, stating: “I fear that unless the SBA is able to dramatically improve its lender oversight, escalating losses and fees will drive lenders and borrowers away from these key loan programs, not only seriously hampering and even harming the ability of small businesses to access capital to grow, but also regrettably reversing the very mission of these programs.”

After these opening statements from the Senators, the first witness was Steven C. Preston, administrator of the SBA. He spoke in broad generalities about the importance of improving the effectiveness of SBA lender oversight. In an attempt to show pro-activity in the face of the increased scrutiny, the SBA had proposed new rules for lender oversight and processes for enforcement actions two weeks before the hearing.

Preston was silent about the redacted OIG report in his opening remarks but referred to his written testimony, which indicated the SBA had provided an un-redacted copy of the report to the Senate committee. The written testimony explained that the public had to remain in the dark to protect “the integrity of the Agency’s duties as a financial regulator,” where “public disclosure of such information would severely damage the Agency’s ability to obtain sensitive or adverse information from its lenders.” While it is hard to see how disclosing BLX’s loan performance, the chronology of the fraud, the OIG recommendations and the SBA response would cause this sort of harm, the Senators seemed to accept this tortured logic and did not ask Preston a single question about the redactions.

Senator Snowe challenged Preston over BLX: “Why didn’t you take remedial steps with respect to BLX? I mean, why weren’t there any remedies or any penalties? I mean, why didn’t you revoke their preferred lender status, for example? Because, as the Inspector General’s report indicates . . . lenders can essentially ignore SBA’s delegated lending authority requirements without suffering any material consequences.” Unfortunately, this question came as part of a much longer statement that included questions on other topics. When Preston answered, he picked his way through the other topics in her question without answering the ones about BLX.

Senator Snowe persisted, probing the large default rate in BLX’s portfolio. Preston didn’t seem concerned and drew a distinction between portfolio quality “and fraud, which certainly in the case of BLX was a highly sophisticated group of people within that institution. . . .”

Senator Kerry asked how the agency first flagged the fraud. Preston could not say, responding, “Senator, I don’t specifically recall.”

Senator Kerry then asked what the SBA was doing to prevent this from happening again and inquired what lessons were learned. Preston again pushed his (and Allied’s) view that BLX was the victim, not the villain, saying that “when fraud is perpetrated of this type, although it’s bad for all of us and none of us like it, the one who ends up losing financially is the lending institution.” Preston said he was satisfied with the settlement from BLX, somehow accepting the arithmetic that the few million dollars of reimbursements from BLX to SBA actually covered the nearly $77 million of allegedly fraudulent Michigan loans. Apparently confident that the SBA fraud stopped at the Michigan state line, Preston had no thoughts or plans to offer about looking for problems anywhere else in the country.

Senator Kerry: “When you found out about the scheme . . . you talked at the time about the tough disciplinary measures that were going to be taken against BLX and then ultimately the agency entered into closed negotiations with the companies and really kept the details of any disciplinary actions confidential. What happened between . . . the tough-stance and the private negotiations?”

Preston: “Right, I’m not aware of—of the chronology and unfortunately I don’t—I can’t comment on that.”

Senator Kerry asked whether Preston had been personally involved in resolving BLX.

Preston: “Early on, I was actively involved in the discussion on what I thought the next step should be. My view was a couple of things. Number one, I want to absolutely ensure that the taxpayer was protected . . . let’s leave it at that. I think the other issue is . . . trying to balance our judgment is when you look at something like this, at what point is the issue behind you? And at what point is the issue continuing? And how do you weigh that against . . . restricting capital to small businesses?” Was he as anxious as Allied to declare the issue “behind”?

The next witness, Eric M. Thorson, inspector general of the SBA, was tougher on BLX and the SBA. “We believe this is the largest 7(a) loan fraud scheme in SBA history. Both Mr. Harrington and Ms. Lazenby have pled guilty. So far, our investigation has resulted in the indictment of twenty-seven individuals of which three are currently international fugitives. This

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