For the Good of Illinois

Watchdog: What happens when an SBA-backed loan goes bad?

March 30, 2015 04:40 AM
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Original Article, click here.
Watchdog
By Tom Steward | Watchdog Minnesota Bureau
 
Somewhere along the line, the Small Business Administration got big.
 
The volume in Minnesota of $1 million plus SBA-backed loans, which fell during the recession, has rebounded, according to "OpenTheBooks.com," a new online tool for tracking federal outlays.
 
Seven-figure SBA-insured loans went to 151 Minnesota companies in 2013, compared to 75 in 2009. Altogether, 865 such loans have flowed to Minnesota businesses since 2007, according to the federal database.
 
Minnesota’s million-dollar loan list includes a dog spa, craft brewery, plastic surgeon, golf course, car-racing team, hotel chains, bowling alleys and chic restaurants. Private equity firms since 2007 have received a total of more than $500 million to further the SBA’s call to "start, build and grow businesses."
 
"Certainly, the SBA loan programs have strayed from the stated purpose of funding companies who ‘cannot find financing in the private marketplace.’ Congress must convene oversight hearings and hold the SBA accountable," said Adam Andrzejewski, founder of "OpenTheBooks.com" and author of "Federal Transfer Report — SBA Lending to the Wealthy Lifestyle."
 
The agency gets about $700 million in taxpayer money, spent in part on vetting loan guarantees. Many SBA loans are no longer backed by taxpayers but rather by fees on lenders who offer the government-insured financing to businesses.
 
The SBA doesn’t advertise the default rate for loans that fail, though in recent years the figure appears to average 4 percent to 5 percent.
 
A 2014 bankruptcy case involving Minnesota Sen. Sean Nienow, R-Cambridge, provides an unusual look at a $613,000 "7a" SBA-backed loan — the agency’s most common.
 
"That’s a big loan. No bank would give me that kind of money," said J. Richard Stermer, a Chapter 7 bankruptcy trustee who helped settle the three-term legislator’s case. "My job isn’t to figure out whether the loan was valid in the first place.  I’m just picking up the pieces after everything has gone south."
 
Photo credit: OpenTheBooks.com
Photo credit: OpenTheBooks.com
BIG BUSINESS ADMINISTRATION? Adam Andrzejewski’s OpenTheBooks.com database reveals that 865 loans of $1 million or more have gone to MN companies since 2007.
In January 2009, Nienow and his wife, Cynthia, personally guaranteed a loan from U.S. Bank to buy National Camp Association Inc., which connected kids and camps. SBA "preferred lenders," such as U.S. Bank, have authority to make loans without government approval.
 
But SBA’s role in Nienow’s loan origination isn’t clear. The agency declined to comment on the specifics of the loan, directing Watchdog Minnesota Bureau to file a Freedom of Information Act request instead.
 
"I don’t know who did or didn’t do any due diligence when they made the loan," Stermer said in a phone interview. "That would have been the time to decide if the taxpayers were going to be on the hook or not."
 
Court records show the Nienows signed a SBA "Unconditional Guarantee," which was "secured by a Deed of Trust in favor of Lender" on their Cambridge house. Legal documents filed in 2014 valued the Nienow’s house at $101,200.
 
Neither Neinow nor his attorney responded to requests for comment.
 
The nine-year note resulted in principal and interest payments of $7,589 per month at 6.75 percent interest, SBA court documents show. By July 2010, the legislator stopped making payments on an unpaid principal balance of $558,076.53. In 2012, the National Camp Association was dissolved, records from the Office of the Minnesota Secretary of State indicate.
 
At that point, SBA typically steps in to attempt a resolution.
 
"When a loan falls into default, the lender initially tries everything in their power to settle, to reach an agreement to see how they can actually work with a borrower, so that the loan doesn’t go completely bust," said SBA spokesman David Hall.
 
Five years into the process, in January 2014, the U.S. Attorney’s Minnesota office sued National Camp Association  on behalf of the U.S. Treasury Department. The Nienows allegedly owed SBA $748,000, including nearly $190,000 in administrative costs, the complaint shows.
 
The U.S. District Court for Minnesota leveled a $748,584.14 judgment against National Camp Association, and Nienow filed for bankruptcy in June 2014. A document entered in US Bankruptcy Court for Minnesota shows the Nienows claimed $121,836.63 in assets and $930,833.25 in liabilities.
 
A bankruptcy court erased the Nienows’ debt on Sept. 23, meaning they were no longer personally liable to pay $748,000 to the SBA.
 
"The senator took out his loan, he was sued for failure, or for default, essentially, and he subsequently declared bankruptcy, and through that, the debt was discharged," said Ben Petok, spokesman for the Office of the U.S. Attorney in Minnesota.
 
The SBA guarantees to reimburse lenders up to 75 percent of 7a loans of more than $150,000 that default — as much as $561,000 in this case. Banks write off the remaining amount of the loss. The SBA failed to disclose the exact amount, and U.S. Bank declined to comment.
 
"When it reaches a point where the bank kind of loses hopes that they’re going to recover anything else, they contact SBA and asks that the SBA honor its commitment to guarantee whatever the percentage is of the outstanding balance, that portion of the loan," said SBA spokesman Hall.
 
Nienow’s biography still touts the legislator’s fiscal bona fides. "Senator Nienow is committed to being thoughtful, prudent and disciplined with your tax dollars to ensure the state meets its obligations, provides appropriate help to those in need, and fosters a vibrant economic climate for Minnesota business.
 
Original Article, click here.
 

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