WASHINGTON, April 7, 2008 /PRNewswire-USNewswire/ -- Today Senator John
Kerry (D-Mass.) called on the Bush Administration to protect taxpayer
investments in government-backed small business loans and reinstate a
program that uses lenders to recoup losses from defaulted loans. There is
currently an estimated $404 million in fixed asset loans through the Small
Business Administration's (SBA) 504 program in default. Yet the Bush
Administration has failed to request $2 million to fund the program that
reimburses 504 lenders for loan recovery costs and last Friday, the Bush
Administration announced it intends to suspend the program.



    "The Bush Administration's willingness to stick taxpayers with a $400
million bill is just bad business," said Senator Kerry, Chairman of the
Committee on Small Business and Entrepreneurship. "The choice is clear:
Spend $2 million today to help recover up to $404 million in defaulted
loans or continue on the current course of failed oversight and inadequate
liquidation staff."



    Last week, the Bush Administration admitted it made a mistake in the
agency's 2008 and 2009 budgets to cover costs incurred by Certified
Development Corporations that liquidate the defaulted 504 loans. However,
instead of working with Congress to reprogram funds or seek additional
funding in the budget, the SBA has changed the rules for lenders currently
liquidating loans and is working to get rid of the program. At the same
time, the agency does not have enough resources to liquidate almost 1,000
defaulted 504 loans worth an estimated $404 million, currently in some
stage of liquidation.



    In 2000, Congress passed a law to delegate liquidation authority to
Certified Development Companies because the SBA did not have a good track
record for maximizing recoveries. After seven years, the SBA finally
established reimbursement rates in April 2007. Then, on Friday, April 4,
2008, the SBA announced it would no longer provide those incentives to
Certified Development Companies for future liquidations and would reduce
the reimbursement rate for Certified Development Companies for loans they
were in the process of liquidating. In 2003, the agency eliminated almost
200 staff from across the country that were responsible for overseeing loan
liquidation, leaving only about eight full-time staff to oversee 504 loans
in default.



    Senator Kerry introduced bipartisan legislation last year that would
strengthen liquidation aspects of the 504 Loan Program. The Small Business
Lending Reauthorization and Improvements Act, S. 1256, passed out of the
Committee but Republican leadership in the Senate has blocked full Senate
consideration.



    Below are Senator Kerry's two letters to the Small Business
Administration:

    April 7, 2008

    The Honorable Steven C. Preston

    Administrator

    U.S. Small Business Administration

    409 Third Street, S.W.

    Washington, D.C. 20416



    Dear Administrator Preston:

    Last week I wrote to you and asked if you would delay publishing a
notice in the Federal Register that would interfere with the liquidation of
defaulted 504 loans. The notice is controversial, and I wanted to work with
you to pursue what I believed, in talking to the SBA and the SBA's lending
partners, would be a better solution to address your lack of funding for
reimbursements and the overall liquidation problem. Unfortunately, you went
forward and published the notice despite my objections.



    Because the underlying problem was caused by the SBA's accounting
error, I have a hard time understanding why the Administration has refused
the Committee's suggestion to seek a reprogramming or amend its budget
request in order to correct the agency's own mistake. Moreover,
preservation of the 504 liquidation reimbursement program will save the SBA
money in the long run. If SBA estimates it will need about $2 million for
reimbursements, that seems like a wise investment as opposed to continuing
with the current liquidation system in which SBA has let more than 200 of
the almost 1,000 defaulted loans languish for so long that, in SBA's words,
there is "little or no remaining residual value" to recover, and therefore
expects to charge them off. The Committee has been told those loans are
worth as much as $100 million. If the reimbursements were to continue, and
CDCs were to continue to liquidate loans, even if they recovered a mere $4
million, the SBA would still be ahead.



    Please provide the Committee with the total number and dollar amount of
504 loans to be charged off and how that will affect the subsidy rate and
fees on the borrowers and lenders who pay to participate in the 504 Loan
Guaranty Program.



    Please also provide the Committee with the estimated funding SBA would
need to continue the reimbursements instead of permanently suspending the
practice, and explain why you will not pursue the funding in order to
reimburse CDCs for their liquidation efforts and help protect the SBA's 504
loan program.



    I ask that you please provide the Committee with a response by Monday,
April 14, 2008.



    Sincerely,

    John F. Kerry

    Chairman



    April 3, 2008

    The Honorable Steven C. Preston

    Administrator

    U.S. Small Business Administration

    409 Third Street, S.W.

    Washington, D.C. 20416

    Re: Compensation to CDCs for 504 Loan Liquidation Expenses

    Dear Administrator Preston:

    I am writing to urge the Small Business Administration to delay
publishing a notice in the Federal Register that would interfere with the
liquidation of defaulted 504 loans. Specifically, I am referring to the
Agency's intention to publish a notice tomorrow that would reduce the
compensation rates for costs incurred by authorized Certified Development
Companies to liquidate defaulted 504 loans and then 90 days after the
publication of that notice to suspend all compensation for any 504 loan
debenture not yet purchased.



    I understand that the Agency made a mistake in not requesting funding
to reimburse authorized Certified Development Companies for these purposes
in its FY2008 and FY2009 budgets, and I appreciate your leadership in
admitting that mistake to our Committee. Nevertheless, I do not believe the
solution is suspending reimbursements, which will exacerbate SBA's
liquidation problems. We are told that SBA has nearly 1,000 loans, worth
about $404 million, in some state of liquidation spread among the Little
Rock, Fresno and district offices, with only about eight staff dedicated to
504 liquidation, supported by district counsel who have many
responsibilities. The growing number of loans in liquidation validates my
concern and opposition to the Agency's elimination of the almost 200
liquidation staff in the districts more than four years ago. If the Agency
stops compensating authorized Certified Development Companies that are
currently helping liquidate defaulted loans, it will reduce their
activities and exacerbate the SBA's existing problems. A better solution is
for the Agency to right its budget mistake by seeking permission from the
appropriators to reprogram funding to cover the estimated amounts needed, a
modest $1 million or $2 million by SBA's estimates, or send up an amended
budget request for FY2009, as the President did in July 2005 for the FY2006
budget, requesting the appropriate funding. Otherwise, the longer SBA takes
to liquidate loans, the less ability it has to recover funds through the
property or from the guarantors, increasing the risk of writing off loans
that average about $500,000.



    It would be far more cost-effective to seek the modest amounts for
compensation than to increase the number of loans SBA must write off. The
Administration should also consider requesting additional funding for the
now obvious shortage of liquidation staff.



    Further, there is a question as to whether the SBA even has the right
to change the maximum compensation rates that were published in the final
rule on April 12, 2007, without putting the change out for public comment.
We understand from conversations with staff that the SBA is relying upon a
provision in the Administrative Procedures Act to take the action in
question. Before publishing this notice, please submit to the Committee an
explanation, in detail, with statutory and regulatory references, of what
legal justification the Agency is relying upon to suspend the notice and
comment procedure its proposed action would normally require.



    Last, my staff sought information from the SBA regarding this issue a
month ago, on February 29th, 2008. The Agency never responded until it
requested a briefing for yesterday, in which the Committee was informed
that the Agency would publish the notice in less than 48 hours. Given the
Agency's silence for a month and then the very short notice, I would hope
that you would delay publication of the changed and suspended compensation
fees, at the very least until the Committee receives the Agency's legal
justification for moving forward.



    Sincerely,

    John F. Kerry

    Chairman

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