posted on: Tuesday, February 12, 2008

By Gary R. Snyder

For more than a year, there have been suggestions that a governmental agency for charities along the lines of the Small Business Administration should be established. For example, two of the sectors leaders, Steve Gunderson of the Council on Foundations at the National Association of State Charity Officials conference and Diana Aviv of the Independent Sector before Congress, have put forth such a proposal. Others have followed suit.

I was intrigued with the suggestion of the leaders. In the face of major headwinds facing the philanthropic world, I thought any change might be helpful. I, therefore, took a look at how an SBA-like agency may benefit the charitable sector.

What is the Small Business Administration?

The U.S. Small Business Administration (SBA) website says that it ‘was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation’.

SBA is the federal agency that: 1. guarantees bank-originated small-business loans, 2. conducts lending in disasters, and 3. ensures small businesses get their cut of government contracts.

How Efficient is the SBA?

The SBA is best known as one of the organizations that botched the federal government's response to the 2005 Gulf Coast hurricanes. Much of the trouble at the SBA originates in a back office that dates to the Sputnik era. It has been on the on the verge of closing for the last 20 of its 54 years.

For good reason…

SBA head Steven Preston has his challenges in transforming the organizational mind-set into one that it is accountable. In just a year and a half, he has tried to refocus the agency on the customer, overhaul processes, set controls, and initiate audits.1

How Effective Is The SBA?

Complicating the tasks, the agency's workforce has been slashed by 27 percent since 2002 even as its workload — measured by number of loans — has grown by 93 percent.
Constraints in the agency's disaster-credit management system and delays in staff hiring meant that homeowner and small-business applicants had to wait an average of 71 days for decisions on loans, instead of the standard 14 to 18 days. The SBA average-size 7(a) loan has fallen more than 39 percent since 2002 even in spite of some this nation’s largest catastrophes.

Last October, Preston disclosed that there were 1,200 backlogged requests for purchases of SBA loans at the agency's Herndon, Virginia-based processing center.

No wonder that it is well known as one of the top federal agencies with the lowest employee morale.

Confidence at the SBA

A backlog highlighted a conflict in the organization. Drastically shrinking staff from 200 to 40 over the previous three years with grave consequences. The SBA had consolidated the loan-purchasing operations in Herndon, removing them from local district offices.

The business-loan operation runs on a Cobol-based system and mainframe hardware, parts of which are more than 50 years old. Modernization of the system will extend to 2012 and cost more than $100 million.

"You have millions of contract actions being put in computer systems every year and coded in various ways by clerks around the country. There hasn't been enough discipline or oversight of that process," says Preston. "A lot of the data in the Federal Procurement Data System [FPDS] was wrong. Large businesses were miscoded."i

In 2007, SBA officials reviewed 11 million contract actions from fiscal years 2005 and 2006. They found about $5 billion in contracts miscoded.

Competence at the SBA

In a five year period, the SBA Inspector General has issued more than 60 reports on general lender oversight issues and SBA’s procedures related to justified payments of guarantees on defaulted SBA loans.

In one instance, the SBA’s Inspector General identified that the SBA cancelled 2/3 of the loans without any prior notification to the borrowers. “This was contrary to SBA’s own procedure that states: ‘Before we initiate an action to cancel all or any funds, we must mail a letter giving 14 calendar days notice of the pending cancellation’.”

In the same report, SBA estimated it gave $368 million in loan proceeds on over 3,000 secured loans without even getting liens on property used as collateral or completing the necessary filings.

About 32 percent of the Gulf Coast Hurricane loans-over 21,000 loans, totaling $1.5 billion-were made to applicants who lacked the ability to repay them.

The Small Business Administration's IG also reported that lenders who doled out billions of dollars in such loans failed - 85 percent of the time - to document that recipients were actually hurt by the terrorism attacks and therefore eligible for the federal aid.

Honesty at the SBA

One senator accused the SBA of "fostering an atmosphere of fraud and abuse in federal small business contracting programs.''

After a $76 million fraud involving SBA-guaranteed loans was uncovered last year, Congress began pressing the agency to reveal its default rate. In response, Preston notes that the agency has a tremendous amount of data on delinquencies, liquidations, and charge-offs, but "we have a lot of work to do on the underlying operational processes."1

Former SBA Administrator Hector Baretto told the House Committee on Small Business in 2005 the billions in abuses were the result of "data entry errors.'' But later, SBA's own Inspector General, according to a report out of American Small Business League's office in Petaluma, Calif., released three separate damaging reports on the subject. The reports found large firms were intentionally misrepresenting themselves as small businesses to illegally receive federal small business contracts.

Enforcement at the SBA

Misrepresenting a large firm as a small business is a common occurrence and is a felony under federal law with a 10-year prison term and a $500,000 fine. The SBA, as of 2005, has never taken any action against any firm for fraudulently claiming to be a small business.


Is the Small Business Administration an agency nonprofits want to mirror in its efforts to partner with the federal government? It seems preposterous that the leaders of the philanthropic world would endorse such a proposition.

Fraud and incompetence are not attributes with which the charitable world should want to associate. Philanthropy needs to show more accountability and transparency than is evidenced by the SBA. If it doesn’t it will be putting our already compromised nonprofit sector at greater risk.



Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: http://garyrsnyder.com, phone: 248.324.3700.