Small Business Loan Process Draws Crooks : Crime: Some packagers use phony tax returns, charge high prices for a complicated job, federal authorities say.
This week’s arrest of six people indicted for allegedly making false statements on their income tax forms to obtain Small Business Administration loans has shed new light on the fast-growing but unregulated business of loan packagers.
Many loan packagers--independent consultants who help put together SBA applications for a fee--are legitimate and perform a useful service, officials say. But some unscrupulous operators are being blamed by the agency for many fraudulent loan applications that have led to a rash of SBA loan defaults--particularly in Southern California.
“The majority of the problems we have with (phony) tax returns are with loan packagers,” said Steve Marica, assistant inspector general for the SBA in Washington, whose probe of loan packagers and fraud in California has extended to other states.
The six indicted, including two couples, are Giam Buu Truong of Fountain Valley; Long Chan Quach, formerly of Cerritos and now of Pinellas Park, Fla.; Meng Hong Phou and Lim Chou of Colton, Calif., and Harris Hoang and Linh Diep of Irvine. All except Quach were arrested and arraigned on Monday and have been released on bond.
SBA investigators say that a slender, middle-aged man from Westminster put together SBA applications on behalf of the six defendants, none of whom have been available for comment. The six borrowed a total of almost $1 million worth of government-backed loans. SBA investigators now say that false tax returns--with inflated income figures and false invoices--were used to apply for the loans, all of which ultimately went into default.
The identity of the loan packager has not been disclosed because he is still under investigation, allegedly having had a hand in a dozen additional SBA-guaranteed loans that went sour. But officials say he is just one of eight loan packagers on the West Coast who are at the center of the SBA’s three-year investigation involving more than 100 troubled loans.
SBA investigators say they expect some of these packagers, as well as other borrowers who allegedly participated in filing fraudulent applications, to be prosecuted soon.
No one knows how many packagers of SBA loans operate in California or elsewhere, because the industry is unregulated and anyone can do it. In fact, accountants, financial planners, unemployed bank employees and even real estate brokers looking to supplement their incomes have long helped potential borrowers assemble parts or all of the voluminous materials that must accompany an SBA application. The SBA estimates it takes about 21 hours, on average, to complete the task.
But in the past few years, as the volume of SBA loans has surged and conventional lending has dwindled, the number of people specializing in packaging SBA loans has swelled--and so have the allegations of fraud.
Investigators believe fraud related to loan packagers will likely cost taxpayers and SBA-participating banks tens of millions of dollars. The problem is acute in Southern California because these packagers have also tapped into federal disaster loans after the riot and earthquake.
Many of the packagers under investigation are said to have drawn customers from immigrant communities where some business people have language barriers and are unfamiliar with U.S. lending practices and thus are likely to seek out such consultants. All six of the people indicted this week, and the Westminster loan packager, are Southeast Asians.
“This has been a more extensive problem in ethnic communities,” said Deborah Jones, a special agent at the SBA inspector general’s office in Los Angeles, which is conducting the investigation. Jones said most of the other packagers who are under scrutiny also worked in immigrant communities.
The troubles with some loan packagers have cast a cloud on the legitimate ones.
Steve Stultz, a Newport Beach consultant who has been packaging SBA loans for 20 years, says he knows of nearly two dozen people in Southern California whose main business is packaging SBA loans. Stultz, who does most of his work on referrals from banks, says he put together 120 such applications last year, charging on average a flat fee of between $1,000 and $2,000 for each.
By contrast, the packager who aided the six business people recently indicted allegedly received a 3% commission on the loans his clients received--or almost $30,000.
Bankers and SBA officials agree there is a need for loan packaging consultants because people often have trouble putting together the applications on their own. They “have done a lot more good than bad,” said Steve Mattern, senior vice president of Truckee River Bank in Northern California, one of the state’s largest SBA lenders.
Mattern is a member of a national task force, which includes SBA officials, that is studying whether to establish standards or regulations for loan packagers. Mattern believes some standards are needed, but he also says banks and other commercial lenders themselves need to monitor the applications better.
“I’m in the driver’s seat,” said Mattern. “I’m not captive to any packager.”
Since the SBA began its investigation in 1991, Truckee and other banks in California have been cross-checking tax returns filed by SBA applicants against filings with the Internal Revenue Service. That step, which is likely to be taken on a nationwide basis as an SBA requirement, has cut down on the number of false tax returns submitted, bank officials say.
But even that has not completely stopped the problem.
David Scherer, senior vice president of the Bank of Yorba Linda, one of Orange County’s largest SBA lenders, said his bank has been cross-checking all of the SBA applications with the IRS for about two years.
Bank of Yorba Linda does not deal much with applications packaged by outside consultants, he said, because its bank employees do the packaging work for applicants for a flat fee of $600. Even so, in the last 12 months, out of about 65 completed SBA applications, two or three of them contained false tax return information, Scherer said.