A Closer Eye on Loan Fraud : SBA modifies its procedures as six are accused of falsifying applications

This week’s federal grand jury indictments of six people on charges of falsifying applications for Small Business Administration loans were welcome evidence that the SBA has recognized problems and is moving to correct them.

Whatever the outcome of court action against those charged, the SBA already has revamped some procedures. All six defendants are or were residents of Southern California, three of them from Orange County, and investigators said fraudulent filings in this region are more widespread than elsewhere. So tax statements filed by Southern California loan applicants are now cross-checked with the statements they file with the Internal Revenue Service. The agency is considering making that practice nationwide, because the problem is spreading. That would be smart.

Also under investigation are loan packagers, who gather the various forms needed to apply to the SBA and help applicants fill them out. A particularly disturbing aspect of the indictments was that all the defendants are originally from Southeast Asia. SBA officials said that some packagers specialize in customers from immigrant communities, who may have problems with English and be unfamiliar with lending practices in this country. That could make them easy prey for the unscrupulous, though SBA officials said most packagers are legitimate.

The agency said the six people indicted used false information to obtain nearly $1 million worth of government-backed loans, all of which went into default. The recession and the savings and loan crisis have made it more difficult to get normal bank loans in recent years, making the SBA guarantees especially important to small borrowers.


When an SBA-backed loan goes into default, it is of course the taxpayers who ultimately pay. The SBA thus must be vigilant, while also taking care not to overburden those seeking help, especially in emergencies like the Northridge earthquake.

Loan packagers are not regulated now; if there turns out to be widespread abuse in their ranks, that will have to change.