In the 1970s, an agency within the U.S. Department of Agriculture agency made thousands of direct loans for the purchase of farmland. The easy money and the government's lack of due diligence led to a massive increase in land values. It ultimately ended in disaster with $13.5 billion in unpaid loans and several farms seized by the agency.
Then, in 1998, the Small Business Administration also learned a hard lesson about government's inability to responsibly lend money. The agency had to stop issuing direct business loans because the subsidy rate – the cost to taxpayers – was 10 to 15 times higher than the subsidy rate for its loan guarantee programs.
Not to be deterred by a history of failure or a complete lack of expertise, the SBA has over the last several years provided direct loans through the Economic Injury Disaster Loan (EIDL) program. And to the shock of absolutely no one, the program has been fraught with fraud.
As the top Republican on the House Small Business Committee, I have been keeping a close eye on EIDL and have continuously called for investigations into this flawed program.
Recently, the SBA Inspector General found that there has been $78.1 billion in potentially fraudulent EIDL activity. As of Sept. 16, the SBA has disbursed approximately $290 billion in Covid EIDL loans and grants. This equates to a fraud rate of nearly 30%. It is unacceptable, and it further proves the point that the federal government is incapable of running a direct lending program with any level of competency.
Much like congressional Democrats and the Biden administration answering inflation with more spending, their reaction to decades of failed direct lending programs is to create more. The multitrillion-dollar reconciliation bill moving through the House calls for $4.5 billion for direct loans through the 7(a) Loan Program. Using EIDL's fraud numbers, we can expect about $1.35 billion of that to be handed over to bad actors.
On top of that, Democrats are now putting the government in direct competition with the smallest financial institutions in the country.
When Covid shut down the country, Congress created the Paycheck Protection Program and turned to financial institutions to help save the economy. Banks, community development financial institutions, minority deposit institutions and credit unions worked day and night to assist millions of small business owners who were fighting with every ounce of their energy to survive and keep their workers employed.
Now those same institutions have a new, very powerful competitor: the federal government.
To be clear, we're not talking about multinational banks with unlimited resources and teams of lawyers and lobbyists. We're talking about the community banks serving small towns in rural America and minority depository intuitions who disproportionately serve minorities and customers in underserved areas. They are the cornerstones of their local economies, but they could soon be in the crosshairs of a government that doesn't seem to follow its own regulations and has absolutely no problem with throwing taxpayer dollars away for the appearance of "public service."
It is long past time that we put an end to government direct lending. As the ranking member of the Small Business Committee, I am working on doing just that. Along with my Republican colleagues on the committee we are drafting legislation to reform the SBA and a key aspect is stripping away their direct lending authority.
Many loan guarantee programs have been successful, particularly for small and disadvantaged businesses. That is where the government's niche should be. The private sector and industry experts will handle the rest.
History has shown too many times that the government's shortcomings end with American citizens paying the price. It needs to stop.
Rep. Blaine Luetkemeyer is a Republican who has represented Missouri's 3rd congressional district since 2009. He is the ranking member of the House Small Business Committee and Consumer Protection & Financial Institutions Subcommittee.
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October 01, 2021 at 07:00PM
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Op-ed: It's time for the government to get out of the direct lending business - CNBC
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