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[Congressional Record Volume 154, Number 160 (Thursday, October 2, 2008)]
[Senate]
[Pages S10468-S10470]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

                  REPORT OF THE SBA INSPECTOR GENERAL

  Mr. KERRY. Mr. President, on behalf of Senator Snowe and myself, I 
rise today to express our concern that the Small Business 
Administration has taken steps to hide from public view the details of 
one of the largest lending scandals in that agency's history. As 
chairman and ranking member of the Senate Committee on Small Business 
and Entrepreneurship, we take our oversight role of the SBA seriously, 
and we believe that transparency is vital to a well-functioning 
government.
  On July 11, 2007, the SBA's Office of Inspector General issued a 
report on the agency's oversight of Business Loan Center, LLC, 
otherwise known as BLX. That report was not made publicly available 
until October of the same year, in a heavily redacted form. BLX was one 
of SBA's largest 7(a) lenders when the $76 million in fraudulent loans 
it made was exposed in January 2007. An OIG investigation regarding 
allegations of the fraudulent loans helped lead to the arrest of a BLX 
executive vice president and 18 other individuals, who were not BLX 
employees. OIG followed up the investigation by releasing the report on 
SBA's oversight of BLX. Despite the obvious need for more, not less, 
transparency of SBA's oversight activities, when the report was made 
publicly available in October of that year, it was heavily redacted and 
virtually useless to the public in trying to determine what the SBA is 
doing to address the multimillion dollar loan fraud that took place 
under its watch.
  To further underscore the damage that took place, it is important to 
note that, in the time that has elapsed since the report was issued, 
BLX--now called Ciena Capital has declared bankruptcy. According to the 
company, it will continue to manage its assets as a ``debtor in 
possession'' under the jurisdiction of the bankruptcy court. However, 
we are still concerned that the former BLX will not fulfill its 
obligations to the SBA and the American taxpayer, in turn.
  Even so, as detailed in hearings on SBA lender oversight, our 
committee remains very concerned by the number and breadth of the 
redactions of the BLX report. At the lender oversight hearing on 
November 13, 2007, then SBA Administrator Steven Preston promised to 
work with the committee to make more of the report publicly available. 
To date, there has been no agreement on a meaningful release of 
redacted material.
  In the context of conducting oversight, it has become apparent to the 
committee that the OIG did not exercise independent authority on what 
was redacted and instead let the agency it was investigating dictate 
that large sections of the report be redacted. This is contrary to the 
usual process that occurs with SBA OIG reports. Of the 15 reports that 
the OIG has released this year, there have been none with a volume of 
redactions even close to those in the BLX report. Of the 30 reports OIG 
issued in 2007, only 3 reports have a comparable amount of text 
redacted and those are all reports regarding agency information 
security.
  In this statement, I will bring to light the OIG's first three 
recommendations to the SBA and a summary of the SBA's comments on the 
recommendations, which were redacted in the publicly released report. 
There is nothing in this material that should have been withheld. In 
fact, on August 3, 2008, the New York Times reported in an article that 
revealed the substance of the three redacted recommendations that 
``With the American taxpayer assuming responsibility for all manner of 
bad loans made by reckless lenders, it's puzzling that a scathing 2007 
audit of the Small Business Administration's

[[Page S10469]]

oversight of one of its top private lenders remains hidden from view.'' 
Additionally, even if there had been a reason to withhold this 
information, the public interest would outweigh that. Given the crisis 
in the credit market, it is more important than ever that the public 
have confidence that SBA can handle its lender oversight 
responsibilities.
  The redacted portion is a recommendation on how to go forward in 
improving SBA's lender oversight and is illustrative of a process that 
broke down in this instance and needlessly made information 
confidential without due consideration.
  According to both the SBA's Office of General Counsel and the OIG, 
the SBA followed a preemptive Freedom of Information Act process when 
preparing for the public release of the BLX report. At its heart, the 
FOIA is a disclosure statute, with certain outlined exemptions. Indeed, 
although FOIA responsiveness has been problematic at best under the 
Bush administration, it has at least recognized FOIA's importance on 
paper as a tool to increase accountability of Government. As is stated 
in former Attorney General John Ashcroft's FOIA memo of October 12, 
2001, which set the policy standard for FOIA compliance for the 
Administration: ``It is only through a well-informed citizenry that the 
leaders of our nation remain accountable to the governed and the 
American people can be assured that neither fraud nor government waste 
is concealed.''
  Unfortunately, discussions with the OIG and OGC make clear that 
neither office fully evaluated each redaction with the above-mentioned 
guidance in mind. The OIG faced a large number of requested redactions 
from the OGC and, rather than challenge the OGC on them, simply decided 
to release the report with SBA's huge number of requested redactions 
intact. The OGC expressed surprise the OIG did not push back more on 
their requested redactions and seemed to have clearly acted on the 
instinct to ask for more redactions they expected to have made. The end 
result was a report that did nothing to increase transparency of 
Government and was virtually useless to the public.
  As I mentioned earlier, the treatment of this report is in stark 
contrast to that of other OIG reports, which tend to have few 
redactions. Indeed, the followup report on lender oversight that was 
released by OIG in May 2008 had comparatively few redactions. However, 
in the BLX report, the redactions were so severe that the OIG felt 
compelled to write a summary as a cover page because the extensive 
redactions made the report difficult to understand. Without question, 
the nature of this report also contributed to the number of redactions, 
since it concentrated on SBA's oversight of one company. Even so, a 
more thorough process would have undoubtedly resulted in far fewer 
redactions being made to the public version of this report. That said, 
Senator Snowe and I would like to see the OIG write reports in a manner 
that allows for the maximum availability of information for the public 
whenever possible.
  The redacted passages that the committee is making public, in 
accordance with both Senate and committee rules, are those that the 
committee believes will be the most useful to the public and that were 
redacted under privileges that, given the passages themselves, are 
outweighed by the public good that can be gained by their disclosure. 
The SBA asserted that the first three recommendations and the summary 
paragraph in its response should be redacted due to the ``deliberative 
process privilege,'' and for the first recommendation they also 
included the bank examination FOIA exemption and privilege. The 
deliberative process privilege is exemption (b)(5) of the FOIA and 
covers ``inter-agency or intra-agency memorandums or letters which 
would not be available by law to a party other than an agency in 
litigation with the agency.'' It traditionally covers the advice, 
recommendations and subjective evaluation that agency staff make in the 
performance of their duties. In this case, the public can see from the 
release of this information how the SBA and its OIG were interacting in 
the investigation of SBA's failed oversight of BLX, a lender making 
Government-backed loans. Regarding the ``bank examination'' FOIA 
exemption (b)(8) and privilege claim, that exemption only pertained to 
a portion of recommendation No. 1, for which SBA indicated it believed 
it could approve the release of an unredacted version.
  SBA claims that the deliberative process privilege exemption applies 
because the OIG is a part of the agency. However, we believe that 
applying the exemption to the OIG--which is an independent office 
created within the SBA by law to conduct and supervise audits, 
inspections, and investigations relating to SBA programs and supporting 
operations; and to detect and prevent waste, fraud, and abuse--in the 
blanket manner SBA has done has the potential to render the OIG 
useless. If the deliberative process privilege exemption is as broad as 
SBA asserts, then the recommendations in the reports that preceded this 
one, as well as the two recommendations in the BLX report it did not 
redact, should have also been redacted. If that were the case, there 
would be virtually no use in having an OIG.
  We are very concerned that the SBA's actions in redacting key 
information and recommendations in the BLX could undermine the future 
authority and efficacy of the OIG. The OIG is an independent office 
created within the SBA by law to conduct and supervise audits, 
inspections, and investigations relating to SBA programs and supporting 
operations; to detect and prevent waste, fraud, and abuse; and to 
promote economy, efficiency, and effectiveness in the administration 
and management of SBA programs. According to the SBA Web site, the SBA 
inspector general ``keeps the SBA Administrator and the Congress fully 
informed of any problems, recommends corrective actions, and monitors 
progress in the implementation of such actions.''
  To resolve this situation, the committee has engaged in staff 
discussions with OIG and OGC with the intention of coming to an 
agreement with the OGC on additional portions of the report that could 
be released. However, OGC has simply not been responsive. Even when 
made aware of the committee's concern about the adequacy of its 
response, in subsequent followup by the committee, OGC did not address 
critical issues and did not agree to make any new releases of 
information. It also continued asserting Executive Privilege which, as 
the committee has previously pointed out, must be, and has not been, 
asserted by the President personally.
  Therefore, to put an end to this matter, the committee is putting on 
the record some information that was withheld to serve as an example of 
a process gone wrong that prevented accountability in Government by 
keeping from the public information about the oversight capabilities of 
an agency that, though comparatively small, can have a huge impact on 
our economy. BLX made over $76 million in fraudulent Government-backed 
loans despite SBA's oversight of their lending activities. More 
transparency, not less, is called for to explain to the American people 
what happened and how it will be prevented in the future.
  Without objection, I ask to have the redacted portion of the OIG's 
recommendations printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

       We recommend that the Associate Administrator for Capital 
     Access take further action to mitigate the risk posed by BLX 
     and to promote consistent and uniform enforcement actions by:
       1. Setting specific performance goals and target dates for 
     BLX to demonstrate improvement. At a minimum, the goals 
     should require BLX to obtain a risk rating of at least ``3.''
       2. Reducing the guaranty percentages for all new loans 
     originated by BLX, until such time as BLX has demonstrated 
     the required level of performance.
       3. Suspending BLX's delegated lending authorities until the 
     goals in recommendation one are met.

  The SBA's comments on those recommendations were completely redacted. 
These sentences are from the first paragraph of the section that 
summarizes the SBA's response.

       SBA management partially agreed with recommendation 1, 
     neither agreed nor disagreed with recommendation 2, provided 
     a conflicting and unclear response to recommendation 4, and 
     disagreed with recommendations 3 and 5. Management noted that 
     it recently created a new Office of Credit Risk Management 
     (OCRM) out of the

[[Page S10470]]

     former OLO, which is now responsible for lender oversight. ).

  While the former BLX's bankruptcy makes the contents of the report 
moot to that particular company, we want to set the record straight on 
how this matter was handled so that, hopefully, SBA will handle such 
reports with more openness in the future.
  Thank you, Mr. President.

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