Government must stop direct lending, says GOP Rep. Luetkemeyer

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Rep. Blaine Luetkemeyer (R-MO) speaks as Secretary of Health and Human Services Alex Azar testifies before the House Select Subcommittee on the Coronavirus Crisis October 2, 2020 on Capitol Hill in Washington, DC.

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In the 1970s, an agency within the US Department of Agriculture made thousands of direct loans to purchase farmland. The government’s easy money and lack of due diligence led to a massive increase in property values. It eventually ended in disaster either $13.5 billion in outstanding loans and several farms confiscated by the agency.

Then, in 1998, the Small Business Administration also learned a hard lesson about the government’s inability to lend responsibly. 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 put off by a history of failure or a complete lack of expertise, the SBA has provided direct loans through the Economic Injury Disaster Loan (EIDL) program in recent years. And to the shock of absolutely no one, the program was riddled with fraud.

As the top Republican on the House Small Business Committee, I have kept a close eye on EIDL and have continually called for investigations into this flawed program.

That’s what the SBA Inspector General found out recently There was $78.1 billion in potentially fraudulent EIDL activity. As of September 16, the SBA has disbursed approximately $290 billion in Covid EIDL loans and grants. This corresponds to a fraud rate of almost 30%. It is unacceptable and further proves the inability of the federal government to run a direct lending program with any level of competency.

Much like Congressional Democrats and the Biden administration responding to inflation with more spending, their response to decades of failed direct lending programs is to create more. The multi-trillion dollar reconciliation bill being moved through the House of Representatives demands $4.5 billion in direct loans through the 7(a) loan program. Using EIDL’s fraud figures, we can estimate that around $1.35 billion is leaked to bad actors.

In addition, the Democrats now put the government in direct competition with the country’s smallest financial institutions.

As 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 depositories, and credit unions worked day and night to help millions of small business owners who were struggling with every ounce of their energy to survive and sustain their workers.

Now those same institutions have a new, very powerful competitor: the federal government.

To be clear, we are not talking about multinational banks with unlimited resources and teams of lawyers and lobbyists. We talk about the community banks that serve small towns in rural America and minority banks that disproportionately serve minorities and customers in underserved areas. They’re the cornerstone of their local economy, but they could soon find themselves in the crosshairs of a government that doesn’t seem to abide by its own regulations and has absolutely no problem throwing away taxpayers’ money on the semblance of “public services.”

It is high time that we put an end to direct government lending. As a senior member of the Small Business Committee, I’m working to do just that. Along with my Republican colleagues on the committee, we are drafting legislation to reform the SBA, and one key aspect is removing direct lending powers from them.

Many loan guarantee schemes have been successful, particularly for small and disadvantaged businesses. That’s where government’s niche should be. The private sector and industry experts will do the rest.

History has shown too often that the failings of government end up with the American people paying the price. It has to stop.

Rep. Blaine Luetkemeyer is a Republican representing Missouri’s 3rd congressional district since 2009. He is the senior member of the House Small Business Committee and the Consumer Protection & Financial Institutions Subcommittee.

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