Dust and debris are beginning to clear from recent volatility in the subprime MBS market, as recent pricings attest. The mood seems better, and although participants do not think the market has reached bottom, they say conditions have stopped deteriorating, for the moment.

In that case, some market participants say, maybe now is the time to bring some long-overdue tidying up to specialty lender Business Loan Express. The routine issuer is polishing off an agreement with the Small Business Administration (SBA), aimed at increasing oversight of some of BLX's operations and halting fraudulent lending practices.

Under BLX's agreement with the SBA, loans originated by BLX and guaranteed by the SBA will undergo an independent review by a major accounting firm before they can be securitized. BLX also agreed to repay the SBA for known losses on loans associated with the federal fraud allegations, about $10 million. The agreement follows a federal indictment of a former BLX executive vice president, Patrick Harrington, and about 18 others for fraudulence in making SBA-guaranteed loans.

So just as the company is planning a $400 million midspring deal secured by conventional small business loans, its harshest critics say that a brisk clean-out is in order, rather than a cursory attempt to shove everything behind a closet door.

The potential for fraud still exists at BLX, they say. That could result in much bigger losses, and could involve its conventional loans, too. Why, they ask, does BLX retain its Preferred Lenders Program Certification from the SBA? The designation gives lenders full authority to approve SBA-guaranteed loans without first sending application packages to the SBA, according to the agency. Market participants are also apprehensive about BLX executive Matthew McGee, from its Richmond, Va. office. McGee was convicted on federal securities charges, but after serving his sentence, he ended up working for BLX through an agreement with the SBA that isolated him from SBA lending. During his tenure, the company became the target of a federal lawsuit alleging fraud in originating shrimp boat loans in the Gulf Coast region.

Fitch Ratings recently downgraded notes from the Business Loan Express 2001-1 series, while Moody's Investors Service still has the bonds under ratings watch, because underlying loans that were more than 90 days delinquent made up 20.49% of the outstanding pool balance. Those delinquencies refer to current securitized loan pools but do not reflect performance of the company's historical loan pool, Ted Horan, BLX's director of capital markets, said. Of the 29 loans associated with the indictments, nine were securitized, and those balances were distributed throughout five deals.

"BLX has a strong performance track record as a securitizer of small business loans," said Tom Becker, spokesman for BLX.

BLX did set up stricter lending practices for its SBA loans, but that was not done in time to prevent Harrington's alleged fraud. This time around, critics say, BLX should make better use of its time and get its house in order before chaos sets in again.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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