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Audit: Many ineligible businesses got 9/11 loans

Report finds Small Business Administration granted loans with no basis

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Small Business Administration
September 11 attacks

WASHINGTON (CNN) -- Nearly $2 million for a doctor's office in Washington state; $725,000 to buy land in Florida, and $371,500 to buy land in Oregon are a few examples of questionable federal loans granted for businesses hurt by the 9/11 attacks, according to an official audit.

Federal loans meant for businesses "adversely affected" by the September 11, 2001, terror attacks on the United States often went to businesses barely touched by the tragedy or not at all, according to an audit of the loan program by the Small Business Administration's inspector general.

The inspector general sampled 59 of 7,058 loans disbursed under the SBA's Supplemental Terrorist Activity Relief (STAR) program and found that 85 percent of the loans lacked justifications or had justifications that were less than convincing.

"Due to initial limited lender participation in originating STAR loans, SBA undertook efforts to promote the program by advising lenders that virtually any small business qualified and assuring them that SBA would not second-guess their justifications," the report, by Inspector General Robert Seabrooks, said. (Read the full report -- PDFexternal link)

25 recipients said 9/11 didn't affect them

As a result, Seabrooks found, many of the loan recipients did not know they'd been given a STAR loan -- and 25 of 42 borrowers interviewed told interviewers they had not been "adversely affected by the terrorist attacks." (View a report on which businesses received STAR loans -- 1:05)

For example, a restaurant in Florida received $725,000 and a doctor's office in Washington state received nearly $2 million -- the maximum loan amount -- each for land purchase and improvements.

The report cited the Coleman Report, a newsletter that reports on disaster loan programs, quoting a top SBA official at a 2002 conference for lenders.

"We have an expansive definition of economic disadvantage," the newsletter quoted the official. "As a matter of fact, we believe that every business can probably demonstrate some degree of economic disadvantage as a result of the terrorist attacks.

"We so strongly believe this -- we have a lunch meeting every Tuesday -- we've offered any lender who has a loan that can't find any basis for it to be a STAR loan to e-mail us the facts of the situation and we'll spend our lunch hour looking at it for you."

Businesses were eligible for the program from January 11, 2002, until January 10, 2003.

Broad definition of 'adversely affected'

Four days after Friday's release of the report on the STAR program, the SBA put out a press release downplaying problems.

"The inspector general also found that loans made under STAR had a lower default rate than the regular guaranteed loans in the portfolio and that qualified borrowers were not precluded from receiving STAR loans due to a lack of funds," the SBA release said.

It said money was left over at the end of the program's eligibility period, money Congress then authorized SBA to transfer to its regular Disaster Loan program.

In his response to the report, Associate Deputy Director Michael Hager said the administration stood by its broad definition of the phrase "adversely affected" and the decisions of the lenders as to what businesses qualified.

"SBA believes that most, if not all, STAR loan program borrowers were eligible for the STAR loan program," he wrote.

Hager acknowledged that "more rigorous controls" could be put in place but he insisted that "SBA did provide clear guidance as to the breadth and depth of situations eligible" for the loans.

Justifications problematic

Some of the lenders, however, were not clear about why they put a particular borrower into a STAR loan. In five of the 59 loans, no justification was given; in three others the justification given was "Borrower has experienced a business downturn." In 21 cases, the justification given was contradictory to the facts.

For example, a $770,000 STAR loan allowed a restaurant in New Jersey to purchase a second location although the borrower said he only experienced a slight dip in business after the attacks and no long-term problems at all.

A real estate appraiser in Oregon received $371,500 to buy land although his financial reports "showed a growing business and an 87 percent increase in revenues," and the borrower said he experienced no adverse affects from the terror attacks.

The lender, however, wrote that the slowdown in the economy had a temporary negative affect on the business as fewer borrowers applied for real estate loans and projects were canceled.

The inspector general recommended that in the future, any similar program should require applicants to justify how their business was harmed and require lenders to provide documentation for the justification.

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