Report cites lax documentation for post-9/11 loans

WASHINGTON - A federal loan program for companies hurt by the terrorist attacks of Sept. 11, 2001, provided no justification for nearly three-quarters of its loans studied by Senate investigators, according to a report to be released today.

Congress created the program that provided $3.7 billion in low-interest loans to businesses nationwide, rather than just near where planes crashed into the World Trade Center and Pentagon.

But the result was that far-flung recipients ranged from $420,000 for a Florida dry cleaner to $583,500 for a Las Vegas tanning salon.

"It was an accumulation of failures," said Sen. Olympia Snowe, R-Maine and chairman of the Small Business Committee that prepared the report. "It is regrettable and I think we have to get to the bottom of it and make sure it does not repeat itself."

The 24-page report echoed and amplified previous results last year from the agency's inspector general. But the report also comes as Congress debates whether to double the size of a loan program for victims of Hurricane Katrina.

The goal of the Small Business Administration's Supplemental Terrorist Activity Relief program was to help businesses with fewer than 500 workers or less than $31 million in annual revenue weather the economic downturn expected as fewer customers bought things or traveled after the hijackings.

Congress authorized the program in January 2002 and distributed $3.7 billion through 7,058 loans.

Lawmakers of both parties Ð Sen. John Kerry, D-Mass., and Sen. Christopher Bond, R-Mo. Ð argued for broad national lending.

The agency granted lenders discretion when determining whether a business was "adversely affected" by the terrorist attacks. Documentation was supposed to be included in the applicant's file, but not necessarily submitted to the SBA.

"As a result, STAR loans may have been issued to recipients whose business operations were unaffected by 9/11," the report said.

One reason for steering borrowers into the program was that lenders paid agency fees of 0.25 percent for STAR loans, compared to 0.5 percent for regular small-business loans. Congressional investigators examined 66 files and found adequate documentation of harm from terrorist attacks in only 26 percent. The remaining 74 percent contained questionable, inadequate or no documentation.

The results were worse, with 85 percent lacking documentation, in an inspector general's report Dec. 23, 2005, that the committee included in its appendix. Of the 59 loans studied, 50 lacked documentation or justification.

In one case, the owner of a New Jersey food mart 50 miles from the World Trade Center complained that the economic downturn forced him to seek a $770,000 loan. But a four-month closure for renovations Ð before the attacks Ð occurred under a previous owner, so auditors said no terrorism justification existed.

In another case, a Texas auto-parts store argued for a $541,600 loan due to a shutdown because of lower sales after the terrorist attacks. But the shutdown occurred under a previous owner.

Another inspector-general's report dated Jan. 11, 2005, found the agency was slow to send letters demanding payment from delinquent borrowers. In 37 delinquent loans studied, officials sent letters to 13 of 17 borrowers who should have received them. The loans had been delinquent an average of 279 days.

Nobody was denied a loan for lack of justification because only $3.7 billion was distributed from $4.5 billion available, according to Michael Hager, the agency's deputy administrator for capital access. He argued that the agency interpreted its mandate broadly, in order to avoid an economic slowdown.

"What we did during those dark days after Sept. 11, 2001, was play very small roles in getting assistance to America's small businesses in an effort to try to keep our economy from faltering," Hager told auditors. "At the time, and still today, we believe that what we did was fully in keeping with the intent of Congress and the desires of the administration."

Hector Barreto, the previous SBA administrator in charge during the loan program, acknowledged in a memo to Snowe that the agency should have been more diligent in overseeing the lending files, but denied any widespread misuse of the program. "However, while not excusing the lack of clear documentation, the (office of inspector general) still found no evidence of ineligible lending," Barreto said.

Snowe described the problems as a failure of Congress to set strict guidelines for who should receive loans, the administration to delineate specific standards and lenders to require documentation.

"It was extremely disappointing because obviously this was a time of great need and stress in America," said Snowe, who served on the oversight committee when the program was created, and became chairman in 2003. "This program was implemented in a lax fashion without any verified documentation."

Congress is debating whether to boost a $523 million disaster-loan program for victims of Hurricane Katrina with an additional $595 million.

"There's no question that we have to look at the issues and look at ways to solve these particular problems," Snowe said.

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