Watchdog: SBA Failed on Sept. 11 Relief Loans

The Small Business Administration failed to ensure that businesses receiving government-backed terrorism relief loans were actually hurt by the Sept. 11, 2001, attacks, the agency's internal watchdog told Congress on Thursday.

Eric Thorson, the SBA's inspector general, said in prepared testimony that his office couldn't determine in 85 percent of the loan cases it sampled whether the businesses qualified for some of the billions of dollars handed out after the terrorist attacks on New York and Washington.

And only two of the 42 borrowers interviewed were even aware they had obtained a loan that was supposed to help victims of Sept. 11, Thorson said.

"We concluded that, in many cases, funds appropriated for guarantees on loans to small businesses adversely affected by the terrorist attacks may not have been used for that purpose," he told the House Subcommittee on Management, Integration and Oversight hearing in Washington.

Thorson's testimony and an earlier report by his office substantiate key findings of an Associated Press investigation that found similar problems with the SBA's reduced-fee Supplementary Terrorist Activity Relief (STAR) program.

Congress and the SBA seemed to agree that the program should help both businesses directly impacted and those harmed by the economic consequences of the attacks, Thorson said.

But lenders were initially reluctant to write STAR loans, fearing the agency would question their justifications and deny payment of the guarantees. That prompted senior SBA officials to take an expansive interpretation of the term "adversely affected" and embark on a vigorous marketing campaign, Thorson said.

The SBA conveyed that "virtually every small business had suffered some direct or indirect adverse impact and could likely qualify for a STAR loan," he said. "Further, SBA officials reassured lenders that the agency would not second-guess their eligibility justifications."

Lenders were told to prepare and file written justifications but were not asked to submit the documents to the agency.

SBA officials, in their response to the December report by the office of inspector general, said their guidance to lenders was clear and consistent.

"Nothing quoted in the OIG report can be construed as giving lenders carte blanche to find all loans eligible for STAR," they wrote.

AP reported many STAR loans went to local outlets of some of America's most famous and lucrative companies, including Dunkin' Donuts, Quiznos, Subway and Dairy Queen. Other recipients included dentists and chiropractors.

The findings prompted outcry from many business owners near Ground Zero who said more relief should have been made available to them.

But Thorson said "we did not find that any businesses legitimately affected by the 9/11 attacks were precluded from obtaining a STAR loan."

The inspector general recommended that any future special loan programs should:

_require applicants to justify how their business was harmed;

_require lenders to submit documentation;

_have effective internal controls and oversight in place.

For existing STAR loans, the agency should work to reclassify loans with inadequate justification or seek recovery of the guarantees from lenders, Thorson recommended.