SBA Under Fire Again, this Time for Post-9/11 Pilot Program; Only Handful of CUs Participated
WASHINGTON - As a SBA pilot loan program enacted to help small businesses impacted by the Sept. 11 terrorist attacks comes under fire for sloppy documentation, of the 7,086 lenders that participated, only four credit unions were involved and all of their loans have either been paid off or remain...
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WASHINGTON – As a SBA pilot loan program enacted to help small businesses impacted by the Sept. 11 terrorist attacks comes under fire for sloppy documentation, of the 7,086 lenders that participated, only four credit unions were involved and all of their loans have either been paid off or remain active. At issue is the Supplemental Terrorist Activity Relief (STAR) one-year loan program established by Congress in January 2002 to provide capital to small businesses impacted by the attacks. A recent review of the program by the SBA Inspector General found that eligibility for 85% of STAR loans reviewed could not be determined. The agency did say while it “did not find that loan recipients were unqualified for the program,” lender documentation “could have been better,” As a result, SBA has alerted lenders that it will not honor its guarantee on those defaulted loans that are missing the required documentation. U.S. Senator Olympia J. Snowe (R-Maine), chair of the Senate Committee on Small Business and Entrepreneurship, called the STAR program review “troubling” and said the committee will conduct its own investigation. “Most lender files did not contain sufficient information to demonstrate that borrowers were adversely affected by the September 11th terrorist attacks and their aftermath,” Snowe said. “My committee is thoroughly reviewing this report in conjunction with our own independent congressional investigation to determine what happened. If abuses did occur many questions must be answered, including how and why was this allowed to take place.” Among the lenders of STAR loans were $522 million Telesis Community Credit Union which approved $1.1 million to Powerhouse Gym in Chatsworth, Calif., $960,000 to Signature Office Furniture, Inc. in Los Angeles, $330,000 to Triax Tool Machining Inc. in Newbury, Calif., and $300,000 to Audio Coach Industries Inc. in Santa Monica. Both Signature Office Furniture and Audio Coach Industries’ loans have been paid in full, according to SBA. The other two loans remain active. The $285 million Progressive Credit Union approved $100,000 to Cool Time Refrigeration Inc. in Griswold, Conn., $150,000 to Coastal Services Inc. in Stamford, and $150,000 to Econo Lodge in New Ashford, Mass. Econo Lodge has paid its loan off and the other two remain active. The $446 million Weokie Credit Union approved a $585,000 loan to Heartland Wholesale Retail, LLC in Oklahoma City, Okla. and $695 million Community First CU approved $850,000 to Monarch Gardens Inc. in Appleton, Wis. Both loans remain active. Give SBA a Break Since only a small number of credit unions participated in the STAR loan program, time and energy on other active programs are more paramount right now, said Mary Dunn, CUNA associate general counsel. “What we want to do is spend our time revitalizing current (SBA) programs,” Dunn said, adding that CUNA continues to meet with legislators on small business issues that are important to credit unions. Dunn also said the SBA may be catching some unwarranted heat. “I think they’re piling it on the SBA. It’s a small agency with limited resources that have been cut and they’re under the microscope,” Dunn said. “This is an agency that has reached out to credit unions that said `we need to be able to offer business loans’ and (the SBA has made that happen). I really feel that the SBA isn’t getting a break.” SBA Administrator Hector Barreto said the agency “implemented the STAR program as Congress intended.” “Furthermore, the program in no way impacted those eligible to receive low-interest loans through our separate disaster loan program following the terrorist attacks,” Barreto said. Congress appropriated $75 million for the STAR loan program, which allowed SBA to guaranty up to $4.5 billion with funds available from Jan. 11, 2002 through Jan. 10, 2003. Ultimately, there were 8,201 STAR loans approved totaling approximately $3.7 billion, but only 7,058 were disbursed. When the STAR loan program expired, funds remained and Congress authorized 37% of the $75 million budgetary authority for making STAR loans to be transferred to the 7(a) loan program. According to SBA Spokesman Mike Stamler, $5.7 million of the STAR loans were eventually charged-off. In guidance regarding who was eligible for STAR loans, the SBA sent notices in 2002 describing “adversely affected small business” to mean a small business “that has suffered economic harm or disruption of its business operations as a direct or indirect result of the terrorist attacks perpetrated against the United States on September 11, 2001.” This includes those having difficulty in making loan payments on existing debt; difficulty in paying employees or vendors; difficulty in purchasing materials, supplies, or inventory; difficulty in paying rents, mortgages, or other operating expenses; and, difficulty in securing financing. In its audit, conducted in September and October 2005, SBA Inspector General contacted 59 STAR borrowers but was only able to reach 42. It also talked to 27 lenders. The agency found that most lender files did not contain sufficient information to demonstrate that borrowers were adversely affected by the Sept. 11 terrorist attacks and their aftermath. “As a result, funds appropriated for guaranties on loans made to small businesses adversely affected by the terrorist attacks may not have been used for that purpose,” the report read. Eligibility for 85% of STAR loans could not be determined because the required justifications were either missing, related to the seller of an existing business rather than the loan applicant and SBA procedures did not specify whether such loans could qualify, contrary to documentation in the lender’s loan files or borrower statements, according to the report. Many of the borrowers contacted were also unaware they had even received STAR loans, SBA said. The SBA acknowledged that it “did not implement adequate internal controls and oversight of the STAR loan program to ensure that only eligible borrowers obtained STAR loans.” The agency said it “delegated to its lenders the responsibility for the final determination of an applicant’s qualification for a STAR loan without any oversight by SBA. Although SBA was responsible for determining if the borrowers met eligibility and credit requirements for regular 7(a) loans, SBA loan officers were directed not to question the lenders’ justifications for regular 7(a) STAR loans.” The report’s findings come on the heels of a Dec. 15 news conference held by U.S. House Small Business Committee Chairman Don Manzullo (R-Ill.) who defended the SBA for the way it has handled its disaster loan program for small businesses impacted by last year’s hurricanes. Manzullo said due diligence is a must in determining eligibility including doing criminal background checks, credit checks and ensuring that applicants have paid their taxes. Meanwhile, if SBA enacts another special program where 7(a) loans are to be used for a nationwide disaster relief, it said it would require loan applicants to justify how the business was harmed by the disaster and require lenders to obtain supporting documentation to verify applicant claims of injury and provide detailed justifications showing applicant eligibility. The agency said it would also implement “effective internal controls and program oversight to ensure borrower eligibility and lender compliance.” -
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