Senate committee scolds SBA for poor oversight of 9/11 business loans

Published 11 September 2006

Small Business Administration told bankers it would not second guess STAR loans; many uneffected by 9/11 received assistance; waste recalls Hurricane Katrina efforts

9/11 effected us all, but some may have taken empathy to new heights. The Senate Small Business and Entrepreneurship Committee last week issued a scathing report of the Supplemental Terrorist Activity Relief (STAR) program, saying that many of the low-cost loans intended to help recoverying small businesses went to companies wholly uneffected (in the business, not emotional, sense) by the attacks. The program was so ill-managed, the report said, that “conceivably every small business in the country became eligible to participate.” Coming on the heels of complaints that some Hurricane Katrina relief funds went to pay for pornography and sex-change operations, it is clear that the federal government must create better systems to distinguish between eligibile and fraudulent emergency claims. The question is how to do so.

Disaster relief puts government in a bind. When victims show up on television news night after night, political acuity and human decency demand that relief be given as quickly as possible and nevermind the cost. Human nature, however, makes it certain that among those claiming relief will be a certain number of imposters. According to the Federal Emergency Management Agency (FEMA), excessive payments typically represent 1 to 3 percent of relief distributed, but these numbers can be much higher. The $2 billion of fraud and waste attributed to Hurricane Katrina was a whopping 9 percent of the $19 billion spent in total.

In the case of the botched 9/11 loans, the Senate committee found that mismanagement rather than fraud was the major cause of waste. “Bankers who could lend more money at less cost under the program had an incentive to push the loans, especially after Small Business Administration officials told lenders they wouldn’t be second-guessed for making STAR loan,” AP reported. Here again a fear of undercompensating true victims resulted in overpayments to ineligible applicants. “Since lenders had a financial incentive to make as many STAR loans as possible, the responsibility for verifying eligibility rested with the Small Business Administration,” the Senate committe explained. “The Agency abdicated that responsibility by telling lenders that the Agency would not review that documentation.”

-read more in Frank Bass and Dirk Lammers’s AP report; read more in this Senate news release