News from U.S. Senator Olympia J. Snowe
Chair, Senate Committee on Small Business and Entrepreneurship
For Immediate Release: September 6, 2006
Contact: Chris Chichester, 202-228-5843
Snowe Releases Findings Of 9-11 STAR Loan Program Review
Charges SBA “Wholly Abdicated” It’s Responsibility by Failing To Maintain Proper Loan Documentation
Washington, D.C. – Concluding a year-long process, Senator Olympia J. Snowe (R-ME), Chair of the Senate Committee on Small Business and Entrepreneurship, today announced the findings of a Committee review of the Supplemental Terrorist Activity Relief (STAR) loan program, which Congress created to assist small businesses “adversely affected” by the September 11, 2001 terrorist attacks and its aftermath. Senator Snowe’s review found that the Small Business Administration and its participating lenders failed to properly document loan eligibility for small businesses damaged by the attacks.
“As the Chair of the Senate Committee on Small Business and Entrepreneurship, I had deep concerns regarding last year’s allegations that the STAR loan program’s implementation may have been seriously flawed, which is why I directed my Committee staff to conduct a thorough review,” said Senator Snowe. “Congress intended the STAR program to be an economic stimulus for small businesses nationwide that were damaged by the September 11, 2001 terrorist attacks and its aftermath. Unfortunately, the inadequate implementation of the program by the SBA and its participating lenders allowed almost every small business in the country to be eligible for a STAR loan.”
“The Small Business Administration failed to review documentation used by banks to demonstrate that certain businesses were eligible for the loans. Because of lower fees and a higher maximum loan cap, lenders had a financial incentive to make as many STAR loans as possible. Thus, the responsibility for verifying eligibility rested with the SBA. The agency wholly abdicated that responsibility,” continued Senator Snowe.
Senator Snowe cautioned that no small business intentionally took advantage of the STAR program and no small business was denied disaster assistance because of the STAR program. In fact, of the $75 million in STAR funding roughly $27 million was still left in the program when its 12-month term expired in December, 2002.
"Small businesses in no way, shape or form are at fault," stated Senator Snowe. "This was not a case of taxpayer money just being handed out to anyone, businesses or lenders. No direct payments from the government existed in the STAR program, with $75 million in appropriations serving as a fund to reduce the cost to the SBA of issuing guarantees from banks to small businesses.”
Senator Snowe noted that while Congress intended the STAR program to be broad, the SBA pushed for lenders to use the STAR program due to budget concerns with the standard, non-STAR 7(a) program. In addition, because the SBA told lenders it would not review STAR loan documentation, lenders were able to issue STAR loans at their own discretion without any SBA oversight. As a result, most lenders did not maintain adequate documentation.
The key Findings of the Report on the Small Business Administration’s Supplemental Terrorist Activity Relief are:
* No small business intentionally took unfair advantage of the STAR program, nor was it determined that any small businesses unaffected by the events of 9-11 and its aftermath purposefully sought a STAR loan.
* A random sample of 66 STAR loan files from 27 participating lenders were reviewed by Committee staff. A key objective was to determine if the participating lenders maintained clear documentation of borrowers’ eligibility to receive STAR loans. The lenders were required to retain records in the borrowers’ files supporting a clear connection between the 9-11 attacks and any adverse economic impact on the recipient small business as a result of that attack.
* 74 percent of files reviewed did not contain adequate documentation justifying borrowers’ eligibility to receive STAR loans.
* Almost any small business could have been found by the lenders to be eligible for a STAR loan due to the vague design of the program.
* The STAR program became an alternate means of accessing funds after the standard 7(a) program became more burdensome to the lenders. STAR loans had a higher maximum loan cap and, for the majority of the existence of the STAR program, had a lower annual fee for lenders. This made the STAR program much more attractive to lenders than the standard 7(a) program.
* The SBA is also to blame for not maintaining oversight of lender documentation demonstrating STAR loan recipients’ eligibility. Since lenders had a financial incentive to make as many STAR loans as possible, the responsibility for verifying eligibility rested with the SBA. The Agency abdicated that responsibility by telling lenders that the Agency would not review that documentation.
* While the intent of Congress for this program was broad inclusion, the manner of the implementation of the program by the SBA and the lenders meant that conceivably every small business across the country became eligible to participate in the STAR program.
Senator Snowe has introduced the Small Business Reauthorization and Improvements Act of 2006 (S. 3778) to address some of the problems found with the STAR program. It creates a private disaster loan program that will allow private lenders to make disaster loans with a government guarantee. The language in the legislation specifically states that businesses will be eligible if the county in which the business is located was declared a disaster area anytime in the last 24 months.
The creation of a private disaster loan program will give the Small Business Administration the opportunity to work with private lending institutions to improve the lending process in the wake of another devastating disaster, such as 9-11 or Hurricane Katrina. These private disaster loans could be made faster and more efficiently than the loans made directly by the SBA, which is the current process. This critical bill was recently voted out of the Committee on Small Business and Entrepreneurship by a vote of 18-0 and is now awaiting consideration by the full Senate.
The report is attached.
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