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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Loan abuse reports may be overblown

Bert Caldwell The Spokesman-Review

One of the area lenders most active in U.S. Small Business Administration loan programs says the press accounts accusing the agency of misusing 9/11 relief funds are misguided, at least as far as the Spokane district office goes.

Bob Beck, vice president of Mountain West Bank in Coeur d’Alene, says the connection between local businesses that qualified for the loans, and events in New York City and Washington, D.C., may have been indirect, but the financial impacts were just as real.

Beck has been a critic of SBA restructuring efforts that in the last few years have reduced the role of local offices that once approved agency loan guarantees. But complaints about SBA handing of assistance authorized under the Supplemental Terrorist Activity Relief Act — or STAR — is unfair, he says. “I think they’re taking a bad rap.”

The furor over the STAR loan program erupted two weeks ago, when the Associated Press reported on its analysis of loans made in the aftermath of the 9/11 attacks. Many loans, the AP found, went to businesses far from the East Coast, and with little or no connection to those events; pet groomers, for example, or dentists. Many were not even in business at the time of the attacks.

The facts were aggravating, the sense of entitlement expressed by some recipients even more so. Many at least said they did not know the funds were tied to the events of 9/11.

Unfortunately, a backlash that followed the reports has hurt deserving businesses along with the undeserving.

SBA Administrator Hector Barreto, in a letter mailed to newspapers around the country last week, assailed the reporting, and added that many business owners have been pilloried for accepting loans they had every right to take. Congress created the STAR program specifically to address the needs of businesses indirectly affected by the attacks, he notes. A separate program was focused on the direct business victims, and that effort granted loans to every business that qualified.

The distinction between the two programs, recognized in the AP reports, was lost on many readers. The SBA did not help matters by initially citing one favorable audit of the program that helped 9/11-impacted businesses, and not an earlier, more critical assessment. That kind of selective memory always arouses press suspicion.

Congress, meanwhile, its antenna high because of the implications for Katrina relief programs, jumped on the AP report. Sen. Olympia Snowe, R-Maine, who chairs the Committee on Small Business and Entrepreneurship, called the alleged abuse of the STAR program “nothing short of an outrage.” She promised an investigation.

But Charla Neuman, spokeswoman for committee member Sen. Maria Cantwell, D-Wash., says the problems may have been overstated. Businesses damaged by the events of 9/11 got help, she says, and SBA’s efforts to assist other businesses were appropriate.

“It’s hard to complain if small businesses were getting help,” Neuman says.

SBA made 392 loan guarantees to Washington businesses directly or indirectly affected by 9/11. Forty-seven Idaho businesses received help.

Some have implied that SBA’s free hand with the STAR funds was a way to offset cuts in its 7(a) loan program, its most popular. That’s an easy argument to rebut. Funding for 7(a) did not prove inadequate until 2003, when the window for STAR loan eligibility had already closed. Nor, according to SBA Press Office Director Mike Stanler, were lenders sloppy with STAR money. The default history is no worse than that for conventional 7(a) loans, he says.

Stanler also points out that, if there is a default, lenders must document borrower harm related to 9/11. If they cannot, SBA may not repay the loan despite the pledge of a guarantee. So far, that has not happened.

Beck notes the loans were made at market rates, not a discounted rate available for disaster loans made directly to borrowers by the SBA. The only incentive was to lenders, who had to pay slightly less for the SBA guarantee. On the average $225,000 7(a) loan made by Mountain West, for example, the one-year fee for the guarantee is $1,125. STAR dropped that to $562.

The bank tried to be scrupulous when determining STAR loan eligibility, he says, and Spokane’s SBA office rejected a few applications that passed bank scrutiny.

“The funds were not diverted in any way, shape or form,” Beck says.

Among the Mountain West customers who did qualify was a manufacturer who lost orders because of transportation concerns, and a restaurant and bed and breakfast who suffered from the falloff in travel after 9/11. He declined to make a loan to a video store owner who sought STAR funds.

Of the 7(a) loans made by the SBA Spokane District office during the one-year period STAR loans were available, about 11 percent were 9/11-related, spokeswoman Patty Jordan says. None have defaulted.

Jordan says local officials who decided who would get STAR loans tried to comply with the letter and intent of the program.

“We were fielding so many calls back then,” she says. “There were a lot of industries you wouldn’t think would normally be impacted.”

Like dentists? Makes you want to gnash your teeth.