Dec. 29, 2005--Many of the loans intended to boost economic recovery following the 9/11 terrorist attacks actually went to small businesses that did not qualify, according to an internal Small Business Administration report.

The report, released by the SBA's inspector general on Wednesday, found that only nine of 59 loan recipients that were sampled showed the attacks "adversely affected" them, which was a requirement to receive a loan under the Supplemental Terrorist Activity Relief (STAR) program. Roughly 85% of the loan recipients in the report did not justify that the attacks hurt them, and many recipients did not even know that the loans were part of a program aimed at providing 9/11 relief, the report said.

Congress authorized the STAR program in the aftermath of 9/11, setting aside up to $4.5 billion in loans to be given by private lenders to small businesses. To become eligible for the loans, small businesses had to show that they were that were "adversely affected," and the lenders would have to document exactly how they were impacted. Congress put the program under the purview of the SBA, which would guarantee up to 85% of each STAR loan.

More than 7,000 small businesses received STAR loans. Some of those loan recipients included a South Dakota radio station, a Virgin Islands perfume shop and more than 100 Dunkin' Donuts and Subway shops, according to the Associated Press.

According to the report, the SBA failed to watch whether lenders made sure that only eligible borrowers obtained the loans. "SBA delegated to its lenders the responsibility for the final determination of an applicant's qualification for a STAR loan without any oversight by the SBA," the report said. "'¦ SBA loan officers were directed not to question the lenders' justifications for regular 7(a) STAR loans."

SBA management responded in the report by saying that "most, if not all" of the STAR loan recipients were, in fact, eligible, and that the inspector general took an overly narrow view of eligibility. SBA officials said that the STAR program was intended as a general economic stimulus program. SBA management, however, acknowledged that more rigorous controls are needed for the loan application review process.

Members of Congress questioned the SBA's handling of the STAR loans. Sen. Olympia Snowe (R-Maine), the chair of the Senate Small Business Committee, described the report's findings as "troubling."

"If abuses did occur, many questions must be answered, including how and why was this allowed to take place," Snowe said in a statement.

Rep. Nydia Velasquez (D-N.Y.), the ranking member on the House Small Business Committee and a vocal critic of the SBA's leadership, said in a statement that the SBA has failed to meet the needs of small businesses after both 9/11 and this summer's hurricanes in the Gulf Coast. "This is a disturbing trend that cannot continue any longer," said Velasquez, who recently called for the resignation of SBA Administrator Hector Barreto.

Barreto, in a statement, defended the SBA and maintains that the agency did implement the STAR program as Congress intended. He also said that the SBA would not honor its guarantee for STAR loans that are missing the required documentation showing eligibility, and that it would accept most of the report's recommendations.

The report recommended for future nationwide disaster-relief loan programs that the SBA: implement effective internal controls and program oversight to ensure borrower eligibility and lender compliance; require lenders to obtain supporting documentation to verify applicant claims and provide detailed justifications showing applicant eligibility; and require loan applicants to justify how they were harmed by the disaster.

The SBA told private lenders that it would rely on lenders to determine whether loan applicants were adversely affected by 9/11 and thus qualified for the STAR loans, according to the report.

"I want to tell you that by the terms under which we have implemented the program, we delegate to you, the lender, the authority to determine that a business was adversely affected," said Jane Butler, the SBA's associate administrator for financial assistance, in a speech in May 2002. "It is your determination, not SBA's determination."

Robert Coleman, the publisher of a newsletter for lenders that was quoted in the report, said that lenders before 9/11 were less willing to take such loan applications from businesses because of concerns over the SBA's post-loan compliance reviews.

He said that the lenders who gave out STAR loans without properly documenting the adverse affect on businesses were just going along with what the SBA told them. "The lenders are conditioned [to say] 'Just tell us the rules and we'll follow them."