DISASTER FUNDING

Because the Small Business Administration loaned money to ineligible companies and kept poor records for a special disaster loan program set up to help businesses hurt by the Sept. 11 terrorist attacks, Sen. Olympia Snowe has proposed creation of a private disaster loan program run by banks to help after future emergencies. Given that a year-long review of the Supplemental Terrorist Activity Relief (STAR) loan program found major failings, similar government programs should be avoided in the future.

Low fees, a government guarantee and high maximum loan caps encouraged lenders to make as many STAR loans as possible. Because the loan requirements were naturally broad – not only businesses in New York and Washington, D.C., for example, were economically harmed by the attacks so businesses nationwide could qualify for the special loans – funds were loaned to entities that had not proven they were harmed by 9-11.

This, according to the report requested by Sen. Snowe, was the fault of the SBA which did not requiring lenders to adequately document a clear connection between the attacks and an adverse economic impact on businesses that received STAR loans. Lenders also directed borrowers to the STAR program because of the cutbacks in another longtime SBA loan program, known at Section 7(a).

Last year, The Associated Press reported that a hair salon that was flattened by the collapse of the World Trade Center in New York City applied for a $70,000 loan to rebuild but received only $20,000. Meanwhile, the owner of a Dunkin’ Donuts in western New York got a $350,000 loan to remodel the shop. Unaware of the source of the money, many loan recipients were embarrassed to learn it came from a 9-11 program.

To avoid such problems in the future, Sen. Snowe, chair of the Senate Committee on Small Business and Entrepreneurship, would move disaster loans out of the SBA. Instead, she would create a government guaranteed private disaster loan program run by banks that could get money to affected businesses faster and more efficiently than loans made through the government agency. It is important, however, that the oversight that was missing under the STAR loan program, be enforced. Her bill, which was unanimously approved by the committee this summer, would also increase the maximum loan under the Section 7(a) program to allow businesses to borrow more from this source.

As we’ve seen with the 9-11 loans and subsequent financial programs to help victims of Hurricane Katrina, rushing to create a program in the wake of a disaster usually results in a poorly crafted effort. Putting a loan program in place before disaster strikes makes sense.