Friday, December 30, 2005

Free Money Giveaway!

Seems that, according to CNN, the Small Business Administration was found to be using some interesting definitions in approving loan guarantees for money lent under its Supplemental Terrorist Activity Relief (STAR) program:

Federal loans meant for businesses "adversely affected" by the September 11, 2001, terror attacks on the United States often went to businesses barely touched by the tragedy or not at all, according to an audit of the loan program by the Small Business Administration's inspector general.

The inspector general sampled 59 of 7,058 loans disbursed under the SBA's Supplemental Terrorist Activity Relief (STAR) program and found that 85 percent of the loans lacked justifications or had justifications that were less than convincing.

"Due to initial limited lender participation in originating STAR loans, SBA undertook efforts to promote the program by advising lenders that virtually any small business qualified and assuring them that SBA would not second-guess their justifications," the report, by Inspector General Robert Seabrooks, said.

In response, the SBA put out a press release that is a marvel of obfuscation, making the technically-true statement that "the inspector didn't find that STAR loan recipients were unqualified", but leaving out the obvious point that the reason he couldn't find them unqualified is because no documentation of their qualification existed. Meanwhile, numerous businesses that did receive loans are frankly bewildered as to why.

Of course, the reason this happened is fairly obvious to anyone who reads the original program details (emphasis mine):

STAR is a unique, temporary addition to the SBA’s 7(a) Loan Guaranty Program. It provides greater access to loans nationwide for small businesses affected by the terrorist activities of September 11, 2001, but not eligible to obtain loans under the SBA’s disaster assistance program. STAR loans may be used for any business purpose. They follow all regular 7(a) loan program requirements. All the lender must do is include in its file a rationale for its determination that the business was adversely affected. Through legislation enacted in January 2002, the program has authority to provide such loan funds through January 10, 2003, or until the $4.5 billion funds available under the program are expended, whichever comes first.

Benefits to Lenders

The lender’s on-going fee is cut in half. STAR’s reduced annual fee is 25 basis points on the outstanding SBA-guaranteed share of a STAR loan, rather than the usual annual fee of 50 basis points for other 7(a) loans. This fee reduction is for the life of the loan.

• STAR loans can be processed using SBA lender options including the regular 7(a) loan program, the Preferred Lenders Program, the Certified Lenders Program, SBALowDoc, SBAExpress, or CommunityExpress.

Benefits to Small Business

• Small businesses adversely affected by the terrorist activities of September 11, 2001, that do not qualify for loans under the SBA’s disaster assistance program may qualify under the STAR program.

• Although the annual lender fee of 25 basis points is not charged to the borrower, the SBA expects that lenders will pass on a portion of their savings to the borrower through an interest rate reduction.

So, in short, banks were told that they could extend what amounted to risk-free loans (government-guaranteed) at half the usual cost with no chance of their reason being questioned, or even checked, since it supposedly applied to "virtually every" business, and no requirement for them to pass the savings on to consumers.

How would you EXPECT the banks to categorize these loans? And the most ironic the SBA's own documentation, they're perfectly justified in doing it.

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