Audit Report 6-09: Audit of SBA’s Administration of the Supplemental Terrorist Activity Relief (STAR)
Date Issued: Friday, December 23, 2005
Report Number: 6-09

On December 23, 2005, the OIG issued Audit Report 6-09, Audit of SBA’s Administration of the Supplemental Terrorist Activity Relief (STAR) Loan Program.  This audit was conducted on the request of the SBA Administrator and the Chair of the U.S. Senate Committee on Small Business and Entrepreneurship.  The objectives of the audit were to determine if STAR loan recipients were appropriately qualified to receive STAR loans and if the SBA established and implemented proper administrative procedures to verify STAR loan recipient eligibility. The report contains one finding and seven recommendations.

 

Under section 7(a) of the Small Business Act, the SBA may guaranty up to 85 percent of the amount of a loan made by an authorized lender to a small business. This program is known as the 7(a) Loan Program. In 1983, the SBA implemented the Preferred Lenders Program (PLP), which allows designated lenders to process, service and liquidate SBA guaranteed loans with reduced SBA oversight. Loans made under the 7(a) program that go into default are individually reviewed by the SBA to determine whether the lender complied with agency lending requirements. If it is determined that the lender did not comply materially with SBA’s regulations, the SBA can negotiate a settlement of the guaranty amount or deny payment of the guaranty entirely.

 

The Small Business Act also permits the SBA to make direct loans to victims of declared disasters in 15 U.S.C. § 636(b). Disaster loans, which are available to businesses and to homeowners, can be used to fund repairs of physical damage to homes and businesses, and to provide working capital to disaster-impacted businesses to allow them to pay their bills or otherwise fund operational needs. These latter loans are known as Economic Injury Disaster Loans (EIDLs). In order to make Federal assistance available to more businesses that were impacted by the September 11th terrorist attacks, and not just those located in the declared disaster areas, on October 22, 2001, the SBA expanded the EIDL program to assist small businesses located outside the declared disaster areas.

 

The STAR loan program was authorized under the Defense Appropriations Act of 2002, Public Law 107-117, January 10, 2002 (The Act). The Act provided that:

 

[T]he [SBA] Administrator shall, in lieu of the fee collected under section 7(a)(23)(A) of the Small Business Act (15 U.S.C. 636(a)(23)(A)), collect an annual fee of 0.25 percent of the outstanding balance of deferred participation loans made under section 7(a) to small businesses adversely affected by the September 11, 2001 terrorist attacks and their aftermath, for a period of 1 year following the date of enactment and to the extent the costs of such reduced fees are offset by appropriations provided by this Act.

 

The OIG found that the eligibility of most STAR loan recipients was difficult to determine from lender loan files.  Further, if the SBA enacts another special program where 7(a) loans are to be used for Nation-wide disaster relief, the OIG recommended that the Office of Capital Access take the following actions:

1. Require loan applicants to justify how the business was harmed by the disaster.

2. Require lenders to obtain supporting documentation to verify applicant claims of injury and provide detailed justifications showing applicant eligibility.

3. Implement effective internal controls and program oversight to ensure borrower eligibility and lender compliance. 

4. Implement procedures to require lenders to submit STAR loan justifications when seeking SBA’s purchase of a STAR loan guaranty.

5. Establish criteria, in consultation with the Office of General Counsel, to provide more definitive guidance and examples for purchase reviewers to use in determining what constitutes an inadequate justification for STAR eligibility.

6. For future purchase requests, determine, in consultation with the Office of General Counsel, whether STAR loans that contain inadequate justifications can  be reclassified as 7(a) loans (if budget authority remains available) or whether the SBA can deny lender requests for purchase of the guaranties under SBA regulations.

7. Review guaranties the agency has already paid under the STAR loan program, obtaining additional records from lenders as necessary, to determine whether lenders were paid despite the absence of adequate borrower eligibility justifications. If lenders had inadequate justifications, determine, in consultation with the Office of General Counsel, whether the SBA should reclassify the loans as 7(a) loans (if budget authority remains available) or seek recovery of the guaranties from the lenders.