Why did N.H. firms receive 9/11 SBA loans?

What do a country inn in Lyme, a photo shop in Goffstown and a general store in Dublin have in common?

All received federally backed loans that went to businesses “adversely affected” by the September 11th terrorist attacks.

None of the people involved with the three businesses thought that their business was affected by the attacks. Indeed, they didn’t even own their business at the time of the attacks. They obtained the loans to purchase the businesses. Nor did they even know that their bank classified their SBA loan as a Supplemental Terrorist Activity Relief – or STAR — loan.

“That’s hysterical,” said Darlene Godoy, owner of Alden Country Inn in Lyme, after being informed about the nature of her $950,000 loan. “An inn in Lyme got a terrorist loan? The good old government really knows what it’s doing.”

“There is no reason for us to get that,” said Lisa Peterson, owner of Photos Plus in Goffstown, which obtained a $551,000 loan in September 2002. “We didn’t get bombed.”

These three businesses – as well as 23 others in New Hampshire – didn’t receive a special break because of the STAR loan program. The terms of the loan were the same as any other SBA 7a government-guaranteed loan, with the same lending criteria, except perhaps for the size of the loan toward the end of the program.

But the banks that made STAR loans did get a break. They only had to pay half the fees to the SBA to guarantee the loan than they would have otherwise. For the banking industry, STAR loans meant a $7.5 million savings nationwide.

And it was only the bank making the STAR loan that had the power to decide whether the loan qualified – in other words, the banks didn’t have to tell the SBA why the business was “adversely affected” by the terrorists attacks. They didn’t even have to talk to the business itself about it, at least according to some SBA officials – all they had to do is put a note in the loan file kept at the bank, and they only had to show the file to the SBA if the agency requested it, which in all probability would only occur if the loan went sour.

Even then, SBA assured reluctant lenders, the agency had no intention of “second-guessing” the justification, and had no intention to play “gotcha” should the justification prove insufficient or just plain wrong.

‘Economic stimulus’

CIT Small Business Lending Corp. and the Business Loan Center, the two top STAR lenders in the state, declined to release the justification in the borrowers’ file to New Hampshire Business Review, even if the borrowers gave permission, citing federal confidentiality laws.

“That’s between the borrower and lender,” said Torie Pennington, spokesperson for CIT.

But after an Associated Press story last year showed that only a fraction of the STAR loans were granted to businesses in the New York City and Washington areas, where the attacks took place, the SBA’s inspector general examined the program.

The agency looked at the justifications of a random sample of some 59 STAR loans nationwide, including some loans issued by CIT. In a report released in December, it found that most of them were vague, inaccurate or did not apply to the borrower or to the business he or she was buying. Only 15 percent adequately documented that the borrower was eligible. In only two cases did the recipients know they even got a STAR loan.

“How was your business impacted by 9/11?” read one justification. “Slowed down.”

“Borrower has experienced a business disruption,” another said.

SBA and the banks defended the program, arguing that since the September 11th attacks disrupted the entire economy, nearly every business was affected.

“Businesses all over the country were suffering directly or indirectly,” said Bill Phillips, director of the SBA’s New Hampshire office, who emphasized that the STAR loan program was not run locally.

CIT echoed these sentiments. The STAR program was “designed to provide economic stimulus to small businesses across the country that were directly or indirectly adversely affected by the September 11th terrorists attacks,” said Pennington in a prepared statement. She did not answer further questions.

Common theme

Most of the New Hampshire businesses contacted by New Hampshire Business Review didn’t think they were affected by the attacks and their aftermath.

SBA guaranteed some 8,202 loans under the STAR program, totaling $3.7 billion. In New Hampshire, 26 such loans were made, totaling slightly less than $14 million, according to a list released by the SBA.

The loan recipients include Nashua Area Family Dentistry, Spritzes Beverage (a defunct bottling company in Campton), Atlas Advance Pyrotechnics, a fireworks display company in Jaffrey, and the Circle 9 Ranch Campground in Epsom.

Only Atlas had heard of the STAR program, and the company emphatically said that it never applied for a STAR loan.

In fact, said Steve Pelkey, president of Atlas, the terrorist attacks may have been bad for the economy, but they were good for any company that profits from displays of patriotism.

“If anything, the attacks increased patriotism and the demand for our products,” said Pelkey, whose firm received a $1.2 million loan under the program, according to the SBA.

“We weren’t affected by 9/11,” said Albert Nault, owner of Spritzes Beverage. The company is currently out of business and in default on its loan, but that had more to do with a legal battle with the town of Campton than because of terrorism, Nault said.

The Dublin General Store is worried about terrorism. It actually holds terrorism insurance, but “there were no consequences on the store because of 9/11,” said Andrew Freeman, who used a $275,000 SBA loan to buy the store in July of 2002. “If the bank was supposed to advise clients if we were qualified, they didn’t tell me about it.”

“We were absolutely not impacted by terrorism,” said Gary Caplan, owner of Gnomon Copy Center, a small printing shop in Hanover and the recipient of a $615,000 STAR loan.

Norm Gentry, owner of Circle 9 Ranch Campground in Epsom, bought the business with the help of a $750,000 STAR loan in 2002. The threat of terrorism affected his business later on because it scared off people during the Democratic convention. But that occurred after he received the loan.

The previous owner lost business because of NASCAR cancellations right after the attack, but he never told that to the bank “because I didn’t think it was an issue,” he said.

Promoting STAR

Around the nation, most of the attention on the STAR loan program has focused on the businesses receiving the loans, despite the fact that most businesses that received such a loan never knowingly applied for one. It was the bank’s decision to make the loan, and it was the bank that benefited from granting them.

The STAR loan program was a companion to another SBA response to the terrorist attacks. The SBA expanded its existing disaster relief program to businesses outside the disaster relief area. This other disaster relief loan offered more concrete benefits to the borrower: eased eligibility requirements and lower interest rates. But unlike the STAR program, there was a requirement for both the bank and the borrower to document those requirements to the SBA.

The STAR loan was meant for those not as directly affected by the attacks. But lacking clear guidance from the SBA, few banks were willing to participate, fee break or no. In the first three months of the program, only 2 percent of the $4.5 billion authorized for the STAR program was actually used.

Then the SBA went to work promoting the program through trade organizations and newsletters. In one article, an SBA official emphasized how loose the guidelines were, according to the inspector’s general report.

“In guaranteeing a STAR loan, the SBA will rely on a lender’s determination that a small business was adversely affected. … The SBA will be looking only to verify that the lender documented its evaluation of the small business’s eligibility,” the newsletter article said. “The SBA has not established any requirements regarding the severity or duration of the adverse impact.”

At a June 2002 lending conference, an SBA official was quoted as saying, “We’ve offered any lender who has a loan that can’t find any basis for it to be a STAR loan to e-mail us the facts of the situation and we’ll spend our lunch hour looking at it for you.”

The official went on to say that one lender told his staff, “If he has a loan that is not a STAR loan, the lender has to justify that as well as justify the ones that are STAR loans. I think that’s a great practice … we want you to understand that we do not intend to play ‘gotcha.’”

After Oct. 1, 2002, there was another major reason for banks to classify a loan as a STAR loan besides the fee break. On that day, regular 7a loans were capped at $500,000 due to budget reasons. STAR loans, however, were exempted from the cap. That meant the only way a bank could get a 7a SBA-guaranteed loan for a larger small business was to put a note in the file declaring that the business was adversely affected by terrorism. All of a sudden, businesses requiring bigger loans were victims of terrorism. Prior to the cap, 27 percent of the STAR loans were greater than $500,000, according to the Inspector General’s audit. After Oct. 1, 2002, 44 percent were larger than $500,000.

‘In full compliance’

Not all banks jumped on the STAR loan bandwagon. In New Hampshire, for instance, two banks with no depository branches located in the state – CIT Small Business Lending Corp. and Business Loan Center – made 12 of the 26 STAR loans in New Hampshire, accounting for $8.3 million, or 59 percent, of the total amount lent.

According to Phillips, CIT made 20 SBA loans in the two-year period the one-year STAR loan program straddled. Eight were STAR loans. Similarly, Business Loan Center made 12 loans. Four of them were STAR loans.

Both banks, however, are leading SBA lenders nationwide. During the STAR loan period, CIT was the nation’s largest SBA lender, followed by the Business Loan Center. So the fact that both banks made so many SBA loans partially explains why they made so many STAR loans, but not totally.

While CIT’s percentage of SBA loans was large (8.7 percent), its percentage of STAR loans was larger: 13.8 percent. Similarly, the Business Loan Center’s share of regular SBA loans (4.1 percent) was much smaller than its STAR total (10.3 percent). Those figures indicate both banks were giving more and larger loans compared to most other SBA lenders.

Both banks, however, maintain that all they did was follow SBA regulations.

“CIT is a great supporter of small business,” said Pennington, who works for a public relations firm employed by CIT. “The program was available to those who needed it.”

But since “CIT is working with SBA on other investigations,” an oral interview was “not an appropriate forum” to discuss the STAR program, she said.

Pennington then ended the conversation and e-mailed a statement:

“As a longtime supporter of the small business marketplace, CIT is proud to have partnered with the SBA to implement the STAR program as authorized by Congress and worked closely with the SBA to ensure the successful rollout of the program. As a lender, CIT was in full compliance with the SBA guidelines at all times.”

Pennington requested that other questions be submitted in writing, but she did not respond to the questions that were sent.

The Business Loan Center, a subsidiary of Business Loan Express, based in New York City, also chose to respond through a public relations firm.

The SBA STAR guidelines “were very clearly written by the federal government and we followed those regulations,” explained Alex Dudley of the Business Loan Center. “Our relationship with the SBA is not worth jeopardizing by bending any rules.”

Dudley, however, refused to answer questions about specific loans, citing federal privacy regulations.

“All we can say is that we followed the guidelines,” Dudley said.

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