Sixty businesses in San Diego County -- from travel agencies and freight transporters to a jewelry retailer and a floral shop -- received nearly $7 million in low-interest loans from the federal government in the aftermath of the Sept. 11, 2001 terrorist attacks.
Most have made good on the loans, which were designed to quickly help businesses that claimed financial losses from the devastation on the East Coast. Ten failed to make payments, leaving taxpayers on the hook for up to $1.3 million.
San Diego’s 60 loans were among nearly 5,000 worth more than $550 million that the government gave to hard-hit businesses across the country, according to Small Business Association data provided by the National Institute of Computer-Assisted Reporting, a nonprofit journalism organization based at the University of Missouri. More than 450 of those loans, valued at $64.2 million, went to businesses in California.
The charge-off rate, or the rate the government deemed a loan uncollectible, has been about 20 percent nationwide, and nearly 11 percent in California. In San Diego County, about one in six post-Sept.11 business loans have been charged off.
Some of the loans were fraudulent, an inevitability, an inspector general testified to Congress in 2006, “due to loan transactions being expedited in order to provide quick relief to disaster victims.” Schemes included businesses claiming false losses, using the loan money improperly and filing false financial statements.
After reviewing 51 loans, valued at about $20 million, the inspector general’s office issued 10 indictments and 10 convictions nationwide. The offending business owners were ordered to pay more than $1 million in restitution and settlements. An audit of a similar post-Sept. 11 SBA relief loan program showed 85 percent of a random sample of applications failed to adequately prove economic injury from the disaster.
Yet, for many, the loans were god-sent.
Maureen Anderson Rouleau said her $50,000 SBA loan saved her San Diego travel agency. Travel Travel had weathered other financial storms for 22 years, she said, but the atmosphere after 9/11 was like no other.
“There was absolutely no income,” Rouleau said. “(Some) people to this day will never get on an airplane again ...”
Ten years later, Rouleau’s travel agency is thriving, she said, thanks in part to the loan, which she has since paid in full. It was a different story for ten county businesses that failed to pay their loans, causing the government to deem the balance uncollectible, categorizing them as a loss.
Investigative Newsource, an investigative reporting nonprofit based at San Diego State University, found that of those, at least eight have had their business licenses suspended by the secretary of state -- an action taken when a business fails to pay taxes, penalties or interest, or neglects to file information with the state office. Nearly all the telephone numbers connected to those businesses have been disconnected. In instances where Newsource was able to find a working telephone number, e-mail or location for a business, owners either declined to talk or did not return messages.
A nationwide ‘disaster area’
After Sept. 11, the SBA made available about $1 billion in loans for victims of physical and economic damage from the attacks. For the first time ever, economic assistance loans were offered to business owners nationwide, not just those in the same area as the disaster. With flights grounded and people reluctant to leave their homes, the economy suffered.
Small businesses nationwide were “adversely affected by the lingering effects of the attacks and subsequent government action, such as airport closings and the precipitous drop in tourism,” stated the Government Accounting Office (GAO) in a 2003 report outlining the SBA’s lending practices after Sept. 11. “In essence, the entire country was deemed a disaster area.”
To assist those affected, the SBA made available disaster loans to any business in the county that could show it was negatively affected by the terrorist attacks. These loans, called Extended Economic Injury Disaster Loans, had a 4-percent interest rate, with a cap of $1.5 million and a 30-year term limit. Business owners in every state took up the offer.
With more than $64 million, California received the third-highest amount of loans, according to the 2003 GAO report, trailing only Florida and areas nearest the disaster sites in New York, New Jersey and Virginia.
To qualify for assistance, businesses needed to show they “suffered substantial economic injury as a direct result of the destruction of the World Trade Center or the damage to the Pentagon on Sept. 11, 2001, or as a direct result of any related federal action” from the attacks, according to SBA documentation. The SBA required business owners use the loan money only for “working capitol” until the economic problems from the disaster abated – using the cash for refinancing or paying off debts incurred before 9/11 was forbidden.
According to the GAO, the bulk of 9/11 disaster funds went to manufacturers, such as vehicle and airplane constructors, transportation and warehousing companies, retailers and tourism businesses.
But what about florists and car dealers? How did these business owners prove that their livelihoods were affected?
According to SBA spokeswoman Carol Chastang, small businesses needed only “to document how the 9/11 attacks and any federal action that followed (such as airport closings) caused ‘substantial economic injury.’”
Federal code describes “substantial economic injury” as being “unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses.” The burden was on the borrower to show how the terrorist attacks had negatively affected business and to prove they were out of money and credit sources.
“Each loan officer basically had to talk with the borrower and really verify the
explanation,” Chastang said. Most of these verifications took place over the phone, Chastang said, adding a caveat that, as in private banking, the “lender has to trust the borrower.”
Loans and losses
Nearly 20 percent of the economic disaster loans -- about $274 million nationwide, according to the data -- have been charged off by the government, Chastang said. A charged-off loan is deemed a loss by the government, as the cost to collect the loan outpaces its recoverable amount.
Since 1953, when the SBA began distributing disaster loans to property owners and businesses, 10.77 percent have been charged off, Chastang said. Comparing charge-off rates from the 9/11 disaster to others is “like comparing apples and oranges,” she added, because the terrorist attacks affected businesses nationwide, not one specific region.
“...[T]he circumstances for this 9/11 declaration were unprecedented, and we haven’t seen anything comparable to it since,” she said.
Dr. David Ely, business professor at San Diego State University, said the rate that these businesses failed -- and failed to pay back their loans -- can be predictable, given the rising unemployment rate after Sept. 11.
Before the attacks, California’s unemployment rate hovered close to 5 percent.
“After that, you see the unemployment rate go up to 5.6 by August 2001, and by 2002, it was at 6.8,” Ely said. “That does suggest a reasonable hit to the California economy.”
Travel agency owner Rouleau experienced the blow to the economy firsthand.
Her profits plummeted amid travelers’ fears and restrictions on air travel. To make things worse, some of her biggest clients had often traveled to the East Coast – mainly New York City and Washington, D.C.
Rouleau said she came close to laying off some of her six employees, before getting her SBA disaster loan in late 2001.
“I knew if I had that loan, it would gap that bridge and allow me to survive,” she said.
It worked, and her business thrived. Rouleau sold Travel Travel to a Manhattan
travel agency, Protravel, in 2003. She still oversees its day-to-day operations.
