The Small Business Administration's inspector general said Wednesday that agency officials were at fault for telling lenders in the program that their determinations would not be questioned.
The inspector general concluded that only nine loan recipients in the 59 cases sampled appeared to be qualified for disaster loans.
Lenders who handed out billions of dollars in loans failed, 85 percent of the time, to document that recipients were actually hurt by the terrorism attacks and therefore eligible for the aid under the law, the report found.
The investigative report of an Associated Press story in September that found similar problems with the SBA's Supplementary Terrorist Activity Relief program.
The report found:
The AP found that terrorism recovery loans went to a South Dakota radio station, a Virgin Islands perfume shop, a Utah dog boutique and more than 100 Dunkin' Donuts and Subway sandwich shops in various locations.
Meanwhile, small businesses near Ground Zero in New York couldn't get the assistance they desperately sought.
SBA Administrator Hector Barreto put the best face on the findings, saying the audit did not find that loan recipients were unqualified for the program, although he did note that lender documentation could have been better.
His statement, however, was contradicted by the chairwoman of the Senate committee that oversees the SBA program.
"These initial findings are troubling and the committee ... will continue with its own investigation of the STAR program to get at the truth and inform Congress for the future," said Sen. Olympia Snowe, R-Maine.
Snowe, who heads the Committee on Small Business and Entrepreneurship, said if abuses are discovered, "many questions must be answered by the parties involved, beginning with: How and why was this allowed to happen?"
The inspector general's report said the program ran into trouble after lenders initially did not participate because requirements were unclear.
SBA officials then embarked on a vigorous marketing campaign, and lenders interpreted their remarks to mean "that every small business could claim it was somehow impacted by the attacks, and therefore, eligible to receive a STAR loan," the report said.
"We believe these communications were intended to, and did, send a message to lenders that the Agency would not question lender eligibility determinations," the inspector general reported.
The Small Business Administration has announced it will accept most of the audit's recommendations, and has alerted lenders that it will not honor its guarantee on defaulted loans that are missing the required documentation.