updated 7/24/2007 9:43:03 PM ET 2007-07-25T01:43:03

The U.S. Small Business Administration canceled nearly 11,900 loans to residents affected by the 2005 Gulf Coast hurricanes over two weeks last September in an effort to help clear a backlog of approved, but undisbursed, loans, a draft report by the agency's watchdog shows.

Of those, 7,752 loans were canceled without notice, the SBA inspector general's office found. In some cases, because of a data system quirk, agency records erroneously indicated that the would-be borrowers asked for the cancellations, the report said.

In many cases, affected applicants planned to use the loan money to rebuild their houses or replace property ruined by hurricanes Katrina, Rita or Wilma, and the cancellations left them having to request reinstatements or forgoing the aid, according to the draft, dated Tuesday and obtained by The Associated Press.

According to the report, the inspector general began investigating after two former SBA employees alleged the agency canceled approved loans unnecessarily to meet production standards. SBA in a statement late Tuesday said it "strongly challenges any inference that managers arbitrarily canceled loans" to meet targets.

"Agency staff has often worked around the clock to ensure Gulf survivors get assistance and are on track to rebuild their lives," SBA said, adding its goal is to help qualified applicants receive loans.

Last fall, SBA aimed to ease a backlog of more than 90,000 loans within 45 days. By the end of September, it had approved $10.6 billion in disaster loans for hurricane-affected applicants but just $3.1 billion had been disbursed, the inspector general's report says.

Of the nearly 40,290 disaster loans SBA canceled last year, 11,893 were made by the agency's Buffalo, N.Y., customer service center over two weeks that month, the report says. The audit focused on the Buffalo office, which in September received 33,000 approved but undisbursed loans for which there were no loan closing documents and was to call applicants to see if the loans should be canceled or closed, the report says.

Shortly after the initial cancelations, SBA contacted 4,569 of the 7,752 loans canceled without notice, the report says. Those who wanted reinstatements had to justify this and be ready to close on their loans _ a challenge given the pace of recovery, the report says. About 1,200 requested loan reinstatements.

According to SBA, the agency gave approved borrowers at least 480 days, or eight times the norm, to produce loan closing records.

Those not reached by SBA or who canceled but now want a loan have through September to seek reinstatements, SBA said.

U.S. Rep. Nydia M. Velazquez, who chairs the House Small Business Committee, said the report contains "serious accusations" that merit further investigation.

"The fact that they were canceling loans without advance notice is a serious problem," Velazquez, D-N.Y., said. "It shows the agency was cutting corners to make its numbers look good at a time when they were under public pressure and pressure from the congressional oversight committee."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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