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ADVICE FOR USAGE OF LOSS STUDY
INTRODUCTION TO THE LOSS REPORT
The FY 2000 Small Business Administration (SBA) Loss Report provides information to
management on the Agency 's loss experience for its various loan programs. The Loss Report
focuses on the actual losses as a percentage of disbursements made to date on SBA loan
programs. The report allows the user, at a glance, to review historical and current year data for
each of the Agency 's primary lending programs. The report combines the results of loans made
since FY 1992 that are subject to the requirements of Federal Credit Reform accounting (credit
reform loans) with the results of loans made prior to FY 1992 (pre-credit reform loans) that are not
subject to this accounting requirement.
The concept of charge-off deserves some explanation. The SBA has extensive debt servicing and
collection procedures using all reasonable efforts to assure maximum recovery of loans prior to
charge-off. These procedures include the use of modern collection methods and the acquisition and
sale of collateral through liquidation processes. Only after the Agency has exhausted these
collection methods does SBA classify a loan as charged-off. For guaranty loans, the loan must first
be purchased from the participating lender before this classification can be made. Also, charge-off
is a reportable status assigned as a debt to the Agency. The assignment of this status does not
preclude the Agency from further collection remedies if it is determined that these efforts would
result in additional collections to the Agency. It should be noted that charged-off loan amounts are
principal only, and do not include accrued interest.
This Loss Report includes a variety of additional data. It includes losses and gains on the sale of
collateral (real estate and other property) acquired on defaulted loans. This property is known as
ColPur. In addition, it includes other costs of doing business to service and liquidate defaulted
loans that have been added to the loan principal balance. Before a loan sale, the portfolio to be sold
is reviewed to write down overvalued loans. The results of the write down are also included in this
Loss Report. Finally, during FY 2000 the SBA, as part of its Loan Asset Sale program, conducted
asset sale number 2.
The SBA uses loss data as part of its process to compute the subsidy rate for its loan programs.
However, the loss rates developed in this Loss Report are not equivalent to the SBA 's subsidy
rates. This is due to the other factors included in the subsidy rate computation such as loan fees,
the present value of cash flows and interest rate considerations. As a result, the loss rates
developed in this report are not easily compared to the subsidy rates on SBA 's loan programs.
This report is prepared using the SBA 's official records including general ledger and loan
accounting system data.
ADVICE FOR USAGE OF LOSS STUDY
SBA LOAN PROGRAMS
General Information
The following general information applies to business loans. Disaster loans are covered in a
separate section of this report. Also, all guidelines are of a general nature and subject to
exceptions. Some of the loan programs discussed have been discontinued, although the SBA
continues to maintain loans in its portfolio that were delivered through these programs.
Direct Loans were historically available to certain special categories of borrowers unable to obtain
lender participation loans. Currently, SBA only lends directly through the Microloan Business
Program and the Disaster Loan Program.
Immediate Participation (IP) Loans historically were made jointly by SBA and private lenders when
guaranty loans were unavailable to the borrower. This program has been inactive for years. For the
purposes of this Loss Report, these loans are included in the Direct Loan category.
Guaranty Loans are made and disbursed by private lenders with the SBA providing a guaranty of up
to 85 percent (with a maximum of 75 percent for loans of more than $150,000). Upon borrower
default, the SBA purchases the guaranty percentage of the unpaid balance of the loan. The
maximum loan amount is $2,000,000 but the maximum exposure allowable on the SBA guaranty is
$1,000,000.
Loan Proceeds may be used to establish a new business or to assist in the operation, acquisition, or
expansion of an existing business. Loan proceeds may be used for working capital, the purchase of
inventory, machinery and equipment, and the construction, expansion and rehabilitation of business
property.
Loan Maturity varies according to the prudent economic life of the assets being financed, subject to
the following maximums:
Machinery and Equipment - 10 to 25 years
Building Construction or Purchase - 25 years
Interest Rates are determined by the SBA program office for direct loans. Guaranty loan rates may
not exceed the New York prime rate by more than 2.25% for loans with a maturity of less than 7
years, or 2.75% for loans with a maturity of 7 years or more (some flexibility is allowed for very
small loans).
What follows is a more specific discussion of the various SBA loan programs.
GENERAL BUSINESS PROGRAM
ADVICE FOR USAGE OF LOSS STUDY
Defined under Section 7(a) of the Small Business Act, the 7(a) program is now more accurately
called the General Business Loan Guaranty Program and is the largest of SBA 's lending programs.
The program promotes small business formation and growth by providing long-term loan guaranties
to qualified firms.
General Business loans are always guaranty loans. The IP and direct loan programs for general
business loans were discontinued in 1993. Direct loans included Economic Opportunity, Small
Business Energy, Handicap Assistance, Veterans, Pollution Control and Import Export Loan
programs.
DEVELOPMENT COMPANY PROGRAM
The Development Company program is actually a grouping of four separate and distinct lending
programs defined under Section 7(a)(13) of the Small Business Act and Title V of the Small
Business Investment Act. In general, all four programs consist of loans made through development
companies for the purpose of fostering economic development in both urban and rural areas.
Section 501 (State) development companies were funded by a partnership arrangement between
SBA and state governments. State development company loans are direct in nature. This program
was discontinued in 1982.
Section 502 (Local) development companies were similar in nature to the Section 501 Loan
program, only local, rather than state, governments are involved. The Section 502 program loan
making activity was discontinued in 1995.
Section 503 and 504 (Certified) development companies provide fixed asset financing to small
businesses for the construction or rehabilitation of owner-occupied or leased premises. These are
guaranty loans only. The Section 503 program was discontinued in 1986, but was replaced by the
Section 504 program that continues today.
U.S. COMMUNITY ADJUSTMENT AND INVESTMENT PROGRAM (CAIP)
The SBA has entered into an agreement with the Department of Treasury to deliver a program
funded through the North American Development Bank (NADBank). The CAIP is designed to help
American communities that have suffered significant job losses as a result of changing trade
patterns brought about by the North American Free Trade Agreement. The CAIP provides
economic support by increasing the availability and flow of credit, and encourages business
development and expansion in impacted areas. Through the CAIP, credit is available to businesses
in eligible communities to create new, sustainable jobs or to preserve existing jobs.
The CAIP is available with both the SBA 7(a) Loan Guaranty Program and the 504 Program to
reduce borrower costs and increase the availability of these proven business assistance programs.
The CAIP and the SBA 7(a) Program: The SBA 7(a) Loan Guaranty Program provides lenders with
ADVICE FOR USAGE OF LOSS STUDY
a guaranty on loans and lines of credit to small businesses. For loans that meet the eligibility
requirements of the CAIP, the NADBank pays the SBA loan guaranty fee that is typically paid by
the lending institution or the borrower. This fee is based on the size of the loan guaranty and
currently ranges from 2 to 3.5 percent of the amount of the guaranty.
The CAIP and the SBA 504 Program: The SBA 504 Program is a new addition to the CAIP. It is
designed to assist businesses in the acquisition of long term fixed assets. The typical 504 Program
transaction has three components: First, a commercial lender provides 50 percent of the purchase
price of real estate or equipment; second, the borrower provides at least 10 percent of the amount;
and third, the balance is provided by a Certified Development Corporation (CDC) through the
issuance of SBA guaranteed debentures. The up-front costs for this portion of the loan are borne by
the borrower and can amount to several thousand dollars, depending on the size of the transaction.
As with the 7(a) Program, the CAIP may reimburse much of these costs for the borrower on
eligible projects.
SMALL BUSINESS INVESTMENT COMPANIES
The SBA's Small Business Investment Company (SBIC) program provides long-term loans and/or
venture capital to small firms. SBICs are privately owned and operated investment companies that
are licensed and regulated by SBA. Venture capitalists participate in the SBIC program to
supplement their own private capital through the issuance of SBA guaranteed debentures and
preferred securities that are sold to private investors. SBA also licenses specialized SBICs
(SSBICs) that specialize in meeting the needs of small firms owned by socially or economically
disadvantaged persons. In addition, SSBICs may also leverage their own private capital by selling
nonvoting preferred stock to SBA. SBICs also issue participating securities that are guaranteed by
SBA and that provide SBA potential revenue for its guaranty of timely payment of amounts due to
the debenture holders. The following types of investments are commonly used by SBICs:
Loans with Warrants: SBICs may make loans in return for warrants that enable them to purchase
common stock, usually at a favorable price, during a specific period of time.
Convertible Debentures: SBICs may make loans with a conversion feature whereby the debenture
can be converted, at the SBIC's option, into an equivalent amount of common stock.
Stock: SBICs may purchase common or preferred stock from small firms.
Partnership Interests: SBICs may purchase a limited partnership interest in a partnership.
DISASTER LOAN PROGRAM
ADVICE FOR USAGE OF LOSS STUDY
Under the Disaster Loan Program, business owners, individuals and nonprofit organizations are
eligible for SBA financial assistance to repair the damage caused by natural disasters such as
hurricanes, floods and tornadoes. When the President or the SBA Administrator declares a specific
area to be a disaster area, SBA offers two types of direct loans:
Physical Damage Disaster Loans are available to homeowners, renters, large and small businesses,
and nonprofit organizations.
Economic Injury Disaster Loans are made to small businesses and small agricultural cooperatives
that suffer substantial economic injury because of a physical disaster.
Interest rates on Disaster Loans are handled differently than other loans. For Business Loans, if a
borrower is deemed able to obtain credit elsewhere, the interest rate may not exceed 8 percent. If
these businesses cannot obtain alternative financing, the interest rate may not exceed 4 percent. For
homeowners, the interest rate on Disaster Home Loans also follows the credit-elsewhere test, but
the rates depend on the Treasury cost of funds. Loan maturity is also based on credit eligibility.
Disaster Business Loan borrowers eligible for credit from other sources generally receive loans with
a maturity not to exceed 3 years. Those borrowers that are unable to secure credit elsewhere can
receive loans with a maturity of up to 30 years.
MICROLOAN PROGRAM
The Microloan Program, established in FY 1992, is to assist women, veterans, low income and
minority entrepreneurs possessing the capability to operate successful business concerns. The
program also assists small business concerns in those areas suffering from a lack of credit due to
economic downturn. The SBA makes direct loans (up to $750,000) to eligible and qualified
intermediary lenders who then use the loan proceeds to make short-term, fixed interest rate
microloans. These loans, usually made for less than the $35,000 maximum, are for start-up, newly
established and growing small business concerns. In conjunction with the loans made to
intermediary lenders, SBA will make grants to such intermediary lenders to be used to provide
intensive marketing, management and technical assistance for microloan borrowers. Also, SBA is
authorized to make limited grants to eligible nonprofit entities to provide marketing, management
and technical assistance to help low income individuals obtain private sector financing for their
small businesses.
SBA LOAN LOSS REPORT
SECTION I
Actual Losses
On Pre Credit Reform and Credit Reform Loans
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(Consolidated)
*General Business Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $5,521,257,814 $81,741,359,435 $87,262,617,249
FY 2000 $- $6,616,709,140 $6,616,709,140
Cumulative Disbursements $5,521,257,814 $88,358,068,575 $93,879,326,388
Charged Off Loans
Balance as of 1999 $1,135,273,286 $5,677,295,671 $6,812,568,957
2000 Loan Principal $2,546,970 $272,636,042 $275,183,012
2000 Judgment Principal $50,153 $3,999,821 $4,049,974
2000 Other Receivables $2,760,664 $7,189,993 $9,950,657
Cumulative Charged Off $1,140,631,073 $5,961,121,527 $7,101,752,600
Loans
Recoveries
Balance as of 1999 $64,935,651 $244,792,697 $309,728,348
FY 2000 $1,494,512 $11,717,183 $13,211,696
Cumulative Recoveries $66,430,163 $256,509,880 $322,940,043
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $1,074,200,910 $5,704,611,647 $6,778,812,556
Actual Loss Rate 19.46% 6.46% 7.22%
(Actual
Losses/Disbursements)
*The following loan programs are included: 7(a), 8(A), Economic Opportunity, Small Business
Energy, Handicap Assistance, Veterans, Pollution Control and Import Export.
Development Company
Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $696,140,948 $11,839,258,851 $12,535,399,799
FY 2000 $- $1,482,578,770 $1,482,578,770
f
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Cumulative Disbursements $696,140,948 $13,321,837,620 $14,017,978,568
Charged Off Loans
Balance as of 1999 $193,255,965 $205,329,911 $398,585,876
2000 Loan Principal $846,164 $18,421,303 $19,267,467
2000 Judgment Principal $- $187,652 $187,652
2000 Other Receivables $46,560 $430,386 $476,946
Cumulative Charged Off $194,148,689 $224,369,252 $418,517,941
Loans
Recoveries
Balance as of 1999 $8,549,176 $7,014,888 $15,564,064
FY 2000 $180,292 $1,558,659 $1,738,951
Cumulative Recoveries $8,729,468 $8,573,547 $17,303,015
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $185,419,221 $215,795,705 $401,214,926
Actual Loss Rate
(Actual
Losses/Disbursements) 26.64% 1.62% 2.86%
SBIC (Small Business
Investment Companies) Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $798,220,667 $4,843,965,846 $5,642,186,513
FY 2000 $- $1,274,395,000 $1,274,395,000
Cumulative Disbursements $798,220,667 $6,118,360,846 $6,916,581,513
Charged Off Loans
Balance as of 1999 $170,862,202 $347,336,432 $518,198,634
2000 Loan Principal $1,745,118 $2,672,075 $4,417,193
2000 Judgment Principal $5,559,165 $2,151,583 $7,710,749
2000 Other Receivables $2,358,906 $- $2,358,906
Cumulative Charged Off $180,525,391 $352,160,090 $532,685,481
Loans
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Recoveries
Balance as of 1999 $7,970,779 $44,115,591 $52,086,370
FY 2000 $(1,605,830) $214,886 $(1,390,944)
Cumulative Recoveries $6,364,950 $44,330,477 $50,695,427
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $174,160,441 $307,829,613 $481,990,055
Actual Loss Rate 21.82% 5.03% 6.97
(Actual
Losses/Disbursements)
USCAIP Guaranty (NAFTA) Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $- $25,932,794 $25,932,794
FY 2000 $- $26,576,129 $26,576,129
Cumulative Disbursements $- $52,508,922 $52,508,922
Charged Off Loans
Balance as of 1999 $- $- $-
2000 Loan Principal $- $72,458 $72,458
2000 Judgment Principal $- $- $-
2000 Other Receivables $- $- $-
Cumulative Charged Off $- $72,458 $72,458
Loans
Recoveries
Balance as of 1999 $- $- $-
FY 2000 $- $- $-
Cumulative Recoveries $- $- $-
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $- $72,458 $72,458
Actual Loss Rate 0.00% 0.14% 0.14%
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(Actual
Losses/Disbursements)
Microloan Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $73,676,265 $3,470,584 $77,146,849
FY 2000 $15,241,718 $6,187,522 $21,429,240
Cumulative Disbursements $88,917,983 $9,658,106 $98,576,089
Charged Off Loans
Balance as of 1999 $- $- $-
2000 Loan Principal $- $- $-
2000 Judgment Principal $- $- $-
2000 Other Receivables $- $- $-
Cumulative Charged Off $- $- $-
Loans
Recoveries
Balance as of 1999 $- $- $-
FY 2000 $- $- $-
Cumulative Recoveries $- $- $-
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $- $- $-
Actual Loss Rate 0.00% 0.00% 0.00%
(Actual
Losses/Disbursements)
All Business Loans Direct/IP Guaranteed Program Total
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Disbursements
Balance as of 1999 $7,089,295,694 $98,453,987,509 $105,543,283,203
FY 2000 $15,241,718 $9,406,446,560 $9,421,688,278
Cumulative Disbursements $7,104,537,412 $107,860,434,069 $114,964,971,481
Charged Off Loans
Balance as of 1999 $1,499,391,453 $6,229,962,014 $7,729,353,467
2000 Loan Principal $5,138,251 $293,801,878 $298,940,129
2000 Judgment Principal $5,609,318 $6,339,057 $11,948,375
2000 Other Receivables $5,166,130 $7,620,379 $12,786,509
Cumulative Charged Off $1,515,305,152 $6,537,723,327 $8,053,028,480
Loans
Recoveries
Balance as of 1999 $81,455,606 $295,923,176 $377,378,782
FY 2000 $68,974 $13,490,729 $13,559,703
Cumulative Recoveries $81,524,580 $309,413,904 $390,938,485
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $1,433,780,572 $6,228,309,423 $7,662,089,995
Actual Loss Rate 20.18% 5.77% 6.0%
(Actual
Losses/Disbursements)
*Disaster Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $22,073,333,204 $39,817,968 $22,113,151,172
FY 2000 $766,295,241 $- $766,295,241
Cumulative Disbursements $22,839,628,445 $39,817,968 $22,879,446,413
Charged Off Loans
Balance as of 1999 $2,149,604,640 $1,936,933 $2,151,541,573
2000 Loan Principal $172,097,281 $- $172,097,281
2000 Judgment Principal $1,013,468 $- $1,013,468
2000 Other Receivables $1,759,592 $- $1,759,592
Cumulative Charged Off $2,324,474,980 $1,936,933 $2,326,411,913
Loans
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Recoveries
Balance as of 1999 $165,274,833 $8,805 $165,283,638
FY 2000 $14,034,135 $- $14,034,135
Cumulative Recoveries $179,308,968 $8,805 $179,317,773
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $2,145,166,012 $1,928,128 $2,147,094,140
Actual Loss Rate 9.39% 4.84% 9.38%
(Actual
Losses/Disbursements)
*Asset sales data is also
included.
All Agency Programs Direct/IP Guaranteed Program Total
Disbursements
Balance as of 1999 $29,162,628,898 $98,493,805,477 $127,656,434,375
FY 2000 $781,536,959 $9,406,446,560 $10,187,983,519
Cumulative Disbursements $29,944,165,857 $107,900,252,037 $137,844,417,894
Charged Off Loans
Balance as of 1999 $3,648,996,093 $6,231,898,947 $9,880,895,039
2000 Loan Principal $177,235,532 $293,801,878 $471,037,410
2000 Judgment Principal $6,622,786 $6,339,057 $12,961,843
2000 Other Receivables $6,925,722 $7,620,379 $14,546,101
Cumulative Charged Off $3,839,780,133 $6,539,660,260 $10,379,440,393
Loans
Recoveries
Balance as of 1999 $246,730,439 $295,931,981 $542,662,420
FY 2000 $14,103,110 $13,490,729 $27,593,838
Cumulative Recoveries $260,833,549 $309,422,709 $570,256,258
Actual Net Losses
Cumulative Charged Off
Loans Net of Cumulative
Recoveries $3,578,946,584 $6,230,237,551 $9,809,184,135
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Actual Loss Rate 11.95% 5.77% 7.12%
(Actual
Losses/Disbursements)
SBA LOAN LOSS REPORT
SECTION II
Other Program Costs
OTHER PROGRAM COSTS
Non-recoverable Program Expenses and ColPur Losses
Other costs associated with SBA 's loan programs include non-recoverable program expenses and
losses on ColPur. These additional costs are an incremental factor in the total cost of SBA 's credit
programs.
Non-recoverable program expenses are those expenses absorbed by the Agency on its loan
portfolio. These expenses are typically small in nature and classified as non-recoverable in that
they are not added to the borrower's indebtedness. Examples include fees for title searches, UCC
refile charges and other miscellaneous expenses.
The term "ColPur" represents pledged collateral, the title to which is held by the Agency following
borrower default on a loan. Title may be transferred to SBA in one of two ways. First, a borrower
may enter into a settlement agreement with SBA, offering the collateral in lieu of full or partial
payment. A fair market value is assigned to the collateral and the borrower's indebtedness is
reduced accordingly. The second method is through outright purchase of the property. Upon
borrower default on a loan, the collateral is auctioned off at a sale. SBA issues a protective bid on
the property that, if not outmatched, effectively results in SBA buying out all prior lien-holders and
assuming title to the property.
This collateral is held only until the Agency can sell it, recovering what it can from the sale. In
cases where the amount recovered is less than what the Agency paid or settled the property for, a
loss on ColPur is recognized.
ADVICE FOR USAGE OF LOSS STUDY
These costs are summarized for FY 2000 on the following pages.
Asset Sale Expenses and Asset Sale Losses
In August 2000, over 26,000 loans with unpaid principal balance totaling $1.2 billion were sold to
three successful bidders for $530 million before expenses. As a result of this sale, the SBA
recognized a $600 million accounting loss. This represented the difference between the adjusted
book value and the sales proceeds from investors. The SBA expected to recover less than $530
million if it held and serviced the loans itself until they matured. Therefore, the sale is deemed
successful and in the best interest of the government.
Other Program Costs:
Total Non-Recoverable Expenses and Net Losses on ColPur in FY 2000
* Gen.
Business Local Dev SBIC Disaster Total
Total Non-
Recoverable Expenses $0 $0 $0 $0 $0
GAINS
Gain on Sale of ColPur $1,046,900 $0 $99 $777,254 $1,824,253
Income Earned on $1,618 $21,351 $0 $0 $22,969
Assets Acquired
Gross Gains on ColPur $1,048,518 $21,351 $99 $777,254 $1,847,222
LOSSES
Loss on Sale of ColPur $6,050,216 $2,007,712 $226,409 $973,388 $9,257,724
Expenses Incurred on $0 $0 $0 $0
Assets Acquired
Gross Losses on $6,050,216 $2,007,712 $226,409 $973,388 $9,257,724
ColPur
Net Gain (Loss) on
ColPur ($5,001,698) ($1,986,361) ($226,310) ($196,134) ($7,410,502)
Total Additional
Program Costs $5,001,698 $1,986,361 $226,310 $196,134 $7,410,502
*The following loan programs are included: 7(a), 8(A), Economic Opportunity, Small Business
Energy, Handicap Assistance, Veterans, Pollution Control, and Import Export.
Other Program Costs: Net Losses on Asset Sales in FY 2000
* Gen.
Business Local Dev SBIC Disaster Total
GAINS $13,111,037 $502,969 $0 $0 $13,614,006
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Gain on Asset Sales
LOSSES
Loss on Asset Sales $48,541,429 $12,122,993 $0 $544,741,391 $605,405,814
Expenses Incurred on
Asset Sales $0
Gross Losses on Asset
Sales $48,541,429 $12,122,993 $0 $544,741,391 $605,405,814
Net Gain (Loss) on
Asset Sales ($35,430,392)($11,620,024) $0($544,741,391)($591,791,808)
* The following loan programs are included: 7(a), 8(A), Economic Opportunity, Small
Business Energy,
Handicap Assistance, Veterans, Pollution Control, and Import Export.
GLOSSARY OF TERMS
Actual Loss Rate
Calculated as a percentage, this figure represents the ratio of net losses to total disbursements. Both
net losses and disbursements are cumulative, inception to date for the program.
ColPur
This term is an abbreviation for "Collateral Purchased" and refers to pledged collateral that the
Agency holds title to following borrower default on a loan.
Credit Reform
Accountability requirements pursuant to the Federal Credit Reform Act of 1990 in which credit
program costs are recognized at the time obligations are incurred and reflect loan subsidies and
Treasury borrowings as component cost elements.
Disbursements
Cumulative total of the principal amount loaned under a particular program. Depending on the loan
type (i.e., Direct, Guaranty, or Immediate Participation), the disbursement of monies is made by
SBA, the participating lender, or both.
Judgment
A judgment is obtained when SBA goes to court in order to collect on a defaulted loan.
Loans Charged-Off
The cumulative total of principal balance still owed SBA that has been determined uncollectible.
ADVICE FOR USAGE OF LOSS STUDY
Recoveries
Borrower payments of principal and interest, judgments and other receivables applied to loans
charged-off.