Full text
INTRODUCTION TO THE LOSS REPORT
The FY 2004 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 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 additional data on the losses and gains from the sale of collateral (real
estate and other property) acquired due to borrower loan defaults. 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 loss of principal and interest since 1992 to give a
complete picture of the component costs of SBA lending programs. We have not included,
however, the losses on the financing of the sale of acquired collateral due to the lack of historical
information.
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 directly comparable with 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 cashflows 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.
1
SBA LOAN PROGRAMS
General Information
The following general information applies to business and disaster loan programs. 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 these loans in its
portfolio.
Direct Loans were historically available only to certain special categories of borrowers unable to
obtain SBA guaranteed loans made by participating lenders. Direct loans are disbursed directly
by SBA. Currently, SBA only lends directly in 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
75 percent (85 percent for loans of $150,000 or less). 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 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 also 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:
Working Capital - 7 to 10 years
Machinery and Equipment - 10 to 25 years
Building Construction or Purchase - 25 years
Interest Rates are determined by the SBA program office for Business 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.
What follows is a more specific discussion of the various SBA loan programs.
2
GENERAL BUSINESS PROGRAM
Defined under Section 7(a) of the Small Business Act, the 7(a) program is now more accurately
called the General Business 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 are 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.
The 504 Development Company Program is designed to assist businesses in the acquisition of
long term fixed assets. The typical 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 SBA provides the balance through a
Certified Development Corporation (CDC) funded through the issuance of debentures.
U.S. COMMUNITY ADJUSTMENT AND INVESTMENT PROGRAM (CAIP)
The Department of Treasury entered into an agreement with the North American Development
Bank (NADBank) to create and fund this program. 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. CAIP provides economic support
by increasing the availability and flow of credit, and encourages business development and
expansion in impacted areas. Through CAIP, credit is available to businesses in eligible
communities to create new, sustainable jobs or to preserve existing jobs.
3
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.
CAIP and the 7(a) Program: The SBA 7(a) Loan Guaranty Program provides lenders with
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 ranges from 2 to 3 percent of the amount of the guaranty.
CAIP and the 504 Program: The 504 Program has been added to the CAIP. The up
front costs for this program 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
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 licensed specialized SBICs
(SSBICs) in the past (new licensing was discontinued in 1997) that specialize in meeting the
needs of small firms owned by socially or economically disadvantaged persons. In addition,
SSBICs leverage their own private capital by selling non-voting preferred stock to SBA. Since
1994, SBIC’s can issue participating securities that are guaranteed by SBA and 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
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.
4
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. Treasury Department cost of funds, determine the interest rates for Business and
Home loans, that are subject to these maximum interest rates. 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 was established in FY 1992 to assist women, 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 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. SBA is also authorized to make
limited grants to eligible non-profit entities to provide marketing, management, and technical
assistance to help low income individuals obtain private sector financing for their small
businesses.
5
SBA LOAN LOSS REPORT
SECTION I
Actual Losses
On Pre Credit Reform and Credit Reform Loans
(Consolidated)
6
* General Business Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $5,521,257,814 $108,684,495,708 $114,205,753,522
FY 2004 $0 $7,849,324,501 $7,849,324,501
Cumulative Disbursements $5,521,257,814 $116,533,820,209 $122,055,078,023
** Charged Off Loans
Balance as of 2003 $1,146,119,255 $7,034,124,958 $8,180,244,213
2004 Loan Principal $103,977 $196,943,520 $197,047,497
2004 Judgment Principal $193,714 $1,504,294 $1,698,008
2004 Other Receivables $147,831 $1,337,539 $1,485,370
Cumulative Charged Off Loans $1,146,564,777 $7,233,910,311 $8,380,475,088
Recoveries
Balance as of 2003 $69,556,739 $292,751,740 $362,308,479
FY 2004 ($832,727) $13,470,652 $12,637,925
Cumulative Recoveries $68,724,012 $306,222,392 $374,946,404
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recoveries $1,077,840,765 $6,927,687,919 $8,005,528,684
Actual Loss Rate 19.52% 5.94% 6.56%
(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.
** Loan balance write-downs associated with asset sales included.
7
Development Company Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $696,140,948 $19,043,470,288 $19,739,611,236
FY 2004 $0 $2,824,370,000 $2,824,370,000
Cumulative Disbursements $696,140,948 $21,867,840,288 $22,563,981,236
** Charged Off Loans
Balance as of 2003 $195,255,329 $363,204,045 $558,459,374
2004 Loan Principal $0 $54,389,156 $54,389,156
2004 Judgment Principal $0 $0 $0
2004 Other Receivables $0 $0 $0
Cumulative Charged Off Loans $195,255,329 $417,593,201 $612,848,530
Recoveries
Balance as of 2003 $7,987,849 $14,826,020 $22,813,869
FY 2004 ($45,375) $2,590,836 $2,545,461
Cumulative Recoveries $7,942,474 $17,416,856 $25,359,330
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recoveries $187,312,855 $400,176,345 $587,489,100
Actual Loss Rate 26.91% 1.83% 2.60%
(Actual Losses/Disbursements)
** Loan balance write-downs associated with asset sales included.
8
Small Business Investment Companies (SBIC) Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $798,220,667 $9,738,075,846 $10,536,296,513
FY 2004 $0 $1,438,675,000 $1,438,675,000
Cumulative Disbursements $798,220,667 $11,176,750,846 $11,974,971,513
Charged Off Loans
Balance as of 2003 $220,398,104 $358,068,649 $578,466,753
2004 Loan Principal $10,223 $247,451 $257,674
2004 Judgment Principal ($343,516) $9,411,271 $9,067,755
2004 Other Receivables $462,314 $48,627 $510,941
Cumulative Charged Off Loans $220,527,125 $367,775,998 $588,303,123
Recoveries
Balance as of 2003 $9,545,925 $47,243,064 $56,788,989
FY 2004 $358,936 ($3,170,096) ($2,811,160)
Cumulative Recoveries $9,904,861 $44,072,968 $53,977,829
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recoveries $210,622,264 $323,703,030 $534,325,294
Actual Loss Rate 26.39% 2.90% 4.46%
(Actual Losses/Disbursements)
9
CAIP Guaranty Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $0 $83,382,686 $83,382,686
FY 2004 $0 $16,208,336 $16,208,336
Cumulative Disbursements $0 $99,591,022 $99,591,022
Charged Off Loans
Balance as of 2003 $0 $1,340,804 $1,340,804
2004 Loan Principal $0 $235,791 $235,791
2004 Judgment Principal $0 $0 $0
2004 Other Receivables $0 $0 $0
Cumulative Charged Off Loans $0 $1,576,595 $1,576,595
Recoveries
Balance as of 2003 $0 ($82,023) ($82,023)
FY 2004 $0 $0 $0
Cumulative Recoveries $0 ($82,023) ($82,023)
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recoveries $0 $1,658,618 $1,658,618
Actual Loss Rate 0.00% 1.67% 1.67%
(Actual Losses/Disbursements)
10
Microloan Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $162,228,967 $12,843,106 $175,072,073
FY 2004 $20,594,645 $0 $20,594,645
Cumulative Disbursements $182,823,612 $12,843,106 $195,666,718
Charged Off Loans
Balance as of 2003 $0 $0 $0
2004 Loan Principal $3,458 $0 $3,458
2004 Judgment Principal $0 $0 $0
2004 Other Receivables $93,839 $0 $93,839
Cumulative Charged Off Loans $97,297 $0 $97,297
Recoveries
Balance as of 2003 $0 $0 $0
FY 2004 $0 $0 $0
Cumulative Recoveries $0 $0 $0
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recoveries $97,297 $0 $97,297
Actual Loss Rate 0.05% 0.00% 0.05%
(Actual Losses/Disbursements)
11
All Business Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $7,177,848,396 $137,562,267,634 $144,740,116,030
FY 2004 $20,594,645 $12,128,577,837 $12,149,172,482
Cumulative Disbursements $7,198,443,041 $149,690,845,471 $156,889,288,512
** Charged Off Loans
Balance as of 2003 $1,561,772,688 $7,756,738,456 $9,318,511,144
2004 Loan Principal $117,658 $251,815,918 $251,933,576
2004 Judgment Principal ($149,802) $10,915,565 $10,765,763
2004 Other Receivables $703,984 $1,386,166 $2,090,150
Cumulative Charged Off Loans $1,562,444,528 $8,020,856,105 $9,583,300,633
Recoveries
Balance as of 2003 $87,090,513 $354,738,801 $441,829,314
FY 2004 ($519,166) $12,891,392 $12,372,226
Cumulative Recoveries $86,571,347 $367,630,193 $454,201,540
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recover $1,475,873,181 $7,653,225,912 $9,129,098,993
Actual Loss Rate 20.50% 5.11% 5.82%
(Actual Losses/Disbursements)
** Loan balance write-downs associated with asset sales included.
12
Disaster Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $25,336,781,553 $39,817,968 $25,376,599,521
FY 2004 $465,152,253 $0 $465,152,253
Cumulative Disbursements $25,801,933,806 $39,817,968 $25,841,751,774
** Charged Off Loans
Balance as of 2003 $2,808,083,253 $2,080,743 $2,810,163,996
2004 Loan Principal $64,670,920 $0 $64,670,920
2004 Judgment Principal $1,519,695 $0 $1,519,695
2004 Other Receivables $693,163 $8,740 $701,903
Cumulative Charged Off Loans $2,874,967,031 $2,089,483 $2,877,056,514
Recoveries
Balance as of 2003 $219,102,607 $11,811 $219,114,418
FY 2004 $10,794,691 ($6,697) $10,787,994
Cumulative Recoveries $229,897,298 $5,114 $229,902,412
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recover $2,645,069,733 $2,084,369 $2,647,154,102
Actual Loss Rate 10.25% 5.23% 10.24%
(Actual Losses/Disbursements)
** Loan balance write-downs associated with asset sales included.
13
All Agency Programs Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2003 $32,514,629,949 $137,602,085,602 $170,116,715,551
FY 2004 $485,746,898 $12,128,577,837 $12,614,324,735
Cumulative Disbursements $33,000,376,847 $149,730,663,439 $182,731,040,286
** Charged Off Loans
Balance as of 2003 $4,369,855,941 $7,758,819,199 $12,128,675,140
2004 Loan Principal $64,788,578 $251,815,918 $316,604,496
2004 Judgment Principal $1,369,893 $10,915,565 $12,285,458
2004 Other Receivables $1,397,147 $1,394,906 $2,792,053
Cumulative Charged Off Loans $4,437,411,559 $8,022,945,588 $12,460,357,147
Recoveries
Balance as of 2003 $306,193,120 $354,750,612 $660,943,732
FY 2004 $10,275,525 $12,884,695 $23,160,220
Cumulative Recoveries $316,468,645 $367,635,307 $684,103,952
Actual Net Losses
Cumulative Charged Off Loans Net of Cumulative Recoveries $4,120,942,914 $7,655,310,281 $11,776,253,095
Actual Loss Rate 12.49% 5.11% 6.44%
(Actual Losses/Disbursements)
** Loan balance write-downs associated with asset sales included.
14
SBA LOAN LOSS REPORT
SECTION II
OTHER PROGRAM COSTS
15
OTHER PROGRAM COSTS
The SBA term "ColPur" represents pledged collateral, the title to which is held by the SBA
following the borrower’s default on a loan. Title may be transferred to SBA in one of two ways.
First, a borrower may enter into a compromise agreement with SBA, offering the collateral in
lieu of 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. Once obtained, the collateral is auctioned off at a sale. SBA issues a protective bid on
the property that effectively results in SBA buying-out all prior lien-holders and assuming title to
the property.
This collateral is held only until the SBA can sell it - recovering what it can from the sale. In
cases where the amount recovered is less than what the SBA paid or compromised the property
for, a loss on ColPur is recognized. In some cases, the sales proceeds for the collateral are
greater than the ColPur value, and a gain is recognized on the sales transaction.
“In Kind Distribution” are distributions the SBA receives from Small Business Investment
Corporations (SBIC). These distributions are generally in the form of securities. The SBIC
may distribute securities to the SBA in lieu of payment of interest advances, distribution of
profits, or a prepayment in the reduction of the underlying security. Normally the distributions
are held only for a short period of time before they are sold. A gain or loss is recognized on the
sale on each security. In 2004 there were no distributions.
The costs discussed above are summarized for FY 2004 on the following page.
16
Other Program Costs: Net Losses on ColPur in FY 2004
* Gen. Business Local Dev SBIC Disaster Total
Net Gain (Loss) ($1,393,475) ($2,580,402) ($158,431) ($102,214) ($4,234,521)
Other Program Costs: SBIC In Kind Securities Activity in FY 2004
Net Gain (Loss) $0 $0
* The following loan programs are included: 7(a), 8(A), Economic Opportunity, Small Business Energy,
Handicap Assistance, Veterans, Pollution Control, and Import Export.
17
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.
Asset Sales
The SBA is in the process of selling their loan portfolio to the private sector. The purchasers
will be responsible for the servicing of the loans.
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.
In-Kind Distribution
The SBA receives stock dividends from Small Business Investment Corporations (SBIC) that are
sold.
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.
Recoveries
Borrower payments of principal and interest, judgements and other receivables applied to loans
charged-off.
18