Full text
ADVICE FOR USAGE OF LOSS STUDY
INTRODUCTION TO THE LOSS REPORT
The FY 2002 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 to a debt owed 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 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. Finally, during FY 2002 the SBA, as part of its Loan Asset Sale program, conducted asset sale numbers 5
and 6. 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.
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.
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 these loans in its portfolio.
Direct Loans were historically available only to certain special categories of borrowers unable to obtain lender
participation loans. Direct loans are disbursed directly from SBA appropriated funds. 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
ADVICE FOR USAGE OF LOSS STUDY
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 (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 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:
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 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.
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 replaced by the Section 504 program that continues today.
U.S. COMMUNITY ADJUSTMENT AND INVESTMENT PROGRAM (CAIP)
ADVICE FOR USAGE OF LOSS STUDY
The Department of Treasury entered into an agreement with the North American Development Bank (NADBank) to
create and fund this program. 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 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.
The CAIP and the SBA 504 Program: The SBA 504 Program has been added to the CAIP. It 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) and funded through the issuance of 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
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 may also leverage their own
private capital by selling non-voting preferred stock to SBA. SBIC’s also 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:
ADVICE FOR USAGE OF LOSS STUDY
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. The rates for both Business and Home Disaster loans 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 Demonstration Program, established in FY 1992, is 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 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.
SBA LOAN LOSS REPORT
SECTION I
Actual Losses
On Pre Credit Reform and Credit Reform Loans
(Consolidated)
ADVICE FOR USAGE OF LOSS STUDY
* General Business Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2001 $5,521,257,814 $94,554,339,847 $100,075,597,661
FY 2002 $0 $7,103,206,369 $7,103,206,369
Cumulative Disbursements $5,521,257,814 $101,657,546,217 $107,178,804,031
** Charged Off Loans
Balance as of 2001 $1,143,773,311 $6,245,100,989 $7,388,874,300
2002 Loan Principal $227,944 $364,076,195 $364,304,139
2002 Judgment Principal $31,728 $3,488,677 $3,520,405
2002 Other Receivables $889,237 $4,224,818 $5,114,055
Cumulative Charged Off Loans $1,144,922,220 $6,616,890,679 $7,761,812,899
Recoveries
Balance as of 2001 $67,513,331 $264,028,084 $331,541,415
FY 2002 $1,180,664 $11,104,351 $12,285,015
Cumulative Recoveries $68,693,995 $275,132,435 $343,826,430
Actual Net Losses
Cumulative Charged Off Loans Net
of Cumulative Recoveries $1,076,228,225 $6,341,758,244 $7,417,986,469
Actual Loss Rate 19.49% 6.24% 6.92%
(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.
** Asset sales data is also included.
Development Company Direct/IP Guaranteed Program Total
Loans
Disbursements
Balance as of 2001 $696,140,948 $14,772,452,725 $15,468,593,673
FY 2002 $0 $2,056,728,563 $2,056,728,563
Cumulative Disbursements $696,140,948 $16,829,181,288 $17,525,322,236
** Charged Off Loans
ADVICE FOR USAGE OF LOSS STUDY
Balance as of 2001 $195,237,725 $248,232,216 $443,469,941
2002 Loan Principal ($598,347) $45,977,182 $45,378,835
2002 Judgment Principal $0 $1,944,188 $1,944,188
2002 Other Receivables $0 $570,194 $570,194
Cumulative Charged Off Loans $194,639,378 $296,723,779 $491,363,158
Recoveries
Balance as of 2001 $7,934,332 $8,586,828 $16,521,160
FY 2002 $0 $3,323,175 $3,323,175
Cumulative Recoveries $7,934,332 $11,910,003 $19,844,334
Actual Net Losses
Cumulative Charged Off Loans Net
of Cumulative Recoveries $186,705,047 $284,813,777 $471,518,823
Actual Loss Rate 26.82% 1.69% 2.69%
(Actual Losses/Disbursements)
** Asset sales data is also included.
Small Business Investment Direct/IP Guaranteed Program Total
Companies (SBIC)
Disbursements
Balance as of 2001 $798,220,667 $7,358,350,846 $8,156,571,513
FY 2002 $0 $1,146,275,000 $1,146,275,000
Cumulative Disbursements $798,220,667 $8,504,625,846 $9,302,846,513
Charged Off Loans
Balance as of 2001 $193,470,490 $352,593,410 $546,063,899
2002 Loan Principal $2,859 $3,500 $6,359
2002 Judgment Principal $4,459,167 $40,549 $4,499,716
2002 Other Receivables $800,069 $1,222 $801,291
Cumulative Charged Off Loans $198,732,584 $352,638,681 $551,371,265
Recoveries
Balance as of 2001 $8,552,406 $47,100,610 $55,653,016
FY 2002 $797,387 $90,002 $887,389
Cumulative Recoveries $9,349,793 $47,190,612 $56,540,405
Actual Net Losses
Cumulative Charged Off Loans Net of
Cumulative Recoveries $189,382,791 $305,448,069 $494,830,860
Actual Loss Rate 23.73% 3.59% 5.32%
(Actual Losses/Disbursements)
ADVICE FOR USAGE OF LOSS STUDY
USCAIP Guaranty Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2001 $0 $63,904,996 $63,904,996
FY 2002 $0 $915,792 $915,792
Cumulative Disbursements $0 $64,820,788 $64,820,788
Charged Off Loans
Balance as of 2001 $0 $643,337 $643,337
2002 Loan Principal $0 $388,288 $388,288
2002 Judgment Principal $0 $0 $0
2002 Other Receivables $0 $0 $0
Cumulative Charged Off Loans $0 $1,031,625 $1,031,625
Recoveries
Balance as of 2001 $0 ($82,023) ($82,023)
FY 2002 $0 $0 $0
Cumulative Recoveries $0 ($82,023) ($82,023)
Actual Net Losses
Cumulative Charged Off Loans Net of
Cumulative Recoveries $0 $1,113,648 $1,113,648
Actual Loss Rate 0.00% 1.72% 1.72%
(Actual Losses/Disbursements)
Program
Microloan Loans Direct/IP Guaranteed
Total
Disbursements
Balance as of 2001 $113,901,149 $10,868,606 $124,769,755
FY 2002 $25,205,296 $1,824,500 $27,029,796
Cumulative Disbursements $139,106,445 $12,693,106 $151,799,551
Charged Off Loans
Balance as of 2001 $0 $0 $0
2002 Loan Principal $0 $0 $0
2002 Judgment Principal $0 $0 $0
2002 Other Receivables $0 $0 $0
Cumulative Charged Off Loans $0 $0 $0
Recoveries
Balance as of 2001 $0 $0 $0
FY 2002 $0 $0 $0
Cumulative Recoveries $0 $0 $0
Actual Net Losses
Cumulative Charged Off Loans Net of
Cumulative Recoveries $0 $0 $0
Actual Loss Rate 0.00% 0.00% 0.00%
(Actual Losses/Disbursements)
ADVICE FOR USAGE OF LOSS STUDY
All Business Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2001 $7,129,520,578 $116,759,917,021 $123,889,437,599
FY 2002 $25,205,296 $10,308,950,224 $10,334,155,520
Cumulative Disbursements $7,154,725,874 $127,068,867,245 $134,223,593,119
** Charged Off Loans
Balance as of 2001 $1,532,481,525 $6,846,569,952 $8,379,051,477
2002 Loan Principal ($367,544) $410,445,165 $410,077,621
2002 Judgment Principal $4,490,895 $5,473,414 $9,964,309
2002 Other Receivables $1,689,306 $4,796,234 $6,485,540
Cumulative Charged Off Loans $1,538,294,182 $7,267,284,765 $8,805,578,947
Recoveries
Balance as of 2001 $84,000,069 $319,633,500 $403,633,568
FY 2002 $1,978,051 $14,517,528 $16,495,578
Cumulative Recoveries $85,978,119 $334,151,028 $420,129,147
Actual Net Losses
Cumulative Charged Off Loans Net of
Cumulative Recoveries $1,452,316,063 $6,933,133,737 $8,385,449,800
Actual Loss Rate 20.30% 5.46% 6.25%
(Actual Losses/Disbursements)
** Asset sales data is also included.
Disaster Loans Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2001 $23,425,402,715 $39,817,968 $23,465,220,683
FY 2002 $1,225,255,239 $0 $1,225,255,239
Cumulative Disbursements $24,650,657,954 $39,817,968 $24,690,475,922
** Charged Off Loans
Balance as of 2001 $2,526,650,256 $2,077,849 $2,528,728,105
2002 Loan Principal $119,617,698 $0 $119,617,698
2002 Judgment Principal $529,626 $206 $529,832
2002 Other Receivables $175,303 $2,688 $177,991
Cumulative Charged Off Loans $2,646,972,882 $2,080,743 $2,649,053,625
Recoveries
Balance as of 2001 $193,848,634 $11,361 $193,859,995
ADVICE FOR USAGE OF LOSS STUDY
FY 2002 $8,584,761 $450 $8,585,211
Cumulative Recoveries $202,433,395 $11,811 $202,445,206
Actual Net Losses
Cumulative Charged Off Loans Net of
Cumulative Recoveries $2,444,539,487 $2,068,932 $2,446,608,419
Actual Loss Rate 9.92% 5.20% 9.91%
(Actual Losses/Disbursements)
** Asset sales data is also included.
All Agency Programs Direct/IP Guaranteed Program Total
Disbursements
Balance as of 2001 $30,554,923,293 $116,799,734,989 $147,354,658,282
FY 2002 $1,250,460,535 $10,308,950,224 $11,559,410,759
Cumulative Disbursements $31,805,383,828 $127,108,685,213 $158,914,069,041
** Charged Off Loans
Balance as of 2001 $4,059,131,781 $6,848,647,801 $10,907,779,582
2002 Loan Principal $119,250,154 $410,445,165 $529,695,319
2002 Judgment Principal $5,020,521 $5,473,620 $10,494,141
2002 Other Receivables $1,864,609 $4,798,922 $6,663,531
Cumulative Charged Off Loans $4,185,267,065 $7,269,365,508 $11,454,632,572
Recoveries
Balance as of 2001 $277,848,703 $319,644,861 $597,493,563
FY 2002 $10,562,812 $14,517,978 $25,080,790
Cumulative Recoveries $288,411,514 $334,162,839 $622,574,353
Actual Net Losses
Cumulative Charged Off Loans Net of
Cumulative Recoveries $3,896,855,550 $6,935,202,669 $10,832,058,219
Actual Loss Rate 12.25% 5.46% 6.82%
(Actual Losses/Disbursements)
** Asset sales data is also included.
ADVICE FOR USAGE OF LOSS STUDY
SBA LOAN LOSS REPORT
SECTION II
OTHER PROGRAM COSTS
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 2002, the SBA, as part of its Loan Asset Sale program, sold $1.252 billion of loans for $862 million before
expenses. As a result of this sale, the SBA recognized a $359 million accounting loss. This represents the difference
between the “adjusted” book value and the sales proceeds from investors. The effect of the $359 million accounting
loss is not included in the Loss Report, but the adjustment to loans made prior to the sale is included in this loss study.
“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.
The costs discussed above are summarized for FY 2002 on the following page.
Other Program Costs: Net Losses on Asset Sales in FY 2002
ADVICE FOR USAGE OF LOSS STUDY
* Gen. Business Local Dev SBIC Disaster Total
Net Gain (Loss) ($32,230,677) ($11,880,563) $0 ($315,345,282) ($359,456,521)
Other Program Costs: Net Losses on ColPur in FY 2002
* Gen. Business Local Dev SBIC Disaster Total
Net Gain (Loss) ($6,280,013) ($2,770,092) ($974,823) ($333,418) ($10,358,346)
Other Program Costs: SBIC In Kind Securities Activity in FY 2002
* Gen. Business Local Dev SBIC Disaster Total
Net Gain (Loss) ($932,258) ($932,258)
* 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.
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
ADVICE FOR USAGE OF LOSS STUDY
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.