The seven basic loan programs of the Small Business Administration are financed from two revolving funds established July 1, 1966, pursuant to amendments to Section 4 (c) of the Small Business Act, approved May 2, 1966 (Public Law 89-409). Prior thereto, a single revolving fund financed the loan programs.

A "Business Loan and Investment Fund" (BLIF) finances regular business loans, displaced business loans, trade adjustment assistance loans and prime contracting under Sections 7(a), 7(b) (3), 7(e), and 8(a) respectively, of the Small Business Act; loans to small business investment companies, and loans to State and local development companies under Titles III and V, respectively, of the Small Business Investment Act; and the small loan program to disadvantaged persons pursuant to Title IV of the Economic Opportunity Act. (To date, no trade adjustment assistance loans have been made.)

A "Disaster Loan Fund” (DLF) finances loans to homeowners, business firms, and nonprofit institutions such as churches and schools, who have suffered losses from floods and other catastrophes. In addition, the Coal Mine Health and Safety Act of 1969 authorized making loans to mining companies to assist them in complying with the safety standards contained in the Act. The Disaster Relief Act of 1969 has, for major disasters declared by the President, liberalized the rules and regulations in effect since March 19, 1968. The revised criteria are highlighted by an up to $1,800 loan foregiveness credit.

Administrative expenses, interest expense payments to Treasury on outstanding cash disbursements from the funds, interest expense payments on outstanding participation certificates, and other related expenses are also financed from the respective funds.

A third revolving fund, the "Lease Guarantees Revolving Fund", finances the Lease Guarantee program for small firms as authorized by Public Law 89-117, approved August 10, 1965.

Capitalization-Limitation on Outstanding
Loans and Commitments

Capital of the two revolving funds was provided by transferring to each the applicable portion of the assets, liabilities, and unexpended balance of the predecessor fund as of June 30, 1966. Through that date, appropriations to the predecessor fund total $1,805 million, of which $5 million was transferred to the Lease Guarantees Revolving Fund as initial capital pursuant to provisions of Public Law 89-117.

Additional appropriations are authorized to be made to the BLIF and DLF funds as capital thereof in such

The capital of the BLIF and DLF loan funds as transferred from the predecessor fund, and including $3.4 million net equity in Reconstruction Finance Corporation loans being liquidated, and $1.5 million in appropriations for Trade Adjustment Loan Assistance, totaled $1,653 million. Of this sum $1,276.6 million was allocated to the Business Loan and Investment Fund, and $376.4 million to the Disaster Loan Fund. A supplemental appropriation of $175 million was approved for the Disaster Loan Fund on December 26, 1969 (Public Law 91-166).

Tables 8 and 9 reflect details of the net charges against the capital amounts available in the BLIF and DLF funds. As shown by these statements, a total $446.3 million was available December 31, 1969, to cover future commitments for new loans and related expenses; $228.3 million in the BLIF fund and $218 million in the DLF fund. These amounts will be augmented in the future by loan repayments and sales, and by revenue.

These tables also show that the balances available at December 31, 1969, resulted, in part, from the sale of participation certificates in loan pools held in trust by the

Government National Mortgage Association. Through December 31, 1969, participation sales amounted to $1,350 million of which $456.1 million had matured and been redeemed leaving an outstanding total of $893.9 million. Of this amount $740 million is allocated to the BLIF fund and $153.9 million to the DLF fund.

Operating Results of Programs

During 1969, SBA's lending operations resulted in a net loss of $82 million compared with a $70 million loss in 1968 and a $59.3 million loss in 1967. Table 1 reflects a distribution of income and expense items among the four major program categories.

In appraising the net loss, several factors peculiar to SBA's operations as compared with those of a private financial institution must be taken into consideration. For example:

1. The maximum interest rate on disaster loans (other than "displaced business" loans) is fixed by statute at 3 percent. However, the Disaster Relief Act of 1969, Public Law 91-79, passed October 1, 1969, provided for loans to be made without regard to the availability of financial assistance from other sources. The interest on these loans

is determined pursuant to a formula prescribed by the legislation. The current rate is 5% percent. The maximum interest rate of business loans is set at 5% percent. At the same time, for fiscal year 1970, SBA is paying the Treasury interest on new disbursements from the two funds at rates of 64, 6%, and 6% percent, depending on the program involved. In addition, interest expense on participation certificates is accruing at rates ranging from 4.75 to 6.45 percent. The following figures compare by program applicable interest rates payable to the Treasury for fiscal years 1969 and 1970.

share of loan disbursement totaling $3 billion. Following is a comparison of the loss rates as of June 30 for the past 3 years:

1969

Business loans 7(a)_

2. Since SBA's primary purpose is to aid and assist small businesses, in numerous instances a prospective applicant's problems and resources are analyzed and reviewed in detail with the applicant even though no formal application and loan result. Frequently, considerable time and effort are spent helping a small businessman overcome his financial problems through means other than a loan. In such cases, the agency's personnel costs may be as high as if revenue-producing loans were made. Also, because SBA usually does not have credit files on applicants and many applicants are located in cities remote from SBA offices, investigation of applications often involves more time and cost than a private lending institution would be willing to expend.

3. Further, the average loan is relatively small, and the resulting income small in relation to the cost of performing processing, closing, and servicing functions.

Loss Experience on Loans

Table 1, on the distribution of income and expenses by major program categories, shows that the losses result in part from charges against earnings to cover estimated future losses on loans made during the year. The establishment of reserves to cover future losses through current charges to earnings at rates based on experience is predicated on the assumption that some loans will prove to be uncollectable. In keeping with accepted accounting practices, potential losses should be recognized in the year of disbursement.

To assure that the reserve rates and accumulated reserves are in line with experience, an analysis of actual and projected losses is made as of June 30 each year. Following are the results of the analysis as of June 30, 1969, for each of the programs involved:

Business loans. From inception of this prograin through June 30, 1969, SBA charged off $56.6 million of principal on 4,465 regular business loans. The field office servicing staff estimated additional losses of $35.5 million on other loans for a combined total actual and estimated principal loss of $92.1 million. This total is equivalent to 3.09 percent of loan disbursements through June 30, 1969. However, based on previous analysis, it is SBA's belief that loans disbursed during the past 2 or 3 years have not matured to a point where estimates of losses are reliable. Accordingly, if it is assumed that the agency's loss experience on loans disbursed prior to July 1, 1966 is a more valid measure, we can anticipate a possible loss of 3.82 percent of total disbursement. Applying this rate to the total of loans disbursed through June 30, 1969, SBA

Total business loans...

Economic opportunity loans.—Through June 30, 1969, principal charged off amounted to $6.7 million. The servicing field staff estimated additional losses of $8.9 million on other loans for a total actual and estimated loss of $15.6 million. This represents 14.6 percent of loan disbursement through June 30, 1969, totaling $106.8 million.

Displaced business loans.—A total of $235,000 of principal was charged off on 25 loans through June 30, 1969. Additional losses of $326,000 were estimated by the field office servicing staff for a total actual and estimated loss of $561,000. This represents 0.49 percent of loan disbursements amounting to $113.8 million through that date.

The loss experience on loans disbursed prior to July 1, 1966, indicates a possible loss of 1.26 percent. Applied to the disbursement total, this could mean an ultimate loss of $1.4 million on loans made through June 30, 1969.

Disaster loans.—Principal charged off through June 30, 1969, totaled $11.4 million on 3,042 loans. On additional loans, the field office servicing staff estimated losses of $8.5 million for a total actual and estimated loss of $19.9 million, equivalent to 3.32 percent of loan disbursements through that date.

SBA's experience on loans disbursed prior to July 1, 1966, indicates a possible loss of 3.86 percent can be anticipated. This rate would mean an ultimate loss of $23.2 million on the SBA share of disbursements totaling $600.2 million through June 30, 1969. The loss rate of 3.86 percent compares with 4.04 at June 30, 1968, and 3.90 at June 30, 1967.

Development company loans.-Through June 30, 1969, principal chargeoffs of $1 million had been recorded on 13 loans to local development companies. Estimates of losses by the field servicing staff amounted to $3.4 million for a total actual and estimated loss of $4.4 million. This represents 2.04 percent of the SBA share of disbursements of $216.2 million. No losses have occurred nor are any estimated on loans to State development companies on which $11.7 million had been disbursed by June 30, 1969. There has not been sufficient repayment experience to permit development of projected losses in a manner as described for business loans, as a substitute for estimated losses based on current appraisals of outstanding loans.

Investment company loans.-Only $3.4 million of principal of these loans had actually been charged off at June 30, 1969. Established reserves for losses amounted to $35.8 million.