Equal Opportunity

The Office of Equal Opportunity and Compliance appointed Women's Coordinators for each of the 10 SBA regions during the year and made trained Equal Employment Counselors available in each of the agency's offices.

Special care was taken at the scene of natural disasters for the recruitment and training of minority persons to work as SBA representatives in meeting the needs of minority victims, especially in areas where there were language, social, or economic barriers.

Minority employment within SBA made an overall gain, with the highest increase among Spanish Americans whose number rose to 5.4 percent in 1970 from 2.2 percent in 1969. Employment for all minorities in the higher grades, GS-9 to 15, increased 64 percent.

The work of the Civil Rights Compliance staff in determining whether SBA loan recipients and contractors met their equal opportunity obligations was cited by the Commission on Civil Rights Report on Federal Civil Rights Enforcement Effort, issued in October 1970. As a result, the SBA received numerous inquiries from other agencies regarding its methods.

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 activity 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 of 1958; and the small loan program to disadvantaged persons pursuant to title IV of the Economic Opportunity Act.

A "Disaster Loan Fund" (DLF) finances the well-known program of loans to homeowners, business firms without regard to size, and nonprofit institutions such as churches and schools, who have suffered property losses from floods and other catastrophies, and loans to small business firms which have suffered substantial economic injury as a result of disasters declared by the President or the Secretary of Agriculture. Effective December 30, 1969, the Coal Mine Health and Safety Act of 1969 authorized the making of "economic injury" loans to mining companies to assist them in complying with the safety standards contained in the act. The Disaster Relief Act of 1969, approved October 1, 1969, liberalized, for major disasters declared by the President, the rules and regulations in effect during the prior 18 months. The revised criteria were highlighted by provision for an up to $1,800 loan forgiveness 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 totaled $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 amounts as may be necessary to carry out authorized functions. While no ceiling exists for such authorized appropriations, there is congressional control over the level of the loan programs financed from the Business Loan and Investment Fund. Limitations have been established, presently aggregating $3,150 million, on the amount of loans and commitments which may be outstanding at any one time. The status of the individual limitations within this total as of December 31, 1970, is shown in the following tabulation:

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. Through December 31, 1970, additional capital of $375 million has been appropriated, $175 million in fiscal year 1970 for the Disaster Loan Fund, and $200 million in fiscal year 1971 for the Business Loan and Investment Fund.

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 $166.7 million was available December 31, 1970, to cover future commitments for new loans and related expenses; $154 million in the BLIF fund and $12.7 million in the DLF fund. These amounts will be augmented in the future by loan repayments and revenue, and additional capital of $100 million appropriated to the DLF fund on January 8,

1971.

These tables also show that the balances available at December 31, 1970, resulted, in part, from the sale of participation certificates in loan pools held in trust by the Government National Mortgage Association. Through December 31, 1970, participation sales amounted to $1,350 million of which $568.2 million had matured and been redeemed, leaving an outstanding total of $781.8 million. Of this amount, $633.4 million is allocated to the BLIF fund and $148.4 million to the DLF fund.

Operating Results of Programs

During 1970, SBA's lending operations resulted in a net loss of $105.6 million compared with an $82 million loss in 1969 and a $70 million loss in 1968. 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. For most disaster loans, the maximum interest rate through December 31, 1970, was fixed by statute at 3 percent. The exceptions were: (1) "Displaced business" and "coal mine health and safety", and (2) loans made without regard to the availability of financial assistance from other sources pursuant to special authority in the Disaster Relief Act of 1969 which carry interest rates determined by formulas prescribed by applicable legislation. The rates on these loans through December 31, 1970, were 5 and 6 percent, respectively. (Effective Jan. 1, 1971, the Disaster Relief Act of 1970, provides a new formula interest rate for all disaster loans other than those identified as (1) above.) The maximum interest rate for business loans and for local development company loans is set at 51⁄2 percent. At the same time, for fiscal year 1971, SBA is paying the Treasury interest on new disbursements from the two funds at rates of 7% and 74 percent, depending on the program involved. In addition, interest expense on participation certificates is accruing at rates ranging from 5.00 to 6.45 percent. The following figures compare by program applicable interest rates payable to the Treasury for fiscal years 1970 and 1971.

Business loans. From inception of this program through June 30, 1970, SBA charged off $66.5 million of principal on 5,266 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 $102 million. This total is equivalent to 3.05 percent of loan disbursements through June 30, 1970.

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 "seasoned" loans (loans disbursed prior to July 1, 1967) is a more valid measure, we can anticipate a possible loss of 3.77 percent of total disbursements. Applying this rate to the total of loans disbursed through June 30, 1970, SBA could incur an ultimate loss of $116 million on the SBA share of loan disbursements totaling $3.3 billion. Following is a comparison of the loss rates as of June 30 for the past 3 years:

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 uncollectible. 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, 1970, for each of the programs involved:

Economic opportunity loans.-Through June 30, 1970, principal charged off amounted to $12.1 million for 1,607 loans. On a modified "seasoned" loan concept, we project a loss rate of 21 percent. Applying this rate to total loan disbursements through June 30, 1970, SBA could incur an ultimate loss of $34.1 million on the SBA share of disbursements totaling $162.4 million.

Displaced business loans.-A total of $343,020 of principal was charged off on 32 loans through June 30, 1970. Additional losses of $373,097 were estimated by the field office servicing staff for a total actual and estimated loss of $716,117. This represents 0.49 percent of loan disbursements amounting to $145.6 million through that date.

The loss experience on loans disbursed prior to July 1, 1967, indicates a possible loss of 1.11 percent. Applied to the disbursement total, this could mean an ultimate loss of $1.6 million on loans made through June 30, 1970.

Disaster loans.-Principal charged off through June 30, 1970, totaled $14.3 million on 4,308 loans. On additional loans, the field office servicing staff estimated losses of $6.4 million for a total actual and estimated loss of $20.7 million, equivalent to 2.86 percent of loan disbursements through that date.

SBA's experience on loans disbursed prior to July 1, 1967, indicates a possible loss of 4 percent can be anticipated. This rate would mean an ultimate loss of $29.0 million on the SBA share of disbursements totaling $724.5 million through June 30, 1970. The loss rate of 4 percent compares with 3.86 at June 30, 1969, and 4.04 at June 30, 1968.

Development company loans.-Through June 30, 1970, principal chargeoffs of $3.0 million had been recorded on 28 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 $6.4 million. This represents 2.33 percent of the SBA share of disbursements of $272.7 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, 1970. 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 $7.2 million of principal of these loans had actually been charged off at June 30, 1970, equivalent to 1.7 percent of the total loan disbursements of $420.7 million. Established reserves for losses amounted to $24.3 million.