Business Loan Program

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement Public Law 106-22, enacted

on April 27, 1999, which establishes new rules for the loan loss

reserve fund which an intermediary must maintain to participate in

SBA's microloan program.

DATES: Comments must be submitted on or before August 25, 1999.

ADDRESSES: Comments should be mailed to Jane Palsgrove Butler,

Associate Administrator for Financial Assistance, Small Business

Administration, 409 Third Street, SW., Washington, DC. 20416.

FOR FURTHER INFORMATION CONTACT: Jody Raskind, 202-205-6497.

SUPPLEMENTARY INFORMATION: Public Law 106-22, enacted on April 27,

1999, amended section 7(m) of the Small Business Act (15 U.S.C.

636(7)(m)) in order to change the requirements for the loan loss

reserve fund (LLRF) which each intermediary in the SBA's microloan

program must maintain. The LLRF is an interest-bearing deposit account

at a bank. An intermediary must establish an LLRF to pay any shortage

in its day-to-day revolving account caused by delinquencies or losses

on microloans it makes to qualified small business borrowers. An

intermediary must maintain the LLRF until it repays all obligations it

owes to the SBA.

Under the present rule, an intermediary, during its first year in

the microloan program, must maintain its LLRF at a level equal to at

least 15 percent of the total outstanding balance of notes receivable

owed to it by its microloan borrowers (Portfolio). Thereafter, the

minimum balance that an intermediary must maintain in its LLRF must be

the percent of its Portfolio equal to its actual average loan loss rate

after its first year in the microloan program. The maximum level of the

LLRF, under the present rule, cannot exceed 15 percent of the

Portfolio. There is no prescribed minimum level.

Under the proposed rule, until the intermediary is in the microloan

program for at least five years, it would be required to maintain a

balance on deposit in its LLRF equal to 15 percent of its Portfolio.

After an intermediary is in the microloan program for five years, it

may request SBA's Associate Administrator for Financial Assistance (AA/

FA) to grant the intermediary's request to reduce the percentage of its

Portfolio which it must maintain in its LLRF to an amount equal to its

actual average loan loss rate during the preceding five year period.

The AA/FA would review the intermediary's annual loss rate for that

five year period and determine whether he or she should grant the

intermediary's request. The AA/FA could not reduce the loan loss

reserve to under ten percent of the Portfolio.

Under the proposed rule, to get a reduction in its loan loss

reserve, an intermediary must demonstrate to the satisfaction of the

AA/FA that (1) its average annual loss rate during the preceding five

years is under fifteen percent, and (2) no other factors exist that

might impair its ability to repay all obligations which it may owe to

SBA under the microloan program.

Compliance With Executive Orders 12612, 12988 and 12866, the

Regulatory Flexibility Act ( 5 U.S.C. 601-612), and the Paperwork

Reduction Act (44 U.S.C. Ch. 35)

SBA certifies that this proposed rule does not constitute a

significant rule within the meaning of Executive Order 12866, since it

is not likely to have an annual effect on the economy of $100 million

or more, result in a major increase in costs or prices, or have a

significant adverse effect on competition or the U.S. economy.

SBA certifies that this proposed rule will not have a significant

economic impact on a substantial number of small entities within the

meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612.

SBA certifies that this proposed rule does not impose any

additional reporting or recordkeeping requirements under the Paperwork

Reduction Act, 44 U.S.C. chapter 35.

For purposes of Executive Order 12612, SBA certifies that this

proposed rule has no federalism implications warranting preparation of

a Federalism Assessment.

For purposes of Executive Order 12988, SBA certifies that this

proposed rule is drafted, to the extent practicable, to accord with the

standards set forth in section 3 of that Order.

List of Subjects in 13 CFR Part 120

Loan programs-business.

For the reasons stated in the preamble, under the authority in

section 5(b)(6) of the Small Business Act (15 U.S.C. 634(b)(6), the

Small Business Administration proposes to amend 13 CFR part 120 as

follows:

PART 120--BUSINESS LOANS

1. The authority citation for part 120 continues to read as

follows:

Authority: 15 U.S.C. 634(b)(6) and 636(a) and (h).

[[Page 40311]]

2. Amend Sec. 120.710 by revising paragraphs (b) and (c) and by

adding paragraphs (d) and (e) to read as follows:

Sec. 120.710 What is the Loan Loss Reserve Fund?

* * * * *

(b) Level of Loan Loss Reserve Fund. Until it is in the Microloan

program for at least five years, an Intermediary must maintain a

balance on deposit in its LLRF equal to 15 percent of the outstanding

balance of the notes receivable owed to it by its Microloan borrowers

(``Portfolio'').

(c) SBA Review of Loan Loss Reserve. After an Intermediary has been

in the Microloan program for five years, it may request the SBA's AA/FA

to reduce the percentage of its Portfolio which it must maintain in its

LLRF to an amount equal to the actual average loan loss rate during the

preceding five year period. Upon receipt of such request, the AA/FA

will review the Intermediary's annual loss rate for the most recent

five-year period preceding the request.

(d) Reduction of Loan Loss Reserve. The AA/FA has the authority to

reduce the percentage of an Intermediary's Portfolio which it must

maintain in its LLRF to an amount equal to the actual average loan loss

rate during the preceding five year period. The AA/FA can not reduce

the loan loss reserve to less than ten percent of the Portfolio.

(e) What Intermediary Must Demonstrate to Get a Reduction in Loan

Loss Reserve. To get a reduction in its loan loss reserve, an

Intermediary must demonstrate to the satisfaction of the AA/FA that

(1) Its average annual loss rate during the preceding five years is

less than fifteen percent, and

(2) No other factors exist that may impair the Intermediary's

ability to repay all obligations which it owes to the SBA under the

Microloan program.

Dated: July 20, 1999.

Aida Alvarez,

Administrator.

[FR Doc. 99-18956 Filed 7-23-99; 8:45 am]

BILLING CODE 8025-01-P