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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: April 3, 2000

FROM: Barry McVay, CPCM

SUBJECT: Small Business Administration; Loan Loss Reserve Fund

SOURCE: Federal Register, April 3, 2000, Vol. 65, No. 64, page 17439

AGENCIES: Small Business Administration (SBA)

ACTION: Final Rule

SYNOPSIS: SBA is amending its regulations pertaining to the loan loss reserve fund (LLRF) which an intermediary must maintain to participate in SBA's microloan program.

EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations. The SBA regulations affected by this final rule are under "Chapter 1, Small Business Administration," "Part 120, Business Loans," "Subpart G, Microloan Demonstration Program," then "120.710, What is the Loan Loss Reserve Fund?"

EFFECTIVE DATE: April 3, 2000.

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

SUPPLEMENTAL INFORMATION: The Microloan Program Technical Corrections Act of 1999, Public Law 106-22, which was enacted on April 27, 1999, amended the Small Business Act to change the requirements for the LLRF. The LLRF is an interest-bearing deposit account at a bank which an intermediary must establish 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 LLRF regulations, an intermediary, during its first year in the microloan program, had to maintain its LLRF at a level equal to at least 15% of the total outstanding balance of notes receivable owed to it by its microloan borrowers (its "portfolio"). After the first year, the minimum balance in an intermediary's LLRF had to be "at a level which, at a minimum, reflects its loss experience as determined by SBA." However, the maximum level of the LLRF was limited to 15% of the portfolio, and there was no prescribed minimum level.

On July 26, 1999, SBA proposed to implement Public Law 106-22 by revising it's regulations at Section 120.710, What is the Loan Loss Reserve Fund? SBA proposed to require an intermediary to maintain a balance in its LLRF equal to 15% of its portfolio until the intermediary has been in the microloan program for at least five years (proposed paragraph (b)). After five years, the intermediary would be permitted to ask the SBA's Associate Administrator for Financial Assistance (AA/FA) to reduce the percentage of its portfolio in its LLRF to an amount equal to its actual average loan loss rate during the preceding five year period (proposed paragraph (c)). The intermediary would have to demonstrate to the satisfaction of the AA/FA that no other factors exist that might impair its ability to repay all obligations it might owe to SBA under the microloan program. However, the AA/FA would not be permitted to reduce the LLRF to less than 10% of the portfolio (proposed paragraph (d)).

To get a reduction in its loan loss reserve, an intermediary would have to demonstrate to the satisfaction of the AA/FA that (1) its average annual loss rate during the preceding five years was under 15%, 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 (proposed paragraph (e)).

SBA received no comments, so it is finalizing the rule as proposed.

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

Copyright 2000 by Panoptic Enterprises. All Rights Reserved.

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