Community Enterprise Development Services

Condition During the audit of the SBA Microloan Program for the year ended September 30, 2025, we noted that the Organization did not maintain the required reserve level within the Microloan Revolving Fund. The Organization has multiple loan funds within the program and the required reserve was underfunded by $202,096 as of year‐end for one of the loan funds. Criteria Per 13 CFR § 120.710(b), intermediaries must maintain a Loan Loss Reserve Fund equal to at least 15 percent of the outstanding balance of microloans. Failure to maintain this reserve constitutes noncompliance with SBA program requirements and increases the risk of loss to the federal government. Cause Management identified the shortfall in August 2025. Management indicated that the SBA was made aware of the reserve shortfall; however, the Organization was unable to restore the required reserve level during the audit period due to timing of response. The Organization did not receive written approval, waiver, or other formal authorization from SBA permitting a temporary deviation from the required reserve level. Effect The Organization was not in compliance with SBA Microloan Program reserve requirements. Failure to maintain the required reserve level increases the risk that sufficient funds may not be available to absorb potential loan losses, thereby exposing the federal program to increased financial risk. Perspective The required Microloan Revolving Fund shortfall was $202,096. Other loan funds within the Microloan Program exceeded required Microloan Revolving Fund reserve levels by approximately $186,000. Additionally, the Loan Loss Reserve Fund for all loan funds exceeded the required threshold by approximately $463,000. However, the Microloan Revolving Fund and Loan Loss Reserve Fund are required to be maintained at the individual loan fund level for each required reserve. Accordingly, the shortfall relating to the individual loan fund is considered a noncompliance to the program even though the Organization had sufficient reserves in total. Questioned Costs None. Repeat Finding No. Recommendation We recommend that the Organization establish procedures to ensure the Microloan Revolving Fund and Loan Loss Reserve Fund are continuously monitored and maintained in accordance with SBA requirements. In addition, the Organization should obtain written approval from SBA for any future deviations from required reserve levels and document all correspondence related to reserve compliance. Views of Responsible Officials Management concurs with the finding. Management has worked with its representative at the SBA to restore the required reserve level by shifting reserves between the Loan Loss Reserve Fund to the Microloan Revolving Fund. Management also indicated that additional internal monitoring procedures will be implemented to prevent future reserve shortfalls.