Disaster Loan Program

[[Page 58014]]

SMALL BUSINESS ADMINISTRATION

13 CFR Part 123

Disaster Loan Program

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: In response to President Clinton's regulatory review

directive, the Small Business Administration has completed a page-by-

page and line-by-line review of its regulations. As a result, SBA is

proposing to clarify and streamline its regulations, revising or

eliminating any duplicative, outdated, inconsistent or confusing

provisions. This proposed rule would reorganize the entire regulation

123 covering the disaster loan program to make it more clear and easier

to use.

DATES: Comments must be submitted on or before December 26, 1995.

ADDRESSES: Written comments should be addressed to David R. Kohler,

Regulatory Reform Initiative Team Leader (123), Small Business

Administration, 409 Third Street, SW., Suite 13, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Bernard Kulik, Associate Administrator

for Disaster Assistance, at (202) 205-6734.

SUPPLEMENTARY INFORMATION: Part 123 of Chapter I, 13 CFR contains

policies governing the eligibility of disaster victims to obtain low-

cost loans to restore their damaged property to its pre-disaster

condition. This proposed rule would reorganize the entire Part 123 to

make it more clear and easier to use. It would eliminate references to

disasters which occurred years ago, and it would eliminate Subpart D--

Persian Gulf Troop Deployment Economic Injury Loans because the

authority for that loan program has expired. A conversion table

follows:

------------------------------------------------------------------------

Existing section Action New section

------------------------------------------------------------------------

123.1........................... Revise............ 123.1

123.2........................... Revise............ 123.101

123.3........................... Revise............ 123.3, 123.4,

123.5, 123.10,

123.101

123.4........................... Revise............ 123.5

123.5........................... Delete............ ..................

123.6........................... Revise............ 123.8

123.7........................... Revise............ 123.3

123.8........................... Delete............ ..................

123.9........................... Revise............ 123.101, 123.104,

123.105

123.10.......................... Delete............ ..................

123.11.......................... Revise............ 123.11

123.12.......................... Revise............ 123.13

123.13.......................... Revise............ 123.16, 123.104

123.14.......................... Revise............ 123.101

123.15.......................... Delete............ ..................

123.16.......................... Delete............ ..................

123.17.......................... Revise............ 123.201

123.18.......................... Revise............ 123.12

123.19.......................... Revise............ 123.9

123.20.......................... Delete............ ..................

123.21.......................... Revise............ 123.100, 123.200

123.22.......................... Revise............ 123.3

123.23.......................... Revise............ 123.3

123.24.......................... Revise............ 123.6, 123.7,

123.12, 123.101,

123.105, 123.106,

23.107, 123.201,

123.202

123.25.......................... Revise............ 123.15, 123.105

123.26.......................... Revise............ 123.202, 123.203

123.27.......................... Delete............ ..................

123.28.......................... Revise............ 123.202

123.29.......................... Delete............ ..................

123.40.......................... Delete............ ..................

123.41.......................... Revise............ 123.14, 123.301,

123.302, 123.303

123.60-69....................... Delete............ ..................

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Compliance With Executive Orders 12612, 12778, and 12866, the

Regulatory Flexibility Act (5.U.S.C. 601, et seq.), and the Paperwork

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

SBA certifies that this rule does not have a significant economic

impact on a substantial number of small entities within the meaning of

Executive Order 12866, or the Regulatory Flexibility Act, 5 U.S.C. 601,

et seq.

For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA

certifies that this rule contains no new reporting or recordkeeping

requirements.

For purposes of Executive Order 12612, SBA certifies that this rule

has no federalism implications warranting preparation of the federalism

assessment.

For purposes of Executive Order 12778, SBA certifies that this rule

is drafted, to the extent practicable, in accordance with the standards

set forth in Section 2 of that Order.

List of Subjects in 13 CFR Part 123

Disaster assistance, Loan programs--business, Reporting and

recordkeeping requirements, Small businesses.

Accordingly, pursuant to the authority set forth in sections

5(b)(6), 7(b)(1), and 7(c)(6) of the Small Business Act, SBA hereby

proposes to revise Part 123 of Title 13 of the Code of Federal

Regulations to read as follows:

PART 123--DISASTER LOAN PROGRAM

Overview

Sec.

123.1 What do these rules cover?

123.2 What are disaster loans and disaster declarations?

123.3 How are disaster declarations made?

123.4 What is a disaster area and why is it important?

123.5 What kinds of loans are available?

123.6 What does SBA look for when considering a disaster loan

applicant?

123.7 Are there restrictions on how disaster loans can be used?

123.8 Does SBA charge any fees for obtaining a disaster loan?

123.9 What happens if I don't use loan proceeds for the intended

purpose?

123.10 What happens if I cannot use my insurance proceeds to make

repairs?

123.11 Does SBA require collateral for any of its disaster loans?

123.12 Are books and records required?

123.13 What happens if my loan application is denied?

123.14 Application of the Federal Debt Collection Procedures Act of

1990.

123.15 What if I change my mind?

123.16 Loan Administration and Servicing.

123.17 Application of Federal requirements relating to flood

insurance, environmental considerations, and other matters.

Home Disaster Loans

123.100 Am I eligible to apply for a home disaster loan?

123.101 When am I not eligible to apply for a home disaster loan?

123.102 What circumstances would justify my relocating?

123.103 What happens if I am forced to move from my home?

123.104 What interest rate will I pay on my home disaster loan?

123.105 How much can I borrow with a home disaster loan and what

limits apply on use of funds and repayment terms apply?

123.106 What is eligible refinancing?

123.107 What is mitigation?

Physical Disaster Business Loans

123.200 Am I eligible to apply for a physical disaster business

loan?

123.201 When am I not eligible to apply for a physical disaster

business loan?

123.202 How much can my business borrow with a physical disaster

business loan?

123.203 What interest rate will my business pay on a physical

disaster business loan and what are the repayment terms?

Economic Injury Disaster Loans

123.300 Is my business eligible to apply for an economic injury

disaster loan?

123.301 When would my business not be eligible to apply for an

economic injury disaster loan?

123.302 What is the interest rate on an economic injury disaster

loan?

123.303 How can my business spend my economic injury disaster loan?

[[Page 58015]]

Authority: 15 U.S.C. 634(b)(6), 636(b), 636(c) and 636(f); Pub.

L. 102-395, 106 Stat. 1828, 1864; and Pub. L. 103-75, 107 Stat. 739.

Overview

Sec. 123.1 What do these rules cover?

This part covers the disaster loan programs authorized under the

Small Business Act, 15 U.S.C. 636(b), (c), and (f). Since SBA cannot

predict the occurrence or magnitude of disasters, it reserves the right

to change these rules, without advance notice, by publishing interim

emergency regulations in the Federal Register.

Sec. 123.2 What are disaster loans and disaster declarations?

SBA offers low interest, fixed rate loans to disaster victims,

enabling them to repair or replace property damaged or destroyed in

declared disasters. It also offers such loans to affected small

businesses to help them recover from economic injury caused by such

disasters. Disaster declarations are official notices recognizing that

specific geographic areas have been damaged by floods and other acts of

nature, riots, civil disorders, or industrial accidents such as oil

spills. These disasters are sudden events which cause severe physical

damage, and do not include slower physical occurrences such as

shoreline erosion or gradual land settling. Sudden physical events that

cause substantial economic injury may be disasters even if they do not

cause physical damage to a victim's property. Past examples include

ocean conditions causing significant displacement (major ocean

currents) or closure (toxic algae blooms) of customary fishing waters,

as well as contamination of food or other products for human

consumption from unforeseeable and unintended events beyond the control

of the victims.

Sec. 123.3 How are disaster declarations made?

(a) There are four ways in which disaster declarations are issued

which make SBA disaster loans possible:

(1) The President declares a Major Disaster and authorizes Federal

assistance, including individual assistance (temporary housing and

Individual and Family Grant Assistance).

(2) SBA makes a physical disaster declaration, based on the

occurrence of at least a minimum amount of physical damage to

buildings, machinery, equipment, inventory, homes and other property.

Such damage usually must meet the following tests:

(i) In any county or other smaller political subdivision of a State

or U.S. possession, at least 25 homes or 25 businesses, or a

combination of at least 25 homes, businesses, or other eligible

institutions, must each sustain uninsured losses of 40 percent or more

of the estimated fair replacement value or pre-disaster fair market

value of the damaged property, whichever is lower; or

(ii) In any such political subdivision, at least three businesses

each sustain uninsured losses of 40 percent or more of the estimated

fair replacement value or pre-disaster fair market value of the damaged

property, whichever is lower, and, as a direct result of such physical

damage, 25 percent or more of the work force in their community would

be unemployed for at least 90 days; and

(iii) The Governor of the State in which the disaster occurred

submits a written request to SBA for a physical disaster declaration by

SBA (OMB Approval No. 3245-0121). This request should be delivered to

the SBA Disaster Area Office serving the region where the disaster

occurred within 60 days of the date of the disaster.

(3) SBA makes an economic injury disaster declaration in response

to a determination of a natural disaster by the Secretary of

Agriculture.

(4) SBA makes an economic injury declaration in reliance on a state

certification that at least 5 small business concerns in a disaster

area have suffered substantial economic injury as a result of the

disaster and are in need of financial assistance not otherwise

available on reasonable terms. The state certification must be signed

by the Governor, must specify the county or counties or other political

subdivisions in which the disaster occurred, and must be delivered

(with supporting documentation) to the servicing SBA Disaster Area

Office within 120 days of the disaster occurrence.

(b) SBA publishes notice of any disaster declaration in the Federal

Register. The published notice will identify the kinds of assistance

available, the date and nature of the disaster, and the deadline and

location for filing loan applications. SBA will accept applications

after the announced deadline only when SBA determines that the late

filing resulted from substantial causes essentially beyond the control

of the applicant. Additionally, SBA will use the local media to inform

potential loan applicants where to obtain loan applications and

otherwise to assist victims in applying for disaster loans.

Sec. 123.4 What is a disaster area and why is it important?

Each disaster declaration defines the geographical areas affected

by the disaster. Only those victims located in the declared disaster

area are eligible to apply for SBA disaster loans. When the President

declares a major disaster, the Federal Emergency Management Agency

defines the disaster area. In major disasters, economic injury disaster

loans may be made for victims in contiguous counties or other political

subdivisions. Disaster declarations issued by the Administrator of SBA

include contiguous counties for both physical and economic injury

assistance. Contiguous counties or other political subdivisions are

those land areas which abut the land area of the declared disaster area

without geographic separation other than by a minor body of water, not

to exceed one mile between the land areas of such counties.

Sec. 123.5 What kinds of loans are available?

SBA offers three kinds of disaster loans: physical disaster home

loans, physical disaster business loans, and economic injury business

loans. SBA makes these loans directly or in participation with a

financial institution. If a loan is made in participation with a

financial institution, SBA's share in that loan may not exceed 90

percent.

Sec. 123.6 What does SBA look for when considering a disaster loan

applicant?

There must be reasonable assurance that you can repay your loan out

of your personal or business cash flow, and you must have satisfactory

credit and character. SBA will not make a loan to you if repayment

depends upon the sale of collateral through foreclosure or any other

disposition of assets owned by you. SBA is prohibited by statute from

making a loan to you if you are engaged in the production or

distribution of any product or service that has been determined to be

obscene by a court.

Sec. 123.7 Are there restrictions on how disaster loans can be used?

You must use disaster loans to restore or replace your primary home

(including a mobile home used as primary residence) and your personal

or business property as nearly as possible to their condition before

the disaster occurred, and within certain limits, to protect damaged or

destroyed real property from possible future similar disasters.

Sec. 123.8 Does SBA charge any fees for obtaining a disaster loan?

SBA does not charge points, closing, or servicing fees on any

disaster loan.

[[Page 58016]]

You will be responsible for payment of any closing costs owed to third

parties, such as recording fees and title insurance premiums. Also, if

your loan is made in participation with a financial institution, SBA

will charge a guaranty fee to the financial institution and the

financial institution may recover the guaranty fee from you.

Sec. 123.9 What happens if I don't use loan proceeds for the intended

purpose?

(a) When SBA approves each loan application, it issues a loan

authorization which specifies the amount of the loan, repayment terms,

any collateral requirements, and the permitted use of loan proceeds. If

you wrongfully misapply these proceeds, you will be liable to SBA for

one and one-half times the proceeds disbursed to you as of the date SBA

learns of your wrongful misapplication. Wrongful misapplication means

the willful use of any loan proceeds without SBA approval contrary to

the loan authorization. If you fail to use loan proceeds for authorized

purposes for 60 days or more after receiving a loan disbursement check,

such non-use also is considered a wrongful misapplication of the

proceeds.

(b) If SBA learns that you may have misapplied your loan proceeds,

SBA will notify you at your last known address, by certified mail,

return receipt requested. You will be given at least 30 days to submit

to SBA evidence that you have not misapplied the loan proceeds or that

you have corrected any such misapplication. Any failure to respond in

time will be considered an admission that you misapplied the proceeds.

If SBA finds a wrongful misapplication, it will cancel any undisbursed

loan proceeds, call the loan, and begin collection measures to collect

your outstanding loan balance and the civil penalty. You may also face

criminal prosecution.

Sec. 123.10 What happens if I cannot use my insurance proceeds to make

repairs?

If you must pay insurance proceeds to the holder of a recorded lien

or encumbrance against your damaged property instead of using them to

make repairs, you may apply to SBA for the full amount needed to make

such repairs. If you voluntarily pay insurance proceeds to a recorded

lienholder, your loan eligibility is reduced by the amount of the

voluntary payment.

Sec. 123.11 Does SBA require collateral for any of its disaster loans?

Generally, SBA will not require that you pledge collateral to

secure a disaster home loan or a physical disaster business loan of

$10,000 or less, or an economic injury disaster loan of $5,000 or less.

For loans larger than these amounts, you will be required to provide

available collateral such as a lien on the damaged or replacement

property, a security interest in personal property, or both.

(a) Sometimes a borrower, including affiliates as defined in Part

121 of this chapter, will have more than one loan after a single

disaster. In deciding whether collateral is required, SBA will add up

all physical disaster loans to see if they exceed $10,000 and all

economic injury disaster loans to see if they exceed $5,000.

(b) SBA will not decline a loan if you lack a particular amount of

collateral as long as it is reasonably sure that you can repay your

loan. If you refuse to pledge available collateral when requested by

SBA, however, SBA may decline or cancel your loan.

Sec. 123.12 Are books and records required?

You must retain complete records of all transactions financed with

your SBA loan proceeds, including copies of all contracts and receipts,

for a period of 3 years after you receive your final disbursement of

loan proceeds. If you have a physical disaster business or economic

injury loan, you must also maintain current and accurate books of

account, including financial and operating statements, insurance

policies, and tax returns. You must retain applicable books and records

for 3 years after your loan matures including any extensions, or from

the date when your loan is paid in full, whichever occurs first. You

must make available to SBA or other authorized government personnel

upon request all such books and records for inspection, audit, and

reproduction during normal business hours and you must also permit SBA

and any participating financial institution to inspect and appraise

your assets. (OMB Approval No. 3245-0110.)

Sec. 123.13 What happens if my loan application is denied?

(a) If SBA denies your loan application, SBA will notify you in

writing and set forth the specific reasons for the denial. Any

applicant whose request for a loan is declined for reasons other than

not being a small business (size) has the right to present information

to overcome the reason or reasons for the denial and to request

reconsideration. (OMB Approval No. 3245-0122.)

(b) Any decline due to size can only be appealed as set forth in

Part 121 of this chapter.

(c) Any request for reconsideration must be in writing and must be

delivered to the SBA office that declined the original application

within six months of the date of the notice of the denial. After six

months, a new loan application is required.

(d) A written request for reconsideration must contain all

significant new information that you rely on to overcome SBA's denial

of your original loan application. Your request for reconsideration of

a business loan application must also be accompanied by current

business financial statements.

(e) If SBA declines your application a second time, you have the

right to appeal to the Area Director's Office. All appeals must be in

writing and be received by the office that processed and declined the

prior reconsideration within 30 days of the decline action. Your

request must state that you are appealing, and must contain your

written justification for believing that the decline action should be

reversed.

(f) The decision of the Area Director is final unless:

(1) The Area Director does not have authority to approve the

requested loan;

(2) The Area Director refers the matter to the Associate

Administrator for Disaster Assistance; or

(3) The Associate Administrator for Disaster Assistance, upon a

showing of special circumstances, requests the Area Director's office

to forward the matter to him or her for final consideration. Special

circumstances may include, but are not limited to, policy

considerations, alleged improper acts by SBA personnel or others in

processing the application, and conflicting policy interpretations

between two Area Offices.

Sec. 123.14 Application of the Federal Debt Collection Procedures Act

of 1990.

(a) Under the Federal Debt Collection Procedures Act of 1990 (28

U.S.C. 3201(e)), a debtor who owns property which is subject to an

outstanding judgment lien for a debt owed to the United States is

generally not eligible to receive physical and economic injury disaster

loans. The SBA Associate Administrator for Disaster Assistance, or

designee, may waive this restriction against receiving disaster loans

upon a demonstration of good cause. Good cause means a written

representation by you under oath which convinces SBA that:

(1) The declared disaster was a major contributing factor to the

delinquency which led to the judgment lien, regardless of when the

original debt was incurred; or

[[Page 58017]]

(2) The disaster directly prevented you from fulfilling the terms

of an agreement with SBA or any other Federal Government entity to

satisfy its pre-disaster judgment lien; in this situation, the judgment

creditor must certify to SBA that you were complying with the agreement

to satisfy the judgment lien when the disaster occurred; or

(3) Other circumstances exist which would justify a waiver.

(b) The waiver determination by the Associate Administrator for

Disaster Assistance, or designee, is a final, non-appealable decision.

The granting of a waiver does not include loan approval; a waiver

recipient must then follow normal loan application procedures.

Sec. 123.15 What if I change my mind?

If SBA required you to pledge collateral for your loan, you may

change your mind and rescind your loan pursuant to the Consumer Credit

Protection Act, 15 U.S.C. 1601, and Regulation Z of the Federal Reserve

Board, 12 CFR Part 226. Your note and any collateral documents signed

by you will be canceled upon your return of all loan proceeds and your

payment of any interest accrued.

Sec. 123.16 Loan Administration and Servicing.

(a) If you obtained your disaster loan from a participating lender,

that lender is responsible for closing and servicing your loan. If you

obtained your loan directly from SBA, your loan will be closed and

serviced by SBA. The SBA rules on servicing are found in part 120 of

this chapter.

(b) If you are unable to pay your SBA loan installments in a timely

manner for reasons substantially beyond your control, you may request

that SBA suspend your loan payments, extend your maturity, or both.

Sec. 123.17 Application of Federal requirements relating to flood

insurance, environmental considerations, and other matters.

As a condition of disbursement, you must be in compliance with

certain requirements relating to flood insurance, lead-based paint,

earthquake hazards, coastal barrier islands, and child support

obligations, as set forth in Secs. 120.170 through 120.175 of this

chapter.

Home Disaster Loans

Sec. 123.100 Am I eligible to apply for a home disaster loan?

(a) You are eligible to apply for a home disaster loan if you:

(1) Own and occupy your primary residence and have suffered a

physical loss to your primary residence, personal property, or both; or

(2) Do not own your primary residence, but suffered a physical loss

to your personal property. Family members residing in the same

household are eligible if they are not dependents of the owners of the

residence.

(b) Losses may be claimed only by the owners of the property at the

time of the disaster, and all such losses will be verified by SBA. SBA

will consider beneficial ownership as well as legal title (for real or

personal property) in determining who suffered the loss.

Sec. 123.101 When am I not eligible for a home disaster loan?

You are not eligible for a home disaster loan if:

(a) You have been convicted, during the past year, of a felony

during and in connection with a riot or civil disorder or other

declared disaster;

(b) You acquired voluntarily more than a 50 percent ownership

interest in the damaged property after the disaster, and no contract of

sale existed at the time of the disaster;

(c) Your damaged property can be repaired or replaced with the

proceeds of insurance, gifts or other compensation, including

condemnation awards (with one exception, these amounts must either be

deducted from the amount of the claimed losses or, if received after

SBA has approved and disbursed a loan, must be paid to SBA as principal

payments on your loan. You must notify SBA of any such recoveries

collected after receiving an SBA disaster loan (OMB Approval No. 3245-

0124). The one exception applies to the Individual and Family Grant

Program of the Federal Emergency Management Agency solely to meet an

emergency need pending processing of an SBA loan. In such an event, you

must repay the financial assistance with SBA loan proceeds if it was

used for purposes also eligible for an SBA loan);

(d) SBA determines that you assumed the risk (for example, by not

maintaining flood insurance as required by an earlier SBA disaster loan

when the current loss is also due to flood);

(e) Your damaged property is a secondary home (although if you

rented the property out before the disaster and the property would not

constitute a ``residence'' under the provisions of Section 280A of the

Internal Revenue Code, you may be eligible for a physical disaster

business loan);

(f) Your damaged property is the type of vehicle normally used for

recreational purposes, such as motorhomes, aircraft, and boats;

(g) Your damaged property consists of cash or securities;

(h) The replacement value of your damaged personal property is

extraordinarily high and not easily verified, such as the value of

antiques, artworks, or hobby collections;

(i) You or other principal owners of the damaged property are

presently incarcerated, or on probation or parole following conviction

for a serious criminal offense;

(j) Your only interest in the damaged property is in the form of a

security interest, mortgage, or deed of trust;

(k) The damaged building, including contents, was newly constructed

or substantially improved on or after February 9, 1989, and (without a

significant business justification) is located seaward of mean high

tide or entirely in or over water; or

(l) You voluntarily decide to relocate outside the business area in

which the disaster has occurred, and there are no special or unusual

circumstances leading to your decision (Business area means the

municipality which provides general governmental services to your

damaged home or, if not located in a municipality, the county or

equivalent political entity in which your damaged home is located).

Sec. 123.102 What circumstances would justify my relocating?

SBA may approve a loan if you intend to relocate outside the

business area in which the disaster has occurred if your relocation is

caused by such special or unusual circumstances as:

(a) Demonstrable risk that the business area will suffer future

disasters;

(b) A change in employment status (such as loss of job, transfer,

lack of adequate job opportunities within the business area or

scheduled retirement within 18 months after the disaster occurs);

(c) Medical reasons; or

(d) Special family considerations which necessitate a move outside

of the business area.

Sec. 123.103 What happens if I am forced to move from my home?

If you must relocate inside or outside the business area because

local authorities will not allow you to repair your damaged property,

SBA considers this to be a total loss and a mandatory relocation. In

this case, your loan would be an amount that SBA considers sufficient

to replace your residence at your new location, plus funds to cover

losses of personal property and eligible refinancing.

[[Page 58018]]

Sec. 123.104 What interest rate will I pay on my home disaster loan?

If you can obtain credit elsewhere, your interest rate is set by a

statutory formula, but will not exceed 8 percent per annum. If you

cannot obtain credit elsewhere, your interest rate is one-half the

statutory rate, but will not exceed 4 percent per annum. Credit

elsewhere means that, with your cash flow and disposable assets, SBA

believes you could obtain financing from non-federal sources on

reasonable terms. If you cannot obtain credit elsewhere, you also may

be able to borrow from SBA to refinance existing recorded liens against

your damaged real property. Under prior legislation, some SBA disaster

loans had split interest rates. On any such loan, repayments of

principal are applied first to that portion of the loan with the lowest

interest rate.

Sec. 123.105 How much can I borrow with a home disaster loan and what

limits apply on use of funds and repayment terms?

(a) For all disasters occurring on or after October 26, 1993, there

are limits on how much money you can borrow for particular purposes:

(1) $40,000 for repair or replacement of household and personal

effects;

(2) $200,000 for repair or replacement of a primary residence

(including upgrading in order to meet minimum standards of safety and

decency or current building code requirements). Repair or replacement

of landscaping and/or recreational facilities can not exceed $5,000;

(3) $200,000 for eligible refinancing purposes; and

(4) 20 percent of the loan amount (not including refinancing) up to

a maximum of $48,000 for mitigation.

(b) You may not use loan proceeds to repay any debts on personal

property, secured or unsecured, unless you incurred those debts as a

direct result of the disaster.

(c) SBA determines the loan maturity and repayment terms based on

your needs and your ability to pay. Generally, you will pay equal

monthly installments of principal and interest, beginning five months

from the date of the loan, as shown on the Note securing the loan. SBA

will consider other payment terms if you have seasonal or fluctuating

income, and SBA may allow installment payments of varying amounts over

the first two years of the loan. The maximum maturity for a home

disaster loan is 30 years. There is no penalty for prepayment of home

disaster loans.

Sec. 123.106 What is eligible refinancing?

(a) If your home (primary residence) is totally destroyed or

substantially damaged, and you do not have credit elsewhere, SBA may

allow you to borrow money to refinance recorded liens or encumbrances

on your home. Your home is totally destroyed or substantially damaged

if it has suffered uninsured or otherwise uncompensated damage which,

at the time of the disaster, is either:

(1) 40 percent or more of the home's market value or replacement

cost at the time of the disaster, including land value, whichever is

less; or

(2) 50 percent or more of its market value or replacement cost at

the time of the disaster, not including land value, whichever is less.

(b) Your home disaster loan for refinancing existing liens or

encumbrances cannot exceed an amount equal to the lesser of $200,000,

or the physical damage to your primary residence after reductions for

any insurance or other recovery.

Sec. 123.107 What is mitigation?

Mitigation means specific measures taken by you to protect against

recurring damage in similar future disasters. Examples include

retaining walls, sea walls, grading and contouring land, relocating

utilities and modifying structures. The money that you can borrow for

mitigation is limited to the lesser of the cost of mitigation, or 20

percent of your loan to repair or replace your damaged primary

residence and personal property. SBA will not accept a request for a

loan increase for mitigation filed after final disbursement of your

original loan unless you can show that your request was late because of

substantial reasons beyond your control.

Physical Disaster Business Loans

Sec. 123.200 Am I eligible to apply for a physical disaster business

loan?

(a) Almost any business concern or charitable or other non-profit

entity whose real or tangible personal property is damaged in a

declared disaster area is eligible to apply for a physical disaster

business loan. Your business may be a sole proprietorship, partnership,

corporation, limited liability company, or other legal entity

recognized under State law. Your business' size (average annual

receipts or number of employees) is not taken into consideration in

determining your eligibility for a physical disaster business loan. If

your damaged business occupied rented space at the time of the

disaster, and the terms of your business' lease require you to make

repairs to your business' building, you may have suffered a physical

loss and can apply for a physical business disaster loan to repair the

property. In all other cases, the owner of the building is the eligible

loan applicant.

(b) Damaged vehicles, of the type normally used for recreational

purposes, such as motorhomes, aircraft, and boats, may be repaired or

replaced with SBA loan proceeds if you can submit evidence that the

damaged vehicles were used in your business at the time of the

disaster.

Sec. 123.201 When am I not eligible to apply for a physical disaster

business loan?

(a) You are not eligible for a physical disaster business loan if

your business is an agricultural enterprise or if you fit into any of

the categories in Sec. 123.101. Agricultural enterprise means a

business primarily engaged in the production of food and fiber,

ranching and raising of livestock, aquaculture and all other farming

and agriculture-related industries.

(b) Sometimes a damaged business is engaged in both agricultural

and non-agricultural business activities. If the primary business

activity of your damaged business is not an agricultural enterprise,

you may apply for a physical disaster business loan, but loan proceeds

may not be used, directly or indirectly, for the benefit of your

agricultural enterprises, even if they also suffered damage.

(c) If your business is going to relocate voluntarily outside the

business area in which the disaster occurred, you are not eligible for

a physical disaster business loan. If, however, the relocation is due

to uncontrollable or compelling circumstances, SBA will consider the

relocation to be involuntary and eligible for a loan. Such

circumstances may include, but are not limited to:

(1) The elimination or substantial decrease in the market for your

products or services, as a consequence of the disaster;

(2) A change in the demographics of your business area within 18

months prior to the disaster, or as a result of the disaster, which

makes it uneconomical to continue operations in your business area;

(3) A substantial change in your cost of doing business, as a

result of the disaster, which makes the continuation of your business

in the business area not economically viable;

(4) Location of your business in a hazardous area such as a special

flood hazard area or an earthquake-prone area;

(5) A change in the public infrastructure in your business area

which occurred within 18 months or as a result of the disaster that

would result in substantially increased expenses for your business in

the business area;

[[Page 58019]]

(6) Your implementation of decisions adopted and at least partially

implemented within 18 months prior to the disaster to move your

business out of the business area; and

(7) Other factors which undermine the economic viability of your

business area.

Sec. 123.202 How much can my business borrow with a physical disaster

business loan?

(a) Disaster business loans, including both physical disaster and

economic injury loans to the same borrower, together with its

affiliates, cannot exceed the greater of the uncompensated physical

loss and economic injury or $1.5 million. Physical disaster loans may

include amounts to meet current building code requirements. If your

business is a major source of employment, SBA may waive the $1.5

million limitation. A major source of employment is a business concern

which has one or more locations in the disaster area which:

(1) Employed 10 percent or more of the entire work force within the

commuting area of a geographically identifiable community (no larger

than a county), provided that the commuting area does not extend more

than 50 miles from such community; or

(2) Employed 5 percent of the work force in an industry within the

disaster area and, if the concern is a non-manufacturing concern,

employed no less than 50 employees in the disaster area, or if the

concern is a manufacturing concern, employed no less than 150 employees

in the disaster area; or

(3) Employed no less than 250 employees within the disaster area.

(b) SBA will consider waiving the $1.5 million loan limit only if:

(1) Your damaged location or locations are out of business or in

imminent danger of going out of business as a result of the disaster,

and a loan in excess of $1.5 million is necessary to reopen or keep

open the damaged locations in order to avoid substantial unemployment

in the disaster area; and

(2) You have used all reasonably available funds from your

business, its affiliates and its principal owners (20% or greater

ownership interest) and all available credit elsewhere (as described in

Section 123.104) to alleviate your physical damage and economic injury.

(c) Physical disaster business borrowers may request refinancing of

liens on both damaged real property and machinery and equipment, but

for an amount reduced by insurance or other compensation. To do so,

your business property must be totally destroyed or substantially

damaged, which means:

(1) 40 percent or more of the aggregate value (lesser of market

value or replacement cost at the time of the disaster) of the damaged

real property (including land) and damaged machinery and equipment; or

(2) 50 percent or more of the aggregate value (lesser of market

value or replacement cost at the time of the disaster) of the damaged

real property (excluding land) and damaged machinery and equipment.

(d) Loan funds allocated for repair or replacement of landscaping

or recreational facilities may not exceed $5,000 unless the landscaping

or recreational facilities fulfilled a functional need or contributed

to the generation of business.

Sec. 123.203 What interest rate will my business pay on a physical

disaster business loan and what are the repayment terms?

(a) SBA will announce interest rates with each disaster

declaration. If your business, together with its affiliates and

principal owners, have credit elsewhere, your interest rate is set by a

statutory formula, but will not exceed 8 percent per annum. If you do

not have credit elsewhere, your interest rate will not exceed 4 percent

per annum. The maturity of your loan depends upon your repayment

ability but cannot exceed 3 years if you have credit elsewhere.

Otherwise, the maximum maturity is 30 years.

(b) Generally, you must pay equal monthly installments, of

principal and interest, beginning five months from the date of the loan

as shown on the Note. SBA will consider other payment terms if you have

seasonal or fluctuating income, and SBA may allow installment payments

of varying amounts over the first two years of the loan. There is no

penalty for prepayment for disaster loans.

Economic Injury Disaster Loans

Sec. 123.300 Is my business eligible to apply for an economic injury

disaster loan?

(a) If your business is located in a declared disaster area, and

suffered substantial economic injury as a direct result of a declared

disaster, you are eligible to apply for an economic injury disaster

loan.

(1) Substantial economic injury is such that a business concern is

unable to meet its obligations as they mature or to pay its ordinary

and necessary operating expenses.

(2) Loss of anticipated profits or a drop in sales is not

considered substantial economic injury for this purpose.

(b) Economic injury disaster loans are available only if you were a

small business (as defined in part 121 of this chapter) when the

declared disaster commenced, you and your affiliates and principal

owners (20% or more ownership interest) have used all reasonably

available funds, and you are unable to obtain credit elsewhere (as

described in Sec. 123.104).

(c) Eligible businesses do not include agricultural enterprises,

but do include--

(1) Small nurseries affected by a drought disaster designated by

the Secretary of Agriculture (nurseries are commercial establishments

deriving 50 percent or more of their annual receipts from the

production and sale of ornamental plants and other nursery products,

including, but not limited to, bulbs, florist greens, foliage, flowers,

flower and vegetable seeds, shrubbery, and sod);

(2) Small agricultural cooperatives; and

(3) Producer cooperatives.

Sec. 123.301 When would my business not be eligible to apply for an

economic injury disaster loan?

Your business is not eligible for an economic disaster loan if you

fit into any of the categories in Secs. 123.101 and 123.201, or if your

business is:

(a) Engaged in gambling, lending, multi-level sales distribution,

loan packaging, speculation, or investment (except for real estate

investment with property held for rental when the disaster occurred);

(b) A non-profit or charitable concern;

(c) A consumer or marketing cooperative; or

(d) Not a small business concern.

Sec. 123.302 What is the interest rate on an economic injury disaster

loan?

Your economic injury loan will have an interest rate of 4 percent

per annum or less.

Sec. 123.303 How can my business spend my economic injury disaster

loan?

(a) You can only use the loan proceeds for working capital

necessary to carry your concern until resumption of normal operations

and for expenditures necessary to alleviate the specific economic

injury, but not to exceed that which the business could have provided

had the injury not occurred.

(b) Loan proceeds may not be used to:

(1) Refinance indebtedness which you incurred prior to the disaster

event; or

(2) Make payments on loans owned by another federal agency

(including SBA)

[[Page 58020]]

or a Small Business Investment Company licensed under the Small

Business Investment Act; or

(3) Pay, directly or indirectly, any obligations resulting from a

federal, state or local tax penalty as a result of negligence or fraud,

or any non-tax criminal fine, civil fine, or penalty for non-compliance

with a law, regulation, or order of a federal, state, regional, or

local agency or similar matter; or

(4) Repair physical damage; or

(5) Pay dividends or other disbursements to owners, partners,

officers or stockholders, except for reasonable remuneration directly

related to their performance of services for the business.

Dated: November 11, 1995.

Philip Lader,

Administrator.

[FR Doc. 95-28450 Filed 11-22-95; 8:45 am]

BILLING CODE 8025-01-P