Business Loan Programs
Federal RegisterDec 15, 1995
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SUMMARY: In response to President Clinton's government-wide regulatory
review directive, SBA has completed a page-by-page and line-by-line
review of all of its existing regulations. SBA determined that it could
eliminate some regulations and consolidate, clarify, and simplify the
remainder. This proposed rule consolidates five current CFR parts into
one Part to be known as Part 120. The surviving Part 120 covers
virtually all policies and regulations, other than size standards,
applicable to SBA's business (non-disaster) loan programs. Almost all
provisions have been reworded, renumbered, and relocated. There are a
few new or revised policies. Several sections have been deleted.
However, most of the revisions merely streamline and clarify the
regulations and do not represent substantive change.
DATES: Comments must be submitted on or before January 16, 1996.
ADDRESSES: Address written comments to David R. Kohler, Associate
General Counsel for General Law, (120) Small Business Administration,
409 3rd Street S.W., Washington, D.C. 20416.
FOR FURTHER INFORMATION CONTACT: Ronald Matzner, Associate Deputy
General Counsel; Office of General Counsel, at (202) 205-6882.
SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton directed
all federal agencies to conduct a page-by-page, line-by-line review of
their existing regulations to determine which could be eliminated or
streamlined. The President's directive complemented SBA's ongoing
reinvention effort, which had already targeted portions of the business
loan programs for streamlining and simplification. From its review of
its business loan programs, SBA is proposing to eliminate many pages of
business loan regulations and consolidate and simplify the remainder.
The proposed rule combines Parts 108, 116, 120, 122 and 131 of 13
CFR into one new Part to be known as Part 120. The new Part 120 will
regulate all of SBA's non-disaster financial assistance to small
businesses under its general business loan program (``7(a) loans''),
its microloan demonstration program (``Microloans''), and its
development company program (``504 loans'').
Many repetitive and overlapping sections from the current
regulations will be eliminated. The remaining provisions will be easy
to find and easy to understand. Formerly, provisions applicable to a
business loan program were often located in different Parts. Sometimes
unintended differences developed between the loan programs in the
interpretation or implementation of similar program policies because of
minor inconsistencies in the language of the provisions in the several
Parts. These inconsistencies have been eliminated.
In the proposed rule, the basic requirements that apply to all of
the business loan programs are located in subpart A. These include
elements currently found in portions of Parts 108, 116, and 120.
Policies specific to a particular program are in the separate subpart
applying to that program. Rules specific to 7(a) loans will be in
subpart B and include elements currently in portions of Parts 116, 120,
and 122. Regulations applying to SBA's special purpose loans currently
in Part 122 and a portion of Part 116 will be in subpart C. Subparts D,
E, and F will contain rules regarding lenders, program administration,
and the secondary market currently found primarily in Part 120. The
loan moratorium provisions presently in Part 131 will also be in
subpart E. Subpart G will contain rules specific to Microloans
currently in Part 122. Finally, regulations applying only to 504 loans
currently located in Part 108 will be in subpart H. The following chart
summarizes the proposed rule:
------------------------------------------------------------------------
Subpart Subject matter covered Section numbers
------------------------------------------------------------------------
Introduction............ Overview of Part 120; 120.1 to 120.99.
definitions.
A....................... Policies applicable to 120.100 to 120.199.
all business loans.
B....................... Loanmaking policy 120.200 to 120.299.
specific to
Guarantees and Direct
7(a) Loans.
C....................... Special Purpose Loans. 120.300 to 120.399.
D....................... Lenders............... 120.400 to 120.499.
E....................... Loan Administration... 120.500 to 120.599.
F....................... Secondary Market...... 120.600 to 120.699.
G....................... Microloan 120.700 to 120.799.
Demonstration Program.
H....................... Development Company 120.800 to 120.899.
Loan Program (504).
------------------------------------------------------------------------
The most noticeable change in the proposed regulation is in the
format. The rule is written in a ``user-friendly'', ``plain-language''
style. Provisions have been grouped in logical sequences. Descriptive
headings make it easier to find sections. Hyphenated section numbers
are no longer used. Questions and answers are sometimes used. Wherever
possible, ordinary language is used instead of ``government-speak''.
SBA's intent was to write regulations that provide easy-to-
comprehend notice of the general content of a policy, rather than
detailed information explaining or expounding upon that policy. Much
explanatory material currently in the regulations and used primarily by
SBA personnel to implement SBA's programs has been eliminated from the
proposed rule, but is available to the public and may be found in SBA
policy guidances, Standard Operating Procedures (``SOPs''), and other
SBA materials.
Most of the revisions do not represent policy changes. In many
cases, the wording of the regulation has been changed to conform to
actual conduct. Although SBA is not aware of any instances, SBA
requests comments regarding any inadvertent substantive changes which
may have been caused by rewording and format changes.
[[Page 64357]]
There are a few substantial policy changes in the proposed rule,
however. For example, the ``alter ego'' rule has been completely
revised making more Passive Companies eligible for financial
assistance, and new provisions are being proposed allowing Certified
Development Companies (``CDCs'') to expand into other areas not being
adequately serviced by the existing CDCs in those areas. These and
other substantive policies are explained in detail below in the section
by section analysis.
Comments to this proposed rule are invited, including suggestions
for further clarification and streamlining. Send them to the person and
address noted above, within the time specified.
Each subpart is addressed separately below. Conversion tables are
provided detailing all deletions, consolidations, relocations, and
policy changes. Immediately below is a chart showing the location of
surviving material by Parts.
------------------------------------------------------------------------
Former part New section
# Subject matter New 120 subpart number(s)
------------------------------------------------------------------------
108........ Development Company H................... 120.800-899
Loans.
116........ Subpart A--Veterans. N/A................. 120.104
116........ Subpart B--Flood N/A................. 120.170
Insurance.
116........ Subpart C--Lead- N/A................. 120.173
based Paint.
116........ Subpart D-- N/A................. 120.172
Floodplain
Management and
Woodlands
Protection.
116........ Subpart E--Coastal N/A................. 120.175
Barrier Resources
Act.
120........ Subpart--General; Dispersed in Intro., 120.1
Subpart A--Loan- Subpart A, Subpart
Making Policy. B..
120........ Subpart B--Loan Subpart E........... 120.500-599
Administration.
120........ Subpart C--Loan Subpart D........... ...............
Participants.
120........ Subpart D........... Subpart D........... ...............
120........ Subpart E........... Subpart D........... ...............
120........ Subpart F........... Subpart F........... ...............
120........ Subpart G........... Subpart F........... ...............
122........ Subpart A--General Dispersed in ...............
Provisions. Introduction,
Subpart A, Subpart
B.
122........ Subpart B--Special Subpart C........... ...............
Purpose Loans.
131........ Loan Moratorium..... Subpart E........... 120.532-536
------------------------------------------------------------------------
Definitions applicable to all business loans are located in
Sec. 120.10, combining separate definitions previously in Parts 108 and
120. Nearly all have been reworded. Some definitions have been added,
and some have been eliminated because they were redundant or were
incorporated into the text. Of particular note is the definition of
``Associate,'' which was broadened. Conversely, the definition of
``close relative'' was limited to the closest family relationship. The
net effect of the changes is to pinpoint more effectively the
individuals subject to the ethical requirements and conflict of
interest prohibitions of the regulations. Terms which are defined in
the proposed rule are capitalized in this preamble for consistency. In
addition, references to SBA Regional offices and officers have been
eliminated and usually, but not always, replaced with a reference to
District Director because of SBA's recent restructuring.
A detailed listing of changes specific to each subpart follows.
120 Subpart A and B--General Loan Policy and Guaranteed and Direct 7(a)
Loans
The following is a conversion table for Subparts A and B:
----------------------------------------------------------------------------------------------------------------
Action(s) (Note: all Extent of policy change,
Former section number New part 120 number sections were renumbered if any; comments on
for loan provisions and moved, or deleted) action(s)
----------------------------------------------------------------------------------------------------------------
116.1-116.3....................... 120.104.............. Revised; Subpart was Minor policy change;
split; provisions moved explanatory material and
to program Parts. definitions will be in
SOP or other policy
material.
116.10-116.12..................... 120.170.............. Revised; provisions No policy change;
condensed. explanatory material
will be in SOP or other
policy material.
116.20-116.23..................... 120.173.............. Revised; provisions No policy change;
condensed. explanatory material
will be in SOP or other
policy material.
116.30-116.35..................... 120.172.............. Revised; provisions No policy change;
condensed. explanatory material
will be in SOP or other
policy material.
116.40-116.41..................... 120.175.............. Revised; provisions No policy change.
condensed.
116 Appendix A.................... N/A.................. Deleted................... No policy change.
Material no longer
needed.
116 Appendix B.................... N/A.................. Deleted................... No policy change.
Material no longer
needed.
120.1-1........................... 120.1................ Revised; some deletion; No policy change. Some
material moved. explanatory material no
longer valid.
120.1-2........................... 120.4................ Revised................... No policy change.
120.1-3........................... 120.180.............. Revised................... No policy change.
120.1-4........................... N/A.................. Deleted. Unnecessary...... No policy change.
120.2............................. 120.10............... Rewritten................. No policy change. New
definitions are added;
an owner is now
considered an
``Associate.''
120.2-1........................... 120.1................ Rewritten................. No policy change.
120.2-2........................... 120.10............... Revised................... See Policy Note above.
120.2-3........................... N/A.................. Deleted................... No policy change.
Definition will no
longer be used.
[[Page 64358]]
120.2-4........................... 120.10............... Revised................... Minor policy change. This
definition has been
dropped, but sub-
definitions were
modified and included
elsewhere.
120.2-5........................... 120.10............... Revised................... Minor policy change.
Definition of Lending
Institution was dropped.
120.2-6........................... 120.10............... Revised................... Minor policy change. Both
definitions were
dropped.
120.2-7........................... N/A.................. Deleted................... Minor policy change.
Definition was dropped,
as no longer used.
120.2-8........................... 120.470.............. Rewritten................. No policy change.
120.3-1........................... 120.2................ Rewritten................. No policy change.
120.3-2........................... 120.2(a)............. Rewritten................. No policy change.
120.3-3........................... 120.2................ Rewritten................. No policy change.
120.3-4........................... 120.101.............. Consolidated with 120.103- No policy change.
1.
120.100........................... N/A.................. Deleted................... No policy change. Section
not needed.
120.101-1(a)...................... 120.100(d)........... Rewritten................. No policy change.
120.101-1(b)...................... 120.103.............. Rewritten................. No policy change.
120.101-1(c)...................... 120.110(j)........... Revised................... No policy change. Section
now combined with
another.
120.101-2......................... 120.110.............. Revised................... No policy change.
120.101-2(a)...................... 120.110(k)........... Revised................... Clarifies policy
regarding promotion of
religion. See Note 1,
below.
120.101-2(b)...................... 120.110(g)........... Revised................... No policy change.
explanatory material
will be in SOP or other
policy material.
120.101-2(c)...................... 120.110(h)........... Revised................... No policy change.
Needless wording was
deleted.
120.101-2(d)...................... 120.110(b)(c), Revised; new rule included Major policy changes. See
120.111. Note 2, below.
120.101-2(d) (1) through (7)...... 120.111.............. Revised; New Rule......... Major policy changes. See
Note 2, below.
120.101-2(d)...................... 120.110(g)........... Revised................... No policy change.
120.101-2(f)...................... 120.110(f)........... Rewritten................. No policy change.
120.101-2(g)...................... 120.110(m)........... Revised................... No policy change.
120.102........................... 120.120.............. Revised................... No policy change.
120.102-1......................... 120.130(f), 120.201.. Revised................... No policy change.
120.102-2......................... 120.207, 120.130(d).. Revised................... No policy change.
120.102-3......................... 120.130(a)........... Revised................... No policy change.
120.102-4......................... 120.104, 120.130(b).. Revised................... No policy change.
120.102-4(a)...................... 120.104.............. Revised................... No policy change.
120.102-4(b)...................... 120.104.............. Revised................... No policy change.
120.102-5......................... 120.130(c)........... Revised................... No policy change.
120.102-6......................... 120.202.............. Revised................... No policy change. Wording
changed to reflect
agency policy.
120.102-7......................... 120.110(i)........... Revised................... Minor policy change. See
Note 3 below.
120.102-8......................... 120.130, 120.130(e).. Revised................... No policy change.
120.102-9......................... None................. Deleted................... Minor policy change.
Provision was not used.
120.102-10, 120.102-10 (a)-(f).... 120.140, 120.110(o).. Revised; new Rule......... Major policy change. See
Note 4 below.
120.102-11........................ 120.130.............. Revised................... Minor new policy. 180-day
parameter added.
120.102-12 (a)-(d)................ 120.110(q)........... Revised................... Minor policy change. See
Note 5 below.
120.103-1(a), 120.103-1(b)........ 120.101, 120.102..... Rewritten................. Major policy change. See
Note 6 below.
120.103-2......................... 120.150.............. Revised................... No policy change.
120.103-2(a)...................... 120.150.............. Revised................... No policy change.
120.103-2(b)...................... 120.150(f)........... Rewritten................. No policy change.
120.103-2(c)...................... 120.160(a), 120.201.. Revised................... Minor policy change or
clarification. See Note
7 below.
120.103-2(d)...................... 120.160(b)........... Revised................... No policy change.
120.103-2(e)...................... 120.160(c), 120.170.. Revised................... No policy change. Though
not now specifically
mentioned in the
regulation, life
insurance may still be
required as part of
prudent lending.
120.103-2(f)...................... 120.170, 120.172-73, Revised................... No policy change.
120.175-76.
120.103-2(g)...................... 120.160(d)........... Revised................... Minor policy change--
depository plan no
longer required.
120.103-2(h)...................... 120.200.............. Revised................... No policy change.
120.103-3 (a)-(e)................. 120.193.............. Revised................... No policy change.
120.104-1 (a)-(e)................. 120.220.............. Rewritten................. No policy change.
120.104-1(f)...................... N/A.................. Deleted................... Eliminated from statute.
120.104-2(a)(1)................... N/A.................. Deleted................... No policy change; policy
will now be contained in
SOP or other policy
guidance.
[[Page 64359]]
120.104-2(a)(2)................... N/A.................. Deleted................... Major policy change;
deleted from the Act.
120.104-2(a)(3)................... N/A.................. Deleted................... Provision eliminated by
statute (and had never
been implemented by
SBA).
120.104-2(b)...................... 120.221(e)(f)........ Rewritten................. No policy change.
120.104-2(c)...................... 120.221(b)........... Rewritten................. No policy change.
120.104-2(d)...................... 120.222.............. Revised................... No policy change.
120.104-2(e)(1)................... 120.222.............. Revised................... No policy change.
120.104-2(e)(2)................... 120.221(a)........... Revised................... No policy change.
120.104-2(e)(3)................... 120.223(a), Revised................... No policy change.
120.222(e),
120.221(d).
120.104-2(e)(4)................... 120.222(c)........... Rewritten................. No policy change.
120.104-2(f)...................... 120.195.............. Rewritten................. No policy change--
Clarified that does
apply to 504 loans. See
Note 8.
120.105........................... 120.176.............. Rewritten; consolidated... No policy change. Note
that recent regulatory
additions appear in
120.171 and 174. More
guidance can be found in
SOP.
120 Appendix A.................... N/A.................. Deleted................... No policy change. Terms
of the agreement are in
effect. Agreement will
appear in SOP or other
policy material.
122.1............................. 120.1................ Combined.................. No policy change.
122.2............................. N/A.................. Deleted................... No policy change.
122.3-1........................... 120.180.............. Consolidated.............. No policy change.
122.3-2........................... N/A.................. Deleted................... No policy change.
122.4............................. 120.176.............. Consolidated.............. No policy change.
122.5-1........................... 120.101.............. Revised; combined......... No policy change.
122.5-2........................... 120.191.............. Revised................... No policy change.
122.5-3........................... 120.101, 120.190(d).. Consolidated; rewritten... No policy change.
122.5-4........................... 120.192.............. Rewritten................. No policy change.
122.5-5........................... 120.192 (definition.) Revised................... No policy change.
122.6-1(a)(b)..................... 120.212.............. Revised................... No policy change.
122.6-2........................... 120.530.............. Moved; revised............ No policy change.
122.6-3, Part 131................. 120.532-535.......... Moved; combined; revised.. No policy change.
122.7............................. 120.151.............. Rewritten................. No policy change.
122.7-1........................... 120.211(a)(b)........ Revised................... No policy change.
122.7-2........................... 120.211(c)........... Rewritten................. Reference to District
Director's authority to
make exceptions will be
in SOP.
122.7-3........................... 120.151.............. Rewritten................. No policy change.
122.7-3(a)........................ 120.210(a)........... Revised................... Minor policy change;
increase approval will
be by AA/FA.
122.7-3(b)........................ 120.210(b)........... Revised................... No policy change.
122.7-3(c)........................ 120.210(c)........... Revised................... No policy change.
122.8-1........................... 120.213(b)........... Revised................... No policy change.
122.8-2........................... 120.213(b)........... Revised................... No policy change.
122.8-3........................... 120.213(a)........... Revised................... No policy change.
122.8-4........................... 120.214.............. Rewritten................. No policy change.
122.8-4(a)........................ 120.214(a)........... Rewritten................. No policy change.
122.8-4(b)........................ 120.214(a)........... Rewritten................. No policy change.
122.8-4(c)........................ 120.214(b)........... Revised................... Clarifies that movement
in amount of loan must
equal movement in base
rate.
122.8-4(d)....................... 120.214(c)........... Moved..................... No policy change.
122.8-4(e)........................ 120.214(d)........... Moved..................... No policy change.
122.8-4(f)........................ 120.214(e)........... Moved..................... No policy change.
122.8-4(g)........................ 120.214(f)........... Rewritten................. No policy change.
122.8-4(h)........................ 120.214(g)........... Revised................... No policy change.
----------------------------------------------------------------------------------------------------------------
The following chart lists additions to Part 120:
------------------------------------------------------------------------
Section number Subject matter covered
------------------------------------------------------------------------
120.110(r)................................ Prohibition for businesses
engaged in political and
lobbying activities.
120.110(o)................................ Prohibition for businesses
engaged in pornographic or
sexually-oriented (non-
medical) activities. See
Note 1 below.
120.171................................... Compliance with Child
Support Obligations as a
condition of an SBA loan.
120.174................................... Earthquake hazards notice.
120.190................................... Where a business applies for
a loan.
120.193................................... Use of computer generated
forms.
------------------------------------------------------------------------
Note 1. SBA often receives eligibility questions from Borrowers
and Lenders. In the proposed rule, SBA has attempted to delineate
clearly and succinctly the businesses that are ineligible for SBA
financial assistance. In particular, SBA field offices, loan
applicants, Lenders, development corporations and other SBA
intermediaries have requested guidance concerning the eligibility of
businesses which may be engaged in religious activities. After
consulting with the Department of Justice, SBA proposes to provide
such guidance through these new regulations.
The present regulation states that churches and religious
organizations are ineligible for SBA financial assistance. It does
not specify
[[Page 64360]]
whether the prohibition extends to businesses principally engaged in
promoting religion through their activities. Nonetheless, such
businesses in the past have been found to be ineligible.
SBA's primary focus is to provide financial assistance to for-
profit small businesses that can contribute to job growth and
economic development in the United States. Within the limits set by
the Establishment Clause of the Constitution, SBA does not
disqualify otherwise eligible small businesses from receiving
financial assistance merely because they offer religious books,
articles, or other products for sale or because they support or
encourage moral and ethical values based upon religious beliefs. At
the same time, SBA does not make financial assistance available to
religious entities or their affiliates for use in directly promoting
or teaching religion.
The Establishment Clause of the First Amendment, which states
``Congress shall make no law respecting an establishment of
religion,'' serves as a limitation on governmental activities with
regard to religion. The Establishment Clause primarily proscribes
``sponsorship, financial support, and active involvement of the
sovereign in religious activity.'' Walz v. Tax Commission, 397 U.S.
664, 668 (1970). ``Neither a state nor the Federal Government * * *
can pass laws which aid one religion, aid all religions, or prefer
one religion over another * * * No tax in any amount, large or
small, can be levied to support any religious activities or
institutions, whatever they may be called, or whatever form they may
adopt to teach or practice religion.'' Everson v. Bd. of Educ., 330
U.S. 1, 15-16 (1947); see also Grand Rapids School Dist. v. Ball,
473 U.S. 373, 381 (1985) (quoting this language); McCollum v. Bd. of
Educ., 333 U.S. 203, 210 (1948) (same).
Under the proposed rule, SBA would not provide financial
assistance to businesses principally engaged in teaching,
instructing, counseling, or indoctrinating religion or religious
beliefs. While incidental or indirect support of religious
objectives might be permissible, SBA would not provide financial
assistance to a newspaper, broadcasting business, day care center,
or private school principally engaged in such activities.
Some of the more difficult eligibility inquiries received by SBA
field offices have involved businesses which engage in activities in
a secular setting which may be considered to be religious in nature.
The U.S. Supreme Court has held that aid used to fund specifically
religious activities in an otherwise substantially secular setting,
has the primary effect of advancing religion, and therefore violates
the Establishment Clause. Hunt v. McNair, 413 U.S. 734 (1973); Bowen
v. Kendrick, 487 U.S. 589, 613 (1988). The facts of each situation
must be carefully examined. With the above Supreme Court standard in
mind, SBA proposes to include among ineligible businesses those
principally engaged in teaching, instructing, counseling or
indoctrinating religion or religious beliefs, whether the setting is
religious or secular, because, in SBA's view, financial assistance
to such small businesses would violate the Establishment Clause.
SBA field office personnel and others also have sought guidance
on the eligibility of small businesses which sell sexually oriented
products or services, or engage in sexually oriented activities. The
present regulation is silent regarding obscene, pornographic, or
sexually oriented activities. A business engaging in any such
activity that is illegal is ineligible under Sec. 120.110(h) of this
regulation. However, SBA receives inquiries regarding businesses
engaged in activities which, while not illegal, may be considered by
the average person to be obscene or pornographic.
``Obscene'' material is not protected by the First Amendment. It
has been defined by the United States Supreme Court in the context
of a criminal case, Miller v. California, 413 U.S. 15, 24 (1973), as
follows: ``* * * whether a work which depicts or describes sexual
conduct is obscene is [determined by] whether the average person,
applying contemporary community standards, would find that the work,
taken as a whole, appeals to the prurient interest, whether the work
depicts or describes, in a patently offensive way, sexual conduct
specifically defined by the applicable state law, and whether the
work, taken as a whole, lacks serious literary, artistic, political,
or scientific value.''
Under Supreme Court precedent, ``[w]hen the government
appropriates funds to establish a program, it is entitled to define
the limits of that program.'' Rust v. Sullivan, 114 L.Ed.2d 233, 256
(1991). In implementing its programs, SBA must also follow the
Congressional mandate set forth in Section 4(d) of the Small
Business Act (15 U.S.C. 633(d)) (``the Act'') to consider the public
interest in granting or denying an application for SBA financial
assistance.
Having considered the legal precedent and the Congressional
mandate, SBA has determined that it may exclude small businesses
engaging in lawful activities of an obscene, pornographic, or
prurient sexual nature. Under the proposed rule, SBA would not
provide financial assistance to small businesses which present live
performances of a prurient sexual nature or which derive significant
gross revenue from the sale, on a regular basis, of products or
services, or the presentation of depictions or displays, of a
pornographic, obscene, or prurient sexual nature. Thus, an
establishment featuring nude dancing, or a book, magazine or video
store containing merchandise of a prurient sexual nature would not
be eligible for SBA financial assistance if the obscene,
pornographic, or prurient activity contributed to the generation of
a significant portion of the gross revenue of the business.
SBA considers this proposed rule to be consistent with its
obligation to direct its limited resources and financial assistance
to small businesses in ways which will best accomplish SBA's
mission, serve its constituency, and serve the public interest.
Applicants' First Amendment freedoms are in no way abridged. They
may still express their views, exercise their freedoms, operate
their businesses, and obtain any other aid available to them.
SBA is considering the use of a percentage of gross revenue
instead of ``significant'' in the final formulation of this rule and
requests commenters to focus particularly on the relative merits of
the two approaches and what percentage would be appropriate.
Note 2. The proposed regulation establishes a new ``Eligible
Passive Company'' rule replacing the current ``alter ego'' rule. The
new rule will be found at Sec. 120.111. An ``Eligible Passive
Company'' is defined as an entity which does not engage in regular
and continuous business activity, which leases real or personal
property to an Operating Company for use in the Operating Company's
operations. SBA generally makes business loans only to small
businesses engaged in regular business activities, and prohibits
such assistance to entities engaged in passive investment or real
estate development, or which do not engage in regular and continuous
activity as an operating business. SBA calls such entities ``passive
businesses.'' At the same time, SBA recognizes that valid business
reasons may exist for an Operating Company not to own the real
estate and fixed assets used to conduct its business. This proposed
rule would allow certain passive businesses to be eligible for SBA
assistance if that assistance is used only to acquire and/or improve
real or personal property leased to a small business and is used in
that small business' operations. The proposed rule would eliminate
certain requirements and restrictions which presently limit the use
of real estate holding entities in SBA's business-loan and
development company programs.
For purposes of these regulations, an Operating Company is
defined in section 120.100 as a small business actively currently
involved in conducting business operations or about to be located on
real property owned by an Eligible Passive Company, or using or
about to use in its business operations, personal property owned by
an Eligible Passive Company.
Many years ago, SBA agreed to assist eligible Operating
Companies seeking SBA financial assistance through their affiliated
``mirror image'' passive businesses by creating an exception for
such ``alter egos''. Subsequent modifications to the mirror image
requirement permitted variations in ownership percentages between
the operating business and the alter ego for immediate family
members. Such variances led to conflicting interpretations of the
policy, which have frustrated its original intent and confused both
the public and SBA personnel. Such variances limited the
effectiveness of the intended assistance. In addition, the variances
caused inconsistencies between the 7(a) loan program and the
development company loan program.
On February 22, 1994, SBA published (59 FR 8425) a proposed rule
(``1994 proposal'') to eliminate the conflicting interpretations and
inconsistencies and to revise the family member common ownership
threshold to extend the alter ego exception to additional passive
businesses. SBA received more than twenty detailed comments
suggesting changes in the proposal. It also has received many other
suggestions and recommendations from small business owners,
development companies, lending institutions and SBA employees at
regulatory partnership meetings and other outreach activities
conducted by SBA. After considering these comments and suggestions,
SBA has revised its thinking sufficiently to
[[Page 64361]]
warrant publication of this new proposed rule, included here as an
integral part of SBA's overall regulatory streamlining.
In its 1994 proposal, SBA suggested reducing the common
ownership threshold for any passive business and Operating Company
to 20 percent. Most of the comments suggested that, as an exception
to a ``mirror image'' requirement, a 20 percent threshold was
insufficient to support a nexus between a passive business and an
Operating Company. Some suggested that the nexus be increased to 50
percent, others to 80 percent. However, others suggested that SBA
eliminate the ``mirror image'' rule altogether. After carefully
considering all of the options, the goals and the objectives of
SBA's loan programs, SBA proposes to eliminate the present alter ego
rule, and allow such a loan whenever it essentially represents
financial assistance to an Operating Company.
Many small businesses utilize separate entities to hold the real
estate or leasehold improvements used in the operation of their
businesses. SBA now believes that an Eligible Passive Company,
without regard to its ownership interests, should be an eligible
entity for SBA financial assistance if it only uses such assistance
to acquire and/or improve real or personal property which it leases
to an Operating Company for the conduct of its operations.
SBA's new proposed ``Eligible Passive Company'' rule recognizes
that an Eligible Passive Company may be an individual, sole
proprietorship, corporation, limited liability company, an
irrevocable trust or any form of partnership. Under the current
rule, trust ownership of any part of an Eligible Passive Company is
prohibited in the SBA business loan program. The development company
program permits the use of trusts as eligible owners. In this
proposed rule (as in its 1994 proposal), SBA proposes to eliminate
the inconsistency between the 7(a) loan program and the development
company loan program. SBA believes that there is no reason to
prohibit a small business concern using the SBA's business loan
programs from taking advantage of the tax and planning benefits
which may be inherent in the use of an irrevocable trust. Trust
eligibility shall be determined by the eligibility status of the
trustor (grantor/settlor), with all donors to the trust being
presumed conclusively to have trustor status for eligibility
purposes.
SBA welcomes comments on whether use of a revocable trust should
also be permitted. While this would give Borrowers greater planning
flexibility, the trustor's reserved authority to amend the trust
might lead to fronts or other abuses. Under this proposed rule, an
Operating Company must be an eligible small business under SBA's
standards, and the proposed use of proceeds by the Eligible Passive
Company would have to be an eligible use if the Operating Company
were obtaining the financing directly. This ensures that the
Eligible Passive Company will utilize SBA's financial assistance in
the same manner as an eligible small business. As suggested by
several comments on the 1994 proposal, both the Eligible Passive
Company and the Operating Company must meet SBA's size standards (13
CFR Part 121).
In response to other comments on the 1994 proposal, the new rule
clarifies that the lease between the Eligible Passive Company and
the Operating Company must be subordinated to SBA's security
interest, mortgage or trust deed lien and the Eligible Passive
Company (as landlord) must pledge as collateral an assignment of
rents derived from the lease. The requirement for an assignment of
the lease has been eliminated, but an assignment may be required by
SBA when necessary to perfect a lien under applicable law.
Several comments urged SBA not to require the Operating Company
to be a co-Borrower on a loan to an Eligible Passive Company,
suggesting that legitimate tax and business reasons exist in many
cases for the Operating Company to be a guarantor instead of a co-
Borrower. Believing this to be a credit and business decision best
left to the discretion of SBA loan officers, the Borrower, and (in
the development company program) the development company, SBA has
provided that the Operating Company may be either a guarantor or a
co-Borrower in most cases. An exception is created for loans in the
7(a) loan programs in which working capital funding is included, in
which case the Operating Company must be a co-Borrower.
When an Operating Company applies for SBA loan assistance, each
20 percent or more ownership interest holder in the Operating
Company must guarantee the loan. Since the Operating Company will be
a co-Borrower or guarantor when an Eligible Passive Company is the
Borrower, the proposed rule would extend the same requirement to
ownership interests of both the Operating Company and the Eligible
Passive Company.
Several comments noted that it is common for an Operating
Company to need working capital when the Eligible Passive Company
applies for a loan primarily to finance the acquisition of real or
personal property. In the past, SBA has required the Eligible
Passive Company to use the loan proceeds solely to acquire and
improve property for lease to an Operating Company. Thus, two
separate SBA loans would be needed--one to the Eligible Passive
Company for the real property and the other to the Operating Company
for working capital. The commenters suggested that SBA permit
proceeds of a single loan to the Eligible Passive Company to be used
for working capital in the Operating Company. This proposed rule
adopts these suggestions for the 7(a) loan program, provided that
the Operating Company is a co-Borrower. The loan proceeds for
working capital would be allocated to the Operating Company, while
those for acquisition and improvement of property for lease to the
Operating Company would be allocated to the Eligible Passive
Business. Under this approach, small businesses would no longer
incur duplicate costs and would benefit by reduced paperwork and a
streamlined loan process.
Several comments noted that a trust, established to take
advantage of tax and planning benefits inherent in the trust form,
may have a need to engage in other activities. They argued that SBA
should not prohibit a trust which qualifies as an Eligible Passive
Company from engaging in activities other than the leasing of
property to the Operating Company. SBA agrees. Accordingly, under
this proposed rule, a trust qualifying as an Eligible Passive
Company may engage in other activities authorized under its trust
documents. The Trustee will need to certify to SBA (and provide
pertinent language from the trust document) that the Trustee has
authority to act, and that the trust has the authority to borrow
funds, pledge trust assets and lease the property to the Operating
Company. The Trustee also will need to provide SBA with a list of
all trustors and donors.
Note 3. To be eligible for SBA financial assistance, the
products and services of a business must be available to the general
public. Because the current rule refers only to recreational and
amusement enterprises, it is misleading and confusing, and is not
uniformly enforced by SBA field offices. The proposed rule clarifies
that private clubs and businesses that limit the number of members
for reasons other than capacity are ineligible for SBA financial
assistance.
Note 4. The current regulations have separate conflict-of-
interest sections for Lenders and development companies. SBA has re-
written and consolidated the sections. The prohibitions are clear
and consistent for all business loan program participants. The
proposed rule expands the categories of individuals subject to the
requirements and may encompass additional acts not specifically
enumerated.
Note 5. The prohibition against assisting a business which
previously has caused SBA to sustain a loss is currently stated
explicitly only in the 7(a) regulations, although it is applied in
all of SBA's business loan programs. Its inclusion in subpart A
clarifies that the policy applies to all business loans.
Considerable explanatory material currently in the 7(a) regulation
has been removed and will be placed in an SOP or other policy
guidance.
Note 6. SBA may provide financial assistance only if the
applicant shows that the desired credit is needed and not otherwise
available on reasonable terms. In Sec. 120.101, SBA clarifies its
present policy. The current provision, Sec. 120.103-1 uses the
language ``not otherwise available on reasonable terms'' without
indicating any factors which should be considered in determining
what is reasonable. Section 3(h) of the Act defines ``credit
elsewhere'' as the availability of credit from non-Federal sources
on reasonable terms and conditions taking into consideration the
prevailing rates and terms in the community in or near where the
concern transacts business, for similar purposes and periods of
time. SBA believes the language in section 3(h) clarifies the credit
elsewhere test and proposes to include the language in Sec. 120.101.
In addition, the current regulation provides that the certification
made by a Lender in its application for an SBA guarantee is
generally accepted as sufficient documentation that the desired
credit is unavailable to the applicant. In the proposed
Sec. 120.101, SBA clarifies and reaffirms its existing policy that
the Lender or CDC must have examined the availability of credit to
the applicant, have based its
[[Page 64362]]
certification upon that examination, and have documentation in its file
to support the certification.
In the 7(a) program, SBA often required applicant principals and
owners to use personal assets before granting financial assistance,
unless undue hardship would result. In the 504 program, SBA did not
enforce this policy and rarely required applicants to use their own
personal resources.
In this proposed rule, SBA clarifies that there is no difference
between the business loan programs regarding evidence of need. SBA
will consider the personal wealth and resources of the principals
and owners in determining an applicant's need for SBA financial
assistance in all business loan programs, and SBA may require the
principals and owners of the applicant to use their personal
resources before SBA will grant financial assistance.
Note 7. Current regulations require owners of 20 percent or more
of a business to guarantee an SBA loan. Under SBA's current SOP, SBA
may require owners of between 5 and 20 percent of a business to
guarantee a loan. Since the public is not always aware of its SOP,
SBA is including the latter policy in this proposed rule. Rather
than set an arbitrary lower limit of 5 percent (or any other
number), SBA proposes that the rule state that SBA may require
holders of interests of less than 20 percent of an applicant to
guarantee an SBA loan, when appropriate under prudent underwriting
criteria.
Note 8. The use of SBA Form 159 (Compensation Agreement) in the
504 program has been a subject of controversy for some time. The Act
requires 7(a) applicants to certify the names of and fees paid to
all professionals or other representatives engaged by the applicant
in connection with the SBA financial assistance. Current section
120.104-2(f) implements the statutory requirement. Title V of the
Small Business Investment Act, 15 U.S.C. 695 (``Title V'') does not
have a corresponding provision. Despite this, SBA, citing section
7(a)(13) of the Act, has generally extended the requirement to the
development company program. Current section 108.503-6(e) requires
the loan application submitted to SBA by a Certified Development
Company (CDC) to disclose the amount of all fees paid, the names of
the fee recipients, and a description of the services rendered. Most
SBA field offices require in 504 loan authorizations that Form 159
be submitted. Many Lenders in the 7(a) program and CDCs in the 504
Program contend that Form 159 has become a burden upon the
Borrowers, the Lenders and the CDCs. The 504 industry, in
particular, has asked SBA to eliminate the form.
President Clinton has directed Federal agencies to reduce the
paperwork burden upon the public whenever possible. However, this
requirement is contained in the Act. Therefore, SBA may not
eliminate the regulation with respect to the 7(a) program without a
statutory change. Congress has recently held hearings regarding the
disclosure of fees because of concern about the increased number of
investigations of fraud by applicant representatives. As a result,
SBA believes it is prudent to continue to require full disclosure of
all fees. Since SBA sees no reason to differentiate among the
various business loan programs regarding this issue, SBA is
proposing in this Rule to maintain the requirement for all business
loans until such time that Congress revisits the issue.
120 Subpart C--Special Purpose Loans
The proposed new Subpart C reorganizes and consolidates the current
subpart B of Part 122, ``Special Purpose Loans'' with a portion of Part
116.
In Secs. 122.51 through 122.51-6, currently known as ``Handicapped
Assistance Loans,'' the word ``Disabled'' replaces the word
``Handicapped'' wherever it appears. Section 122.60 ``Rural Loans'' is
deleted since this special program expired on September 30, 1995. The
section currently beginning at Sec. 122.61, ``Microloan Demonstration
Project,'' has been reorganized as subpart G of Part 120 to separate it
from 7(a) Special Loan Programs. There are no major substantive changes
in the remaining eleven Special Loan Programs. A new revolving credit
program--CapLines--replaces the GreenLine program and is outlined in
Sec. 120.395.
In the proposed rule, this subpart outlines the significant
policies of each program in a streamlined format while deleting
superfluous and repetitious material.
120 Subpart D--Lenders
Proposed subpart D reorganizes and consolidates current Part 120
subparts C (``Loan Participants''), D (``Preferred Lenders Program''),
and E (``Certified Lenders Program''). Sections have been grouped
together to aid the reader in locating information. There are only a
few substantive changes in subpart D.
Proposed new Sec. 120.430 states specifically that SBA may review a
Lender's records relating to SBA guaranteed loans during normal
business hours. In addition, Sec. 120.420, which is the former
Sec. 120.301-7, contains a new provision (120.420(c)) restricting the
use of SBA loans by Non-Depository Lenders.
(a) Certified Lenders Program (``CLP''). The proposed rule deletes
the definitions found now at Sec. 120.501. Some of the terms are not
used in the subpart. Others apply to the entire Part and will appear in
Sec. 120.10.
The proposed rule streamlines the procedure for obtaining CLP
status. Thus, current Sec. 120.502-1 will be deleted and replaced with
new Sec. 120.441 authorizing SBA District Directors (whose decision is
final) to approve and renew CLP Lenders. Section 120.441(c) clarifies
that CLP status applies only in the SBA office which approved that
status.
The proposed rule will eliminate current Sec. 120.502-2, which
specifies factors which SBA will consider in deciding whether a Lender
should become a CLP lender. Its replacement, Sec. 120.441(a), retains
several of the current seven considerations. SBA may consider other
factors as well.
Proposed Sec. 120.442, ``Suspension or revocation of CLP status''
is new, and follows the mechanism and procedure established for PLP
lenders.
(b) Preferred Lenders Program (``PLP''). The proposed PLP
regulations delete superfluous information and have been reorganized
into a more logical sequence. They also will reflect SBA reorganization
and program changes, including the establishment of the centralized PLP
processing office located in Sacramento, California.
The proposed rule deletes the definitions found now at
Sec. 120.401. Some of the terms are not used in the subpart. Others
apply to the entire Part and will appear in Sec. 120.10.
Current Sec. 120.402-1 describes how a Lender initially may become
a PLP Lender. Proposed Sec. 120.451(a) describes new procedures
following SBA's structural reorganization. The branch or district
office will forward its nomination of a Lender or the Lender's request
for PLP status to the loan processing center rather than to a regional
office. The district office's recommendation and the loan processing
center's recommendation are forwarded to the AA/FA who makes the final
determination. This section also provides for expansion and
recertification of PLP status by the AA/FA after a review of the PLP
Lender by SBA.
The section clarifies that if a PLP Lender is not already a CLP
Lender in a territory into which it seeks to expand its PLP status, it
will automatically obtain CLP status in the territory when it is
granted an extension of its PLP status into that territory without
approval from the District Office.
Proposed Sec. 120.451(b)(current Sec. 120.402-2) describes the
factors SBA will consider in evaluating PLP nominations. SBA has
eliminated the requirement that the Lender be a Certified Lender before
being considered as a PLP Lender.
Proposed Sec. 120.451(c) is a new provision providing that the AA/
FA will designate the ``area'' in which a PLP Lender can make PLP
loans. SBA believes that centralizing this function in the AA/FA will
result in a uniform policy and practice.
[[Page 64363]]
The proposed rule consolidates the current Sec. 120.403-1
(statutory ceiling), Sec. 120.403-5 (interest rates), and Sec. 120.403-
6(b)(fees) into Secs. 120.151, 120.213, 120.214, 120.221 and 120.222
respectively. The proposed rule deletes the current Sec. 120.403-3
(credit allocation) because it is no longer used.
The proposed rule deletes the current Sec. 120.403-6(a), which
limits the fees a PLP lender can charge if it sells the guaranteed
portion of a loan within six months of disbursement, because SBA feels
there is no need to retain a cap on this fee. It consolidates the
current Sec. 120.403-7(c) into Sec. 120.430.
The current Sec. 120.403-7 has been rewritten as the new
Sec. 120.452(a) specifying the requirements of PLP loan processing. The
section specifying the percentage of a PLP loan that SBA will guarantee
has been moved from the current Sec. 120.403-2 to Sec. 120.452(a)(3).
In proposed Sec. 120.452(b), SBA describes the new procedures for
approving a PLP loan by submitting documents to the loan processing
center, which issues an SBA loan number.
The proposed rule consolidates the current Secs. 120.404-1 through
120.405-1 concerning servicing and liquidation into proposed
Sec. 120.453, and deletes current Secs. 120.405-2 through 120.405-4
because they are redundant or adequately described in SBA's SOP.
In proposed Sec. 120.451(f), SBA has added a new provision to allow
a PLP Lender to submit a request to expand its territory to the SBA
loan processing center.
(c) Small Business Lending Companies (``SBLC''). The proposed rule
revises the SBLC regulations for clarity and to eliminate details of
the program better suited to an SOP. The sections have been renumbered,
reorganized in a more logical structure, and presented in a question
and answer format.
Finally, a provision on SBA's authority to suspend or revoke an
SBLC's license is proposed at Sec. 120.475.
120 Subpart E--Loan Administration
New subpart E proposes general loan administration rules.
Basically, these proposed rules reflect existing SBA policies. Any SBA
field office can provide more detailed guidance concerning any aspect
of these proposed rules.
Proposed Secs. 120.510 and 120.511 describe the servicing
responsibilities of the parties making loans. SBA services direct loans
that it makes without the participation of a Lender, while Lenders
service loans they make with the SBA guarantee. After SBA honors its
guarantee, the Lender generally continues to service the loan. Proposed
Sec. 120.512 describes this arrangement.
Proposed Sec. 120.513 lists the servicing actions that require the
concurrence of the Lender and the SBA because of their importance to
the effective and efficient operation of SBA's loan program. The list
includes the provisions contained in the participation agreement which
a Lender executes with SBA to allow it to make 7(a) guaranteed loans,
such as the alteration of terms and conditions of any loan instrument,
the release of collateral with a value over 20 percent of the original
amount of the loan, the acceleration of the maturity of a note, and the
initiation of litigation.
SBA has the authority to purchase the guaranteed portion of a loan
at any time, and proposed Sec. 120.520 provides that a Lender may ask
SBA to purchase the guaranteed portion when the Borrower has been
continuously in default on its installment payments to the Lender for
more than 60 days. If a Borrower cures a default (see Sec. 120.523)
before SBA purchases, the Lender's right to request purchase lapses. If
SBA honors its guarantee, it does not waive any right it may have
against the Lender because of the Lender's negligence, misconduct, or
violation of the regulations, the guarantee agreement between the
lender and SBA, or any of the loan instruments. SBA may sue to recover
the amounts paid and may assert as a basis for recovery any of the
grounds set forth in Sec. 120.524.
A Borrower's obligation to pay principal and interest continues
after SBA honors its guarantee. Proposed Sec. 120.521 prescribes that
the interest rate for which the Borrower is liable after the purchase
continues to be the rate stated in the note if it is a fixed rate note.
If a loan carries a fluctuating interest rate, the Borrower is obliged
for the rate in effect at the time of the earliest uncured default
(where there has been a default), or the rate in effect at the time
when SBA purchases (where there has been no default). This means that
no further fluctuations of interest can occur after SBA honors its
guarantee.
Proposed Sec. 120.522 provides that the interest rate for which SBA
is liable when it purchases the guaranteed portion is the rate in the
note if it is a fixed rate loan, or the rate in effect on the date of
the earliest uncured default (if a default has occurred) or when SBA
purchases (if there has been no default). The section provides that SBA
pays a Lender no more than 120 days interest from the date of a
Borrower's uncured default, plus any deferment period or time it takes
for SBA to process a request to purchase. This cut-off period
encourages a Lender to make timely demand on SBA to purchase. Because
extenuating circumstances may occur, the proposed section authorizes
SBA to extend the 120 day time period for good cause.
Proposed Sec. 120.523 defines ``earliest uncured default'' as the
date on which a Borrower fails to pay a regular installment payment
which remains unpaid for 60 days. If a Borrower makes a payment before
a Lender requests SBA to honor its guarantee, the earliest uncured
default date advances to the next unpaid installment date. This means
that if a Borrower cures early defaults, the earliest uncured default
date continues to move forward.
SBA does not have to honor its guarantee, under proposed
Sec. 120.524, if a Lender, amoungst other things, fails to make, close,
service, or liquidate an SBA guaranteed loan in a prudent fashion. The
regulation contemplates that a Lender will comply with all the
provisions of the regulations, the loan guarantee agreement it executed
with SBA, the loan authorization (which is the document SBA issues to
state that it is providing its guarantee for a specific loan request),
and other loan documents. A Lender's failure to disclose material
facts, a Lender's making material misrepresentations to SBA, or the
Lender's failure to use SBA provided forms or exact computerized
facsimile copies also justifies denial of liability under the
guarantee. Other Lender actions which would support SBA's denial of
liability on its guarantee include Lender's failure to pay the
guarantee fee, Lender's late demand on SBA to purchase, or if the
Borrower has paid the loan in full.
In order to assure the successful establishment and operation of a
Borrower, proposed Sec. 120.530 authorizes SBA to defer a Borrower's
initial payments for a stated period of time. Under proposed
Sec. 120.531, SBA could extend the maturity of a loan for up to ten
years beyond its stated maturity if the extension would aid in the
orderly liquidation of the loan. Proposed Sec. 120.532 defines
``Moratorium'' to be the period of time during which SBA assumes a
Borrower's obligation to make installment payments on a guaranteed
loan.
Under proposed Sec. 120.533, SBA could grant a Moratorium if the
business would become or remain insolvent without it; if the business
would become or remain viable with a Moratorium; if a deferment is not
available; if all the parties agree that SBA could stop making payments
at any time; if the Borrower executes a demand
[[Page 64364]]
note to repay SBA's Moratorium payments; and if SBA obtains security
which it deems necessary. These conditions supporting a Moratorium
ensure that the parties know that their obligations continue and that
SBA expects to be reimbursed for its advances under this procedure.
Proposed Sec. 120.534 allows SBA to continue a Moratorium for six
months. SBA may extend a Moratorium for up to five years if a Borrower
could demonstrate its eventual ability to repay the original note (and
the demand note required for the Moratorium). Proposed Sec. 120.535
lists the repayment terms for a Moratorium. Under this section, the
interest rate on the demand note is the same as for the guaranteed
loan; SBA will apply repayments first to accrued interest and then to
principal; and SBA may demand payment in full under the demand note or
accept a repayment schedule.
Proposed Sec. 120.540 establishes SBA's policy concerning the
liquidation of collateral. Ordinarily, SBA does not liquidate
collateral if there is any reasonable prospect that the Borrower or
guarantor (other than SBA) may repay the loan within a reasonable
period of time. Without the Borrower's consent, SBA has the authority
to sell a direct loan, convert a direct loan to a guaranteed or
immediate participation loan, or convert an immediate participation
loan to a guaranteed loan or a loan owned solely by the Lender.
Importantly, this authority enables SBA to take appropriate steps to
resolve issues and problems concerning a loan. The proposed section
also provides that SBA will generally use competitive bids or a
negotiated sale to dispose of collateral. Under the proposed section,
SBA and the Lender would share all loan payments and recoveries, all
reasonable expenses, and any security or guarantee which the Lender or
SBA may receive in connection with a loan. The proposed section
provides that guarantors of financial assistance have no rights of
contribution against SBA on a direct or guaranteed loan. The proposed
section makes clear that SBA is not a co-guarantor with any other
guarantor, and that SBA's guarantee is unique, distinctive, and of a
totally different character than the guarantees offered by other
parties.
Under applicable federal law, homestead protection for a farmer-
Borrower covers a residence and a reasonable amount of adjoining real
property (``the collateral'') that are still occupied by the farmer-
Borrower after being acquired by SBA as a result of foreclosure, a
voluntary conveyance, or conveyance to the government by a trustee in
bankruptcy. The homestead protection provisions in the proposed rules
cover SBA direct and guaranteed loans, as well as SBA disaster loans.
Proposed Sec. 120.550 specifies that a farmer-Borrower who defaults on
an SBA loan would be allowed to lease the collateral from SBA. Under
proposed Sec. 120.551, SBA must notify the farmer-Borrower of the
homestead protection rights within 30 days after SBA acquires the
property. Under the proposed rule, the farmer-Borrower has to apply to
the local SBA office for homestead protection within 90 days after SBA
acquires the property, provide evidence that the farm produces farm
income reasonable for the area and economic conditions, show that at
least 60 percent of the farmer's gross annual income came from farm or
ranch operations in at least 2 out of the last 6 years, that the
farmer-Borrower has resided on the property during the preceding 6
years, and that the farmer is personally liable for the debt. This last
point means that the SBA loan could have been made to any individual or
entity, so long as the farmer-Borrower was personally liable for the
debt.
Under proposed Sec. 120.552, the farmer, under a lease with SBA,
has to occupy the residence and pay a reasonable rent to SBA. The lease
can be for a period of up to 5 years, and can be renewed for up to
another 5 years. During the lease, or at its end, the lessee-farmer has
the right of first refusal to reacquire the homestead property under
terms and conditions no less favorable than those offered to any other
purchaser. If the sale of the homestead property is an installment
sale, the purchase agreement has to require a down payment of no less
than 20 percent of the purchase price. The option price to the lessee-
farmer must be the appraised fair market value determined by an
independent appraisal. SBA cannot demand a payment for the homestead
property that exceeds the appraised value.
Under proposed Sec. 120.553, a farmer-Borrower can appeal denial of
a homestead protection application to the AA/FA. Until a final decision
is made, the farmer would be allowed to remain on the property. If a
conflict exists between state law and the SBA homestead provisions,
state law prevails.
120 Subpart F--Secondary Market
SBA has consolidated subparts F, G, and H of Part 120 into one new
Subpart F, governing SBA's secondary market for SBA guaranteed portions
of loans. Subpart F covers central registration requirements, the
pooling and sale of SBA guaranteed portions, and the sale of individual
SBA guaranteed portions that do not comprise part of a Pool. Provisions
currently found in separate subparts have been consolidated for ease of
understanding. SBA has renumbered and reordered the resulting
provisions, but there are no substantive or policy changes.
The following is a conversion chart explaining where the current
sections of subparts F, G, and H of 120 will be placed:
------------------------------------------------------------------------
New section Old section
------------------------------------------------------------------------
120.600......................... 120.601, 120.700, 120.800.
120.601......................... 120.602, 120.702, 120. 800, 120.802.
120.610......................... 120.706 and 120.803.
120.611......................... 120.707.
120.612......................... 120.710 and 120.807.
120.613......................... 120.301-2.
120.620......................... 120.711 and 120.701.
120.621......................... 120.801.
120.630......................... 120.703.
120.631......................... 120.704.
120.640......................... 120.709 and 120.806.
120.641......................... 120.713 and 120.809.
120.642......................... 120.708.
120.643......................... 120.805.
120.644......................... 120.804.
120.645......................... 120.605,120.605-1.
120.650......................... 120.603, 120.604, 120.604-1, and
120.604-2.
120.651......................... 120.605-3.
120.652......................... 120.712 and 120.808.
120.660......................... 120.605-2, 120.705, and 120.810.
------------------------------------------------------------------------
Proposed Sec. 120.600 describes the secondary market. Section
120.601 contains definitions used in subpart F. Proposed Sec. 120.610
provides that each Certificate representing either the entire
individual guaranteed portion of an individual 7(a) guaranteed loan or
an undivided interest in a Pool consisting of the SBA guaranteed
portions of a number of 7(a) guaranteed loans (``Certificate'') must be
in registered form only. This means that there are no bearer
Certificates. The section also specifies payment terms for
Certificates.
Proposed Sec. 120.611 describes the Pools which back Pool
Certificates, including Pool characteristics and Pool Certificate
interest rates. In Sec. 120.612, SBA specifies conditions which must be
met for an SBA guaranteed portion of a loan to be eligible to back a
Certificate. Among other things, a loan must be current.
Proposed Sec. 120.613 describes a secondary participation guarantee
agreement (SPGA). Before an SPGA may be executed, the Lender must
disburse the full amount of the loan, pay SBA's guarantee fee, and give
SBA copies of the SPGA and note.
[[Page 64365]]
Proposed Sec. 120.620 describes the extent of SBA's guarantee of a
Pool Certificate. SBA guarantees the timely payment, whether or not
collected, of principal and interest, and any prepayment of principal
on the loans. SBA's guarantee to a Registered Holder in a Pool of SBA
guaranteed portions of loans is backed by the full faith and credit of
the United States.
Proposed Sec. 120.621 describes the extent of SBA's guarantee of an
individual guaranteed portion. SBA guarantees to purchase from the
Registered Holder the guaranteed portion equal to the unpaid principal
and interest, less deductions for the servicing fees of the Lender and
the fiscal and transfer agent (``FTA''). SBA does not guarantee timely
payment on individual guaranteed portions. SBA's guarantee to a
Registered Holder is unconditional and is backed by the full faith and
credit of the United States. SBA's guarantee is triggered when the
Borrower defaults on installments of principal or interest, the Lender
fails to send to the FTA any payments it received from the Borrower, or
the FTA fails to send to the Registered Holder any payments it received
from the Lender.
Proposed Sec. 120.630 specifies the qualifications that an entity
must possess to be a Pool Assembler. Among other things, the entity
must be subject to regulation by an appropriate agency, have the
financial capability to assemble acceptable guaranteed portions, and be
in good standing with SBA. In proposed Sec. 120.631, SBA specifies
reasons for suspending a Pool Assembler from the secondary market.
Proposed Sec. 120.640 describes the administration of the Pools and
individual guaranteed portions. The FTA maintains a registry of
Certificate owners. Each Pool is self-liquidating, which means that
there is no substitution of guaranteed portions of loans that are paid
off by the borrower or SBA. If SBA pays a claim under a guarantee with
respect to a Certificate, it is subrogated to the rights satisfied by
the payment. This means that SBA can take any and all steps to be
reimbursed for payments it makes. Absent an express statutory change,
no federal, state or local law can preclude or limit SBA's exercise of
its ownership rights in the portions of loans constituting the Pool
against which Certificates are issued.
Proposed Sec. 120.641 requires the Pool Assembler, Registered
Holder of a Certificate representing an individual guaranteed portion,
or any subsequent seller to disclose to the purchaser information on
the Certificate's terms, conditions, and yield. Section 120.642
specifies the documents that a Pool Assembler must deliver to the FTA
before the FTA can issue a Certificate, such as a Pool application form
and documents which evidence the guaranteed portions which comprise the
Pool. Section 120.643 specifies the documents that a seller must
provide the FTA before the FTA can issue the initial Certificate for an
individual SBA guaranteed portion, including documentation of ownership
and a copy of the note that represents the guaranteed loan.
Proposed Sec. 120.644 describes certain conditions applying to the
sale of individual guaranteed portions. Each Certificate which
represents the guaranteed portion of a single loan must be for the
entire amount of the guaranteed portion. A Lender (or its Associate)
cannot purchase the guaranteed portion of a loan which it has made.
In Sec. 120.645, SBA describes how to transfer a Certificate and
what information a seller must supply to the FTA. Transfers must comply
with Article 8 of the Uniform Commercial Code of New York State.
Under Sec. 120.650 the FTA registers, issues, transfers title to,
and redeems Certificates. Proposed Sec. 120.651 tells a Registered
Holder what information it must give to the FTA to replace a
Certificate because of loss, theft, destruction, mutilation or
defacement. Section 120.652 authorizes the FTA to collect fees approved
by SBA.
Proposed Sec. 120.660 specifies the reasons for SBA to suspend or
revoke the privilege of a lender, broker, dealer, or Registered Holder
to participate in the secondary market.
Subpart G--Microloan Demonstration Program
This proposed subpart revises, amends, and reorganizes the rules
covering the microloan demonstration program (``microloans'') currently
located in Part 122. Substantive changes include: (1) Sec. 120.708(c)
provides a clearer understanding of how SBA determines the interest
rate charged to an intermediary; (2) Sec. 120.708(e) makes it clear
that SBA loans to intermediaries are non-recourse unless an
intermediary causes a loss to SBA by fraud or negligence; and (3)
Sec. 120.710 requires an intermediary to maintain accurate and current
books and records, and to report periodically to SBA the status of its
microloan portfolio.
The following conversion chart shows where to find the current Part
122 microloan sections:
----------------------------------------------------------------------------------------------------------------
Existing section Action New section
----------------------------------------------------------------------------------------------------------------
Sec. 122.61 (a) and (b)................. Revised.......................... Sec. 120.700 (a)-(c)
Sec. 122.61-2 (a)-(c)................... Retained......................... Sec. 120.701 (a)-(c)
Sec. 122.61-2(d)........................ Revised.......................... Sec. 120.701(d)
Sec. 122.61-2 (e)-(g)................... Retained......................... Sec. 120.701 (e)-(g)
New.............................. Sec. 120.701(h)
Sec. 122.61-3(a)........................ Revised.......................... Sec. 120.700(d)
Sec. 122.61-3(b)........................ Revised.......................... Sec. 120.703
Sec. 122.61-3(c)........................ Revised.......................... Sec. 120.703(c)
Sec. 122.61-4 (a) and (b)............... Revised.......................... Sec. 120.705
Sec. 122.61-4(c)........................ Deleted.......................... ..................................
Sec. 122.61-5........................... Revised.......................... Sec. 120.704
Sec. 122.61-6 (a)-(c)................... Revised.......................... Sec. 120.707
Sec. 122.61-6(d)........................ Revised.......................... Sec. 120.707
Sec. 122.61-6(e)........................ Revised.......................... Sec. 120.707
Sec. 122.61-6(f)........................ Deleted.......................... ..................................
Sec. 122.61-7........................... Revised.......................... Sec. 120.708
Sec. 122.61-8 (a)-(c)................... Revised.......................... Sec. 120.710
Sec. 122.61-8(d)........................ Deleted.......................... Sec. 120.710
Sec. 122.61-9 (a) and (b)............... Revised.......................... Sec. 120.710
Sec. 122.61-10.......................... Retained......................... Sec. 120.712
Sec. 122.61-11(a)....................... Revised.......................... Sec. 120.712
Sec. 122.61-11(b)....................... Revised.......................... Sec. 120.702
[[Page 64366]]
Sec. 122.61-11(c)....................... Retained......................... Sec. 120.712
Sec. 122.61-12.......................... Revised.......................... Sec. 120.711
----------------------------------------------------------------------------------------------------------------
Subpart H--Development Company (504) Loan Program
This proposed rule makes current Part 108 a subpart of Part 120.
The following conversion chart details the restructuring, subsection-
by-subsection. Those sections of Part 108 applicable to all business
loans have been consolidated with the corresponding 7(a) provisions and
placed in subpart A (``Policies Applying to All Business Loans'').
Sections of Part 108 that apply only to the Development Company Loan
Program (``504 loans'') will be in this subpart H. Finally, some
sections of Part 108 have been deleted as delineated in the chart.
Part I--Section-by-Section Analysis of Part 108
----------------------------------------------------------------------------------------------------------------
Former Sec. 108 subpart Proposed action on subpart Comments on action
----------------------------------------------------------------------------------------------------------------
Sec. 108.1(a)........................ Condensed and moved to Sec. 120.800......... No policy change.
Sec. 108.1(b)........................ Condensed and moved to Sec. 120.800......... No policy change.
Sec. 108.1(c)........................ Rewritten and moved to Sec. 120.860-Sec. No policy change.
120.862.
Sec. 108.1(d)........................ Incorporated into Sec. 120.862.............. No policy change.
Sec. 108.1(e)........................ Eliminated as redundant; incorporated into No policy change;
Sec. 120.176. eliminated because
policy covered by other
parts.
Sec. 108.2........................... Definitions applying to all business loans See comments below on
are in Sec. 120.10. Those applying solely specific definitions.
to 504 loans are in Sec. 120.801. Some
terms applying only to a certain subsection
are defined in the subsection.
Sec. 108.3(a)........................ Rewritten and placed into Sec. 120.881(a). No policy change.
Definition of Substantial Increase in
Unemployment is found in Sec. 120.801.
Sec. 108.3(b)........................ Eliminated................................... Deleted because 501 and
502 programs have been
eliminated.
Sec. 108.3(c)........................ Eliminated................................... Deleted because 501 and
502 programs have been
eliminated.
Sec. 108.3(d)........................ Eliminated................................... Deleted because 501 and
502 programs have been
eliminated.
Sec. 108.4(a)........................ Eliminated................................... No change of policy; rule
eliminated because
inherent in standard
business practice.
Sec. 108.4(b)........................ Eliminated, but covered in Sec. 120.826..... No change in policy; will
be covered in SBA's
Standard Operating
Procedure (SOP) or other
policy guidance.
Sec. 108.4(c)........................ Eliminated, but covered in Sec. 120.826..... No change in policy; will
be covered in SBA's SOP
or other policy
guidance.
Sec. 108.4(d)........................ Rewritten, clarified, and broadened. Most Minor policy change: SBA
provisions consolidated with corresponding may waive prohibition on
sections of current Part 120 into proposed member of CDC Board of
Sec. 120.140. See Note 4, subparts A and B. Directors being on
Those applying only to 504 loans are in Sec. another CDC's Board.
120.855.
Sec. 108.4(e)........................ Consolidated with Sec. 108.4(d) and placed No policy change.
in Sec. 120.40. Specific examples of
conflicts of interest will be found in SOP.
Prohibition against debt refinancing is in
Sec. 120.884.
Sec. 108.4(f)........................ Eliminated................................... Consolidated into Sec.
120.176.
Sec. 108.5(a)........................ Covered in Sec. 120.826; specific No policy changes.
explanations and details in SOP.
Sec. 108.5(b)........................ Covered in Sec. 120.826; specific Miniaturized
explanations and details in SOP. reproductions of CDC
records no longer
referenced. Other
technologies now
available. Specific
details will be in SOP.
Sec. 108.5(c)........................ Condensed into Sec. 120.830(c).............. No policy change.
Sec. 108.5(d)........................ Condensed into Sec. 120.830(d) and (e)...... Policy change -means of
delivery will be
detailed in SOP.
Sec. 108.5(e)........................ Eliminated................................... Report considered
unnecessary under
Presidential directive
to reduce paperwork.
Sec. 108.5(f)........................ Eliminated................................... No policy change. Not
required as regulation.
Sec. 108.6........................... Eliminated................................... Reserved sections were
removed.
Sec. 108.7(a)........................ Consolidated in Sec. 120.140................ No policy change.
Sec. 108.7(b)........................ Eliminated. Provision covered in note and No policy change.
other closing documents.
Sec. 108.8(a)........................ Credit elsewhere test consolidated and placed Major change of policy
in Sec. 120.101; evidence of need and use emphasis. See Note 6,
of personal resources by principals placed subparts A and B.
in Sec. 120.102.
Sec. 108.8(b)........................ Consolidated into Sec. 120.150 and Sec. No policy change.
120.160.
Sec. 108.8(c)........................ Sound business purpose is addressed in Sec. No policy change.
120.120 and Sec. 120.150. Size requirements
is addressed in Sec. 120.100(c) and Sec.
120.880(b).
[[Page 64367]]
Sec. 108.8(d)........................ Replaced by Sec. 120.111.................... Major policy change. See
Note 2, subparts A and
B.
Sec. 108.8(e)........................ Condensed and placed in Sec. 120.870........ No policy change.
Sec. 108.8(f)........................ Included in Sec. 120.881. Financial and Clarifies policy.
investment businesses addressed in Sec. Ineligibility of project
120.110. because relocation will
cause unemployment may
be rebutted if the
relocation is crucial to
the continued existence,
economic wellbeing or
competitiveness of the
applicant, and the
benefit to new community
outweighs injury to old.
Sec. 108.8(g)........................ This subject is consolidated into Sec. No policy change.
120.110 and Sec. 120.130.
Sec. 108.9........................... Rewritten and placed in Sec. 120.923(c)..... No policy change.
Sec. 108.10.......................... Eliminated. Not necessary to include in No policy change.
regulation.
Sec. 108.501......................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.501-1....................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.502......................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.502-1....................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.503(a)...................... Eliminated................................... No policy change; covered
in Sec. 120.1.
Sec. 108.503(b)...................... Rewritten and incorporated into Sec. 120.2, No policy change.
Sec. 120.860, Sec. 120.861, and Sec.
120.862.
Sec. 108.503(c)...................... Rewritten and placed in Sec. 120.829........ Minor policy change.
$45,000 is substituted
for 25% increase, which
was $43,750. Specific
instructions and details
in SOP and program
guidance.
Sec. 108.503(d)...................... Condensed and placed in Sec. 120.829(b) and No policy change;
(c). specific instructions
and details in SOP and
policy guidance.
Sec. 108.503-1(a).................... Description of the program incorporated into No policy change
Sec. 120.2(c) and Sec. 120.801. Eligible
projects are in Sec. 120.120, and
applications for certification are in Sec.
120.810.
Sec. 108.503-1(b).................... Rewritten and placed in Sec. 120.820 through No policy change;
Sec. 120.826, and Sec. 120.855(a). incidental benefit to
CDC Associate clarified
to allow relationship in
the regular course of
business.
Sec. 108.503-1(c).................... Rewritten and placed in Sec. 120.821. See Important policy changes--
definition of Area of Operations in Sec. see comments below.
120.802. Extending a CDC's Area of
Operations is in Sec. 120.835 and Sec.
120.836. Expiration of existing, temporary
Expansions is in Sec. 120.837. Case-by-case
extensions are in Sec. 120.838.
Sec. 108.503-1(d).................... Consolidated into Sec. 120.822. Member or Policy change. See Note
Board representation in another CDC is in under current Sec.
Sec. 120.855(b). 108.4(d) above. Specific
details and instructions
will be in SOP
Sec. 108.503-1(e).................... Rewritten and placed in Sec. 120.826 and No policy change;
Sec. 120.827. SBIC limitation addressed in Specifics addressed in
Sec. 120.820. SOP.
Sec. 108.503-1(f).................... Incorporated in Sec. 120.827................ No policy change
Sec. 108.503-1(g).................... Rewritten and placed in Sec. 120.855(b)..... Policy change. See Note
under current Sec.
108.4(d) above.
Sec. 108.503-2(a).................... Rewritten and placed in Sec. 120.810........ Small substantive change.
Regional offices removed
from process because of
SBA reorganization. More
information in SOP.
Sec. 108.503-2(b).................... Rewritten and placed in Sec. 120.811........ Minor procedural changes.
10 day period to submit
notice to SBA
eliminated; officer and
director addresses no
longer required in
notice.
Sec. 108.503-2(c).................... Rewritten and placed in Sec. 120.981........ No policy changes.
Sec. 108.503-2(d).................... Rewritten and placed in Sec. 120.812........ No policy change.
Sec. 108.503-2(e).................... Rewritten and placed in Sec. 120.980........ No policy change.
[[Page 64368]]
Sec. 108.503-3(a).................... Rewritten and placed in Sec. 120.827........ No policy change.
Sec. 108.503-3(b).................... Covered by Sec. 120.827(a).................. No policy change. Will be
expounded upon in SOP.
Sec. 108.503-3(c).................... Rewritten and placed in Sec. 120.828........ Policy change. The number
of loan approvals
required to satisfy the
minimum level of
activity will now be
specified in annual
program announcement.
See major policy change
note (a) below.
Sec. 108.503-3(d).................... Covered by Sec. 120.826..................... No policy change.
Specifics in SOP.
Sec. 108.503-3(e).................... Eliminated................................... Deleted reserved section.
Sec. 108.503-3(f).................... Rewritten and placed in Sec. 120.830(a) and No policy change. SBA
(b). streamlining paperwork
requirements under
Presidential directive.
Specifics in SOP.
Sec. 108.503-3(g).................... Rewritten and placed in Sec. 120.140(c)..... No policy change.
Sec. 108.503-3(h).................... Rewritten and placed in Sec. 120.983........ No policy change.
Sec. 108.503-4(a).................... Rewritten and placed in Sec. 120.120, Sec. No policy changes.
120.110, Sec. 120.150 and Sec. 120.193.
See Sec. 120.871 and Sec. 120.872 for
portions of new construction or existing
building that may be leased.
Sec. 108.503-4(b).................... Rewritten and placed in Sec. 120.130 and Policy change. Airplanes
Sec. 120.881. in Alaska and Hawaii no
longer eligible.
Reference to assets
limited in potential use
or marketability
deleted. This is part of
the credit decision. The
rule clarifies the
eligibility status of
heavy construction
equipment. See comment
(d) below.
Sec. 108.503-4(c).................... Rewritten and placed in Sec. 120.882(a)(2) Policy change. Any
and Sec. 120.884(a) and (c). Statutory expenditure made toward
ceiling discussed in Sec. 120.931; SBIC a project in
participation in Sec. 120.103 and Sec. anticipation of SBA
120.913; and administrative ceiling in Sec. assistance within 6
120.932.. months of receipt by SBA
of an application is
eligible. No notice is
required. See comment
(b) below.
Sec. 108.503-5(a).................... Rewritten and placed in Sec. 120.120 and No policy change.
Sec. 120.882.
Sec. 108.503-5(b).................... Rewritten and placed in Sec. 120.883........ No policy change.
Sec. 108.503-5(c).................... Rewritten and placed in Sec. 120.130 and No policy change.
Sec. 120.884.
Sec. 108.503-5(d).................... Discussed in Sec. 120.882(a)(2). Land See comment under current
contributions in Sec. 120.911. Sec. 108.503-4(c) above
and policy comment
discussion (b) below.
Specific instructions
and explanations will be
in SOP.
Sec. 108.503-6(a).................... Rewritten and placed in Sec. 120.883(c), No policy change. Omits
Sec. 120.961(a), and Sec. 120.971(a)(1). reference to $2,500 in
discussion of legal
fees. See note (c).
Specifics in SOP.
Sec. 108.503-6(b).................... Rewritten and placed in Sec. 120.936........ No policy change.
Sec. 108.503-6(c).................... Rewritten and placed in Sec. 120.961(b)..... No policy change.
Sec. 108.503-6(d).................... Rewritten and placed in Sec. 120.971(a)(3).. No policy change.
Sec. 108.503-6(e).................... Eliminated................................... Policy change. See Note
8, subparts A and B.
Sec. 108.503-7(a).................... Rewritten. Certification of project No policy change.
completion placed in Sec. 120.891. Specifics in SOP.
Certifications of no adverse change are in
Sec. 120.892..
Sec. 108.503-7(b).................... Rewritten and placed in Sec. 120.890........ No policy change.
Sec. 108.503-7(c).................... Rewritten and placed in Sec. 120.962........ No policy change.
Sec. 108.503-8(a).................... Rewritten and placed in Sec. 120.900........ No policy change, but (3)
is now called ``Borrower
contribution'' instead
of ``the 503 Company
injection''.
Sec. 108.503-8(b).................... Rewritten and placed in Sec. 120.920 through No policy change, but
Sec. 120.925. Newly published (1/20/95) Sec. 120.923(b)
``other real estate owned'' provision placed clarifies that some
in Sec. 120.923(a). payments made by
lienholder are allowed
to maintain and protect
the lien position.
Sec. 108.503-9....................... Loan conditions are detailed in Sec. 120.930 No policy change.
through Sec. 120.941. Description of
program is in Sec. 120.3 and Sec. 120.801.
Sec. 108.503-10...................... Rewritten and placed in Sec. 120.910 through No policy change. Some
Sec. 120.913. specifics left for SOP.
Sec. 108.503-11...................... Eliminated. Consolidated with current Sec. No policy change.
108.504(e) into Sec. 120.954.
Sec. 108.503-12...................... Rewritten and placed in Sec. 120.960........ No policy change.
Specifics in SOP.
Sec. 108.503-13(a) and (b)........... Rewritten and placed in Sec. 120.970. No policy change.
Quarterly reports discussed in Sec. Specifics moved to SOP.
120.830(f).
Sec. 108.503-13(c)................... Placed in 120.970. Incorporates Sec. 120.513 No policy changes.
Specifics in SOP.
Sec. 108.503-13(d)................... Rewritten and placed in Sec. 120.971(a)(1).. No policy change.
Sec. 108.503-13(e)................... Rewritten and placed in Sec. 120.982........ No policy change.
Sec. 108.503-13(f)................... Rewritten and placed in Sec. 120.983........ No policy change.
[[Page 64369]]
Sec. 108.503-13(g)................... Rewritten and placed in Sec. 120.938........ No policy change.
Sec. 108.503-13(h)................... Consolidated into Sec. 120.530.............. No policy change.
Specific information and
explanatory material
will be in SOP.
Sec. 108.503-14...................... Rewritten and placed in Sec. 120.970........ No policy change.
Specific information and
explanatory material
will be in SOP.
Sec. 108.503-15(a) and (b)........... Rewritten and placed in Sec. 120.972........ No policy change--
specifics in SOP.
Sec. 108.503-15(c) and (d)........... Eliminated................................... Deleted all reserve
sections.
Sec. 108.503-15(e)................... Rewritten and placed in Sec. 120.984........ No policy change.
Sec. 108.504 (a), (b) and (c)........ Consolidated into Sec. 120.801.............. No policy change.
Sec. 108.504(d)...................... Placed in Sec. 120.934...................... No policy change.
Sec. 108.504(e)...................... Rewritten and placed in Sec. 120.954........ No policy change.
Sec. 108.504(f)...................... Rewritten and placed in Sec. 120.941........ No policy change.
Sec. 108.504(g)...................... Eliminated. More suitable for inclusion in No policy change.
SOP.
Sec. 108.504(h)...................... Rewritten and placed in Sec. 120.941........ .........................
Sec. 108.504(i)...................... Consolidated into Sec. 120.962.............. No policy change.
Sec. 108.504(j)...................... Rewritten and placed in Sec. 120.939........ No policy change.
Sec. 108.504(k)...................... Placed into Sec. 120.941.................... No policy change.
Sec. 108.504(l)...................... Eliminated................................... No policy change.
Debentures are sold
through Pools.
Sec. 108.504-1....................... Condensed and placed in Sec. 120.194........ Computer generated forms
now may be used for all
business loans, not just
504 loans.
Sec. 108.505(a)...................... Consolidated into Sec. 120.1................ No policy change.
Sec. 108.505(b)...................... Consolidated into Sec. 120.2 and Sec. No policy change.
129.801.
Sec. 108.505(c)...................... SBA guarantee discussed in Sec. 120.801; No policy change.
timely payment on Certificate is in Sec.
120.942; effect of other laws is in Sec.
120.991.
Sec. 108.505(d)...................... Condensed and placed in 120.941.............. No policy change.
Sec. 108.505(e)...................... Condensed and placed in Sec. 120.942........ No policy change.
Sec. 108.505(f)...................... Placed in Sec. 120.950, Sec. 120.951 No policy change, but
(selling agent), Sec. 120.952 (fiscal reference to ``Transfer
agent), Sec. 120.953 (trustee), and Sec. Agent'' has been
120.954 (central servicing agent). Bond/ deleted. ``Trustee'' has
Insurance requirement moved to Sec. been used since 1986.
120.956(a).
Sec. 108.505(g)...................... Eliminated. Regulations not necessary........ No policy change, but
``Pooler'' is now
referred to as
``Underwriter'' and
specific conditions and
duties will be in SOP.
Sec. 108.505(h)...................... Consolidated and placed in Sec. 120.955..... No policy change.
Sec. 108.505(i)...................... Consolidated and placed in Sec. 120.971(c).. No policy change.
Sec. 108.505(j)...................... Included in Sec. 120.942(b)................. No policy change.
Sec. 108.505(k)...................... Condensed into Sec. 120.940................. No policy change.
Sec. 108.505(l)...................... Condensed into Sec. 120.956................. No policy change.
Sec. 108.506......................... Condensed and consolidated into Sec. No policy change.
120.140(i).
Sec. 108.507......................... Rewritten and placed in Sec. 120.850........ No policy change.
Sec. 108.507-1....................... Merged into Sec. 120.850.................... No policy change.
Sec. 108.507-2....................... Consolidated into Sec. 120.851.............. Minor policy change. ADCs
may be for-profit, as
well as non-profit
status. SBA's purpose is
to encourage more
organizations to aid
small businesses.
Sec. 108.507-3....................... Condensed into Sec. 120.851................. No policy change.
Specifics will be in
SOP.
Sec. 108.507-4....................... Consolidated into Sec. 120.850(a)........... No policy change.
Sec. 108.507-5....................... Reviews and audits consolidated into Sec. No policy change.
120.972. Suspension and revocation discussed
in Sec. 120.852.
Sec. 108.508-1....................... This new program, published 4/26/95, was No policy change.
condensed and placed at Sec. 120.840.
Sec. 108.509......................... This new program, published 4/26/95, was No policy change.
condensed and placed at Sec. 120.845.
New................................... 120.831...................................... Minor policy change. CDCs
would disclose to SBA &
Borrower any
compensation or
remuneration received
from a Lender or other
party involved in a 504
loan to monitor any
inducements.
----------------------------------------------------------------------------------------------------------------
Part II--Major Policy Changes
(a) Area of Operations. During the policy review accompanying the
regulatory rewriting, SBA focused much of its attention on the question
of what constitutes adequate service in an Area of Operation.
Throughout the history of the 504 program there has been a great
divergence among CDCs in the number of loan approvals each year. While
some CDCs have exhibited continued growth measured by their loan
approvals and
[[Page 64370]]
ability to package, process and service loans, other CDCs have lagged
behind. There are many complicated reasons for this, but the net result
has been a patchwork of 504 service (measured by loan approvals) across
the country, with many small businesses in some areas receiving 504
assistance while in other areas few, if any, small businesses have
received such assistance.
SBA attempted to address this issue by permitting CDCs to expand
temporarily into adjacent areas, and then, in l993, by designating a
minimum number of loan approvals per year which a CDC must average over
the previous two fiscal year periods to retain certification as a CDC.
The current number of required loan approvals is two. SBA also
established the status of an Associate Development Company (``ADC'').
Those CDCs unable or unwilling to meet the minimum number of loan
approvals may become ADCs, thereby continuing to participate in the
program goals of economic and community development without having to
make loans. A number of CDCs have been decertified as a result of this
policy and have opted for ADC status.
However, a focus on removal from CDC status does not address the
real question of adequacy of service within an Area of Operations. What
constitutes adequate service within a community? The statutory
objectives of the 504 program are to provide a portion of long term
fixed-asset financing for small business projects that provide jobs and
result in economic development. Clearly, these goals cannot be met in
an Area of Operations unless loans are being packaged, processed,
approved, closed and serviced by one or more CDCs. Unfortunately, SBA
is aware of too many locations across the country in which present CDCs
are unable or unwilling to meet the small business demand for 504
loans. Transferring an existing CDC to ADC status does not address this
inadequacy. SBA has concluded that the answer lies not in
decertification, but in competition and customer service.
Therefore, in Sec. 120.835, SBA is proposing that existing CDCs be
permitted to expand into Areas of Operations that are not being
adequately serviced. The expanding CDC would have to show that the
proposed Area of Operations is not being adequately served by the
existing CDCs and that the expanding CDC is well-qualified to serve it.
SBA is not proposing any geographic or size limitation on CDCs applying
to service a location, but such factors will be considered in
evaluating the application. A CDC must apply in writing to the SBA
district office serving the geographic area in which the CDC proposes
to expand.
In this context, SBA has concluded that there is no minimum loan
approval number appropriate to every CDC in every location across the
country. A small CDC with a rural Area of Operations and slow economic
activity may be providing adequate service at a low level of approvals
while a larger CDC in a metropolitan region with much economic activity
may be providing inadequate service, despite having a greater number of
loan approvals.
SBA has also concluded that adequate service includes adequate
servicing of loans, as well as the number of loan approvals. Thus, any
CDC seeking to expand will have to show that it has a history of
adequate experience and expertise in both loan packaging and servicing,
and that the existing CDCs in the proposed area of expansion have not
been adequately packaging or servicing loans. Even if the number of
loan approvals does not accurately represent the competence of a CDC,
it does accurately reflect the adequacy of the market penetration of
504 financing in the proposed area of expansion.
In general, SBA will consider an Area of Operations inadequately
served if the existing CDCs in the Area of Operations have not
averaged, over the last two fiscal years, sufficient loan approvals for
the population, as published by SBA in an annual program announcement.
SBA will establish the initial formula in a program announcement upon
publication of the final rule, but would like the benefit of comments
on this subject before committing any specific numbers to print. SBA is
considering a two or three tier formula based on the current national
averages for CDC loan approvals per number of population. Suggestions
have been received that the formula should be based not on population,
but on the number of small businesses in the Area of Operations or some
other factor. SBA is interested in comments and would like
recommendations on how, if at all, to incorporate a servicing component
into its approach.
SBA is proposing (Sec. 120.837) that all existing, temporary
expansions of Areas of Operations will expire automatically 6 months
after the effective date of these regulations, unless a CDC applies for
permanent expansion into that Area before the expiration date. SBA
believes that CDCs will best serve the small business community by
making a permanent commitment to an Area of Operations. Upon showing
good cause, a CDC will still be able to apply to SBA to make an
individual loan for a Project outside its Area of Operations in an area
not being adequately served by other CDCs (Sec. 120.838). Note also
that the Borrower may write to the AA/FA (but not the District
Director) to request the servicing of a CDC not currently serving the
area. SBA has added this provision to give Borrowers more flexibility
if they have a concern about the services of a particular CDC.
(b) Expenditures in Anticipation of Project. In the current
regulations, costs incurred by a Borrower in anticipation of receiving
a 504 loan are not eligible to be included in Project costs unless the
applicant has filed a written notice with the CDC and SBA within 60
days of incurring the expense and SBA gives written approval. As a
result, CDCs and SBA receive notices from many potential borrowers
considering 504 financing who desire to maximize potential financing.
Many of these businesses never actually apply or their applications are
denied. In those cases, the written notices are a useless paperwork
burden on SBA, the CDC and the applicant.
Therefore, SBA is proposing (Sec. 120.882(a)(2)) to eliminate the
requirement for written notice. Any expense incurred toward a Project
within six months of receipt by SBA of a complete loan application will
be an eligible Project cost.
(c) Legal Fees. The Borrower's closing costs, including legal fees,
are eligible for inclusion in the 504 loan. Typically, legal services
are provided by the CDC's counsel, who is usually experienced in
closing 504 loans and thus, is able to do so cost effectively.
Sometimes, a Borrower will also retain an attorney. Under the current
regulations, the CDC may charge the Borrower up to $2,500 for the legal
services performed by the CDC counsel, unless SBA approves a higher fee
in a complex case. If the fee is more than $2,500, the CDC must pay the
difference. The CDC collects the fee at closing and forwards it to the
closing attorney.
The $2,500 figure in the regulation has engendered much debate
within the industry. Many CDCs feel the figure establishes a minimum
base for attorney services and is, therefore, anti-competitive. On the
other hand, during the past five months, SBA has conducted several
expedited closing training sessions for CDC counsel. Many attorneys
feel that the figure establishes a ceiling for attorney services and
is, therefore, anti-competitive. There appears to be a wide range of
prices charged by CDC counsel for closing services. Most CDCs try to
minimize
[[Page 64371]]
counsel fees to reduce costs to the Borrower.
SBA has determined that there is no reason for SBA to refer to any
legal fee amount. Whether it is viewed as a ceiling or a base, the
$2,500 reference has apparently caused misunderstanding and may have
had an effect on legal fees charged. SBA believes legal fees should be
determined by the competitive market. Therefore, proposed
Secs. 120.883(d) and 120.961(a), omit any reference to amount.
(d) Eligible Use of Proceeds. In the current regulations, airplanes
are not eligible for 504 loans, except that Alaskan and Hawaiian
Projects may include airplanes not exceeding 20 percent of the Project
cost, if they are indispensable to the Project. SBA proposes to
eliminate this exception (Sec. 120.884(d)(2)), previously justified
because of the great distances people must travel in those states. But
distances are great in many mainland states, as well, and airplanes
simply are not directly attributable and necessary for a Project.
Also, in the current regulations there is no direct reference to
the eligibility of construction equipment as a distinct sub-category of
equipment and machinery. CDCs and SBA often receive questions from
potential Borrowers as to whether construction equipment is eligible
for 504 financing. The proposed rule in Sec. 120.884(d)(3) clarifies
that construction equipment is ineligible for 504 financing unless it
is heavy duty equipment integral to the operation of a business and
meeting the IRS definition of capital equipment. Note also that
Sec. 120.884(d)(1) clarifies SBA policy that short term equipment is a
permitted use of loan proceeds if the equipment is essential to the
Project and reflects a minor percentage of the loan. This is not a
change in policy.
(e) Definitions. SBA has created several new definitions to help
make the regulation easier to understand. Comments and suggestions will
be appreciated.
Several definitions clarify terms long associated with the 504
program which were included in the regulations, but were not defined.
These include ``Area of Operations,'' ``Certificate,'' ``Debenture,''
``Job Opportunity,'' and ``Substantial Increase in Unemployment.''
Finally, some key words have been replaced with more useful and apt
words. A ``Small Business Concern'' is now a ``Small Business.'' The
term ``Underwriter'' has replaced ``Pooler.'' The term ``Project'' has
replaced ``Plant.'' ``Project Property'' is a new definition previously
undefined in the regulation.
(f) Minor Policy Changes. In proposed Sec. 120.828, the minimum
level of CDC lending activity is no longer set at a specific number;
SBA will retain the ability to change this number through its program
announcements based on program performance and the economy. In proposed
Sec. 120.939(b), CDCs will be liable for SBA losses incurred by
``wrongful CDC conduct'' as well as in cases of fraud and negligence.
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 proposed rule involves internal
administrative procedures and would not be considered a significant
rule within the meaning of Executive Order 12866 and would 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, et
seq. It is not likely to have an annual economic effect of $100 million
or more, result in a major increase in costs or prices, or have a
significant adverse effect on competition or the United States economy.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this proposed rule, if adopted in final form, would
contain no new reporting or record keeping requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
would not have any federalism implications warranting the preparation
of a 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
13 CFR Part 108
Equal employment opportunity, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 116
Coastal Zone, Flood insurance, Flood plains, Lead poisoning, Small
businesses, Veterans.
13 CFR Part 120
Loan programs-business, Reporting and recordkeeping requirements,
Small businesses.
13 CFR Part 122
Community development, Employee benefit plans, Energy conservation,
Environmental protection, Exports, Individuals with disabilities, Loan
programs-business, Loan programs-energy, Loan programs-veterans,
Microloans, Reporting and recordkeeping requirements, Small businesses,
Solar energy, Trusts and trustees, Veterans.
13 CFR Part 131
Loan programs-business, Small businesses.
Accordingly, pursuant to the authority set forth in sections 5
(b)(1) and (b)(6) of the Small Business Act, 15 U.S.C. 634(b)(6) and
636 (a) and (h), SBA hereby proposes to amend Chapter I of Title 13,
Code of Federal Regulations (CFR), as follows:
1. Part 120 would be revised to read as follows:
PART 120--BUSINESS LOANS
General Descriptions of SBA's Business Loan Programs
Sec.
120.1 Which loan programs does this part cover?
120.2 Descriptions of the business loan programs.
120.3 Pilot programs.
Definitions
120.10 Definitions.
Subpart A--Policies Applying to All Business Loans
Eligibility Requirements
120.100 What are the basic requirements for all Borrowers?
120.101 Credit not available elsewhere.
120.102 Funds not available from alternative sources, including
personal resources of principals.
120.103 Are farm enterprises eligible?
120.104 Are businesses financed by SBICs eligible?
120.105 Special consideration for veterans.
Ineligible Businesses and Eligible Passive Companies
120.110 What businesses are ineligible for SBA business loans?
120.111 What conditions must an Eligible Passive Company satisfy?
Uses of Proceeds
120.120 What are eligible uses of proceeds?
120.130 Restrictions on uses of proceeds.
Ethical Requirements
120.140 What ethical requirements apply to participants?
Credit Criteria for SBA Loans
120.150 What are SBA's lending criteria?
120.151 What is the statutory limit for total loans to a Borrower?
120.160 Loan conditions.
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120.161 Lending limits.
Requirements Imposed Under Other Laws and Orders
120.170 Flood insurance.
120.171 Compliance with child support obligations.
120.172 Flood-plain and wetlands management.
120.173 Lead-based paint.
120.174 Earthquake hazards.
120.175 Coastal barrier islands.
120.176 Compliance with other laws.
Enforceability Despite Rule Changes
120.180 Are rules enforceable if they are changed later?
Loan Applications
120.190 Where does an applicant apply for a loan?
120.191 The contents of a business loan application.
120.192 Approval or denial.
120.193 Reconsideration after denial.
Computerized SBA Forms
120.194 Use of computer forms.
120.195 Duty of Lender, CDC, Intermediary Lender, and Borrower to
report fees.
Subpart B--Policies Specific to 7(a) Loans
Bonding Requirements
120.200 What bonding requirements exist during construction?
Limitations on Use of Proceeds
120.201 Refinancing unsecured or undersecured loans.
120.202 Restrictions on loans for changes in ownership.
120.203 Revolving credit.
Maturities; Interest Rates; Loan and Guarantee Amounts
122.210 What percentage of a loan may SBA guarantee?
120.211 What limits are there on the amounts of direct loans?
120.212 What limits are there on loan maturities?
120.213 What fixed interest rates may a Lender charge?
120.214 What conditions apply for variable interest rates?
Fees for Guaranteed Loans
120.220 Guarantee fees that Lender pays SBA.
120.221 Fees which the Lender may collect from a loan applicant.
120.222 Fees which the Lender or Associate may not collect from the
Borrower or share with third parties.
Subpart C--Special Purpose Loans
120.300 Statutory Authority.
Disabled Assistance Loan Program (DAL)
120.310 What assistance is available for the disabled?
120.311 Definitions.
120.312 DAL-1 use of proceeds and other program conditions.
120.313 DAL-2 use of proceeds and other program conditions.
120.314 Resolving doubts about creditworthiness.
120.315 Interest rate and loan limit.
Businesses Owned by Low Income Individuals
120.320 Policy.
Energy Conservation
120.330 Who is eligible for an energy conservation loan?
120.331 What devices or techniques are eligible for a loan?
120.332 What are the eligible uses of proceeds?
120.333 Are there any special credit criteria?
Export Working Capital Program (EWCP)
120.340 What is the Export Working Capital Program?
120.341 Who is eligible?
120.342 What are eligible uses of proceeds?
120.343 Collateral.
120.344 Cash flow projections.
International Trade Loans
120.345 Policy.
120.346 Eligibility.
120.347 Use of proceeds.
120.348 Amount and percentage of guarantee.
Qualified Employee Trusts (ESOP)
120.350 Policy.
120.351 Definitions.
120.352 Use of proceeds.
120.353 Eligibility.
120.354 Creditworthiness.
Veterans Loan Program
120.360 Which veterans are eligible?
120.361 Other conditions of eligibility.
Pollution Control Program
120.370 Policy.
Loans to Participants in the 8(a) Program
120.375 Policy.
120.376 Special requirements.
120.377 Use of proceeds.
Defense Economic Transition Assistance
120.380 Program.
120.381 Eligibility.
120.382 Repayment ability.
120.383 Restrictions on loan processing.
Caplines Program
120.390 Revolving credit.
Small General Contractors
120.391 What is the Small General Contractor Program?
120.392 Who may apply?
120.393 Are there special application requirements?
120.394 What are the eligible uses of proceeds?
120.395 What is SBA's collateral position?
120.396 What is the term of the loan?
120.397 Are there any special restrictions?
Subpart D--Lenders
120.400 Participation agreements.
Participation Criteria
120.410 Requirements for all participating Lenders.
120.411 Preferences.
120.412 Other services Lenders may provide Borrowers.
120.413 Advertisement of relationship with SBA.
Pledging Notes or Transferring Unguaranteed Portion
120.420 Financings by Nondepository Lenders.
Miscellaneous Provisions
120.430 SBA access to Lender files.
120.431 Suspension or revocation of eligibility to participate.
Certified Lenders Program (CLP)
120.440 What is the Certified Lenders Program?
120.441 How does a Lender become a CLP Lender?
120.442 Suspension or revocation of CLP status.
Preferred Lenders Program (PLP)
120.450 What is the Preferred Lenders Program?
120.451 How does a Lender become a PLP Lender?
120.452 What are the requirements of PLP loan processing?
120.453 What are the requirements of PLP loan servicing and
liquidation?
120.454 PLP performance review.
120.455 Suspension or revocation of PLP status.
Small Business Lending Companies (SBLC)
120.470 What is an SBLC?
120.471 Records.
120.472 Reports to SBA.
120.473 Change of ownership or control.
120.474 Prohibited financing.
120.475 Suspension or revocation.
Subpart E--Loan Administration
120.500 General.
Servicing
120.510 Servicing direct and immediate participation loans.
120.511 Servicing guaranteed loans.
120.512 Who services the loan after SBA honors its guarantee?
120.513 What servicing actions require the prior written consent of
the SBA?
SBA'S Purchase of a Guaranteed Portion
120.520 When does SBA honor its guarantee?
120.521 What interest rate applies after SBA purchases its
guaranteed portion?
120.522 How much accrued interest does SBA pay to the Lender or
Registered Holder when SBA purchases the guaranteed portion?
120.523 What is the ``earliest uncured default''?
120.524 When is SBA released from liability on its guarantee?
[[Page 64373]]
Deferment, Extension of Maturity and Loan Moratorium
120.530 Deferment of payment.
120.531 Extension of maturity.
120.532 What is a loan Moratorium?
120.533 When will SBA grant a Moratorium?
120.534 How long can a Moratorium continue?
120.535 What are the repayment terms of a Moratorium?
Liquidation of Collateral
120.540 What are SBA's policies concerning liquidation of
collateral?
Homestead Protection for Farmers
120.550 What is homestead protection for farmers?
120.551 Who is eligible for homestead protection?
120.552 Lease.
120.553 Appeal.
Subpart F--Secondary Market
120.600 What is the SBA Secondary Market?
120.601 Definitions.
Certificates
120.610 Description of Certificates.
120.611 Description of Pools backing Pool Certificates.
120.612 What loans are eligible to back Certificates?
120.613 What is a Secondary Participation Guarantee Agreement?
The SBA Guarantee of a Certificate
120.620 The SBA guarantee of a Pool Certificate.
120.621 The SBA guarantee of a Certificate representing a
individual guaranteed portion.
Pool Assemblers
120.630 Qualifications to be a Pool Assembler.
120.631 Suspension or termination of eligibility of Pool Assembler.
Sale of Certificates
120.640 Administration of the Pool and individual guaranteed
portions.
120.641 Disclosure to purchasers.
120.642 Requirements before the FTA issues Pool Certificates.
120.643 Requirements before the FTA issues the Certificate for an
individual guaranteed portion.
120.644 Sale of individual SBA guaranteed portion.
120.645 Transfers of Certificates.
Fiscal and Transfer Agent (FTA)
120.650 Registration duties of FTA in Secondary Market.
120.651 Claim to FTA by Registered Holder to replace Certificate.
120.652 FTA fees.
Suspension or Revocation of Participant in Secondary Market
120.660 Suspension or revocation.
Subpart G--Microloan Demonstration Program
120.700 What is the Microloan Program?
120.701 Definitions.
120.702 Are there limits on Intermediaries or loans?
120.703 How do I apply to become an Intermediary?
120.704 What is my financial contribution?
120.705 Microloan Revolving Fund.
120.706 Loan Loss Reserve Fund.
120.707 What are the terms and conditions of my Intermediary SBA
loan?
120.708 What conditions apply to my loans to Microloan Borrowers?
120.709 What records and reports does SBA require?
120.710 How does an Intermediary get a grant to assist Microloan
Borrowers?
120.711 Does SBA provide technical assistance to Intermediaries?
120.712 How does a non-Intermediary get a grant?
120.713 Does SBA guarantee any loans an Intermediary obtains from
another source?
Subpart H--Development Company Loan Program (504)
120.800 What is the purpose of the 504 program?
120.801 How is a 504 Project financed?
120.802 Definitions.
Certification Procedures to Become a CDC
120.810 Applications for certification as a CDC.
120.811 Public notice of CDC certification application.
120.812 Probationary period for newly certified CDCs.
Requirements for CDC Certification and Operation
120.820 CDC non-profit status.
120.821 CDC Area of Operations.
120.822 CDC membership.
120.823 CDC board of directors.
120.824 Professional management and staff.
120.825 Financial ability to operate.
120.826 Basic requirements for operating a CDC.
120.827 Services a CDC provides to small businesses.
120.828 The minimum level of CDC lending activity.
120.829 The Job Opportunity average a CDC must maintain.
120.830 Reports a CDC must submit.
120.831 Disclosure of referral fees or other payments by or to a
CDC
Extending a CDC's Area of Operations
120.835 Application to extend an Area of Operations.
120.836 Public notice of application for extension.
120.837 Expiration of existing, temporary expansions.
120.838 Case-by-case extensions.
Accredited Lenders Program
120.840 Accredited Lenders Program.
Premier Certified Lenders Program
120.845 Premier Certified Lenders Program.
Associate Development Companies (ADCs)
120.850 ADC functions.
120.851 ADC eligibility and operating requirements.
120.852 Suspension and revocation of ADCs.
Ethical Requirements
120.855 CDC and ADC ethical requirements.
Project Economic Development Goals
120.860 Required objectives.
120.861 Job creation or retention.
120.862 Other economic development objectives.
Leasing Policies Specific to 504 Loans
120.870 Leasing Project Property.
120.871 Leasing part of a new construction Project to another
business.
120.872 Leasing part of an existing building to another business.
Loan-Making Policies Specific to 504 Loans
120.880 Basic eligibility requirements.
120.881 Ineligible Projects for 504 loans.
120.882 Eligible Project costs for 504 loans.
120.883 Eligible administrative costs for 504 loans.
120.884 Ineligible costs for 504 loans.
Interim Financing
120.890 Source of interim financing.
120.891 Certifications of disbursement and completion.
120.892 Certifications of no adverse change.
Permanent Financing
120.900 What are the sources of permanent financing?
The Borrower's Contribution
120.910 How much must the Borrower contribute?
120.911 Land contributions.
120.912 Borrowed contributions.
120.913 May an SBIC provide the contribution?
Third Party Loans
120.920 The first lien position.
120.921 Terms of Third Party loans.
120.922 Pre-existing debt on the Project Property.
120.923 What are the policies on subordination?
120.924 Prepayment of subordinate financing.
120.925 Preferences.
504 Loans and Debentures
120.930 Amount.
120.931 504 lending limits.
120.932 Interest rate.
120.933 Maturity.
120.934 Collateral.
120.935 Deposit.
120.936 Subordination to CDC.
120.937 Assumption.
120.938 Default.
120.939 Borrower prohibition.
120.940 Prepayment of the 504 loan or Debenture.
120.941 Certificates.
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Debenture Sales and Service Agents
120.950 SBA and CDC must appoint agents.
120.951 Selling agent.
120.952 Fiscal agent.
120.953 Trustee.
120.954 Central Servicing Agent.
120.955 Agent bonds and records.
120.956 Suspension or revocation of brokers and dealers.
Closings
120.960 Responsibility for closing.
120.961 CDC closing fees.
120.962 Construction escrow accounts.
Servicing and Post-Closing Fees
120.970 Servicing of 504 loans and Debentures.
120.971 Post-closing fees paid by Borrower.
120.972 Oversight and evaluation of CDCs and ADCs.
CDC Transfer, Suspension and Revocation
120.980 Transfer of CDC to ADC status.
120.981 Voluntary transfer and surrender of CDC certification.
120.982 Correcting CDC servicing deficiencies.
120.983 Transfer of CDC servicing to SBA or another CDC.
120.984 Suspension or revocation of CDC certification.
Enforceability of 501, 502 and 503 Loans and Other Laws
120.990 501, 502 and 503 loans.
120.991 Effect of other laws.
Authority: 15 U.S.C 634(b)(6) and 636 (a) and (h).
General Descriptions of SBA's Business Loan Programs
Sec. 120.1 Which loan programs does this part cover?
This Part regulates SBA's financial assistance to small businesses
under its general business loan programs (``7(a) loans'') authorized by
section 7(a), 15 U.S.C. 636(a) of the Small Business Act (``the Act''),
its microloan demonstration loan program (``Microloans'') authorized by
section 7(m), 15 U.S.C. 636(m) of the Act, and its development company
program (``504 loans'') authorized by Title V of the Small Business
Investment Act, 15 U.S.C. 695 to 697f (``Title V''). These three
programs constitute the business loan programs of the SBA.
Sec. 120.2 Descriptions of the business loan programs.
(a) 7(a) loans. (1) 7(a) loans provide financing for general
business purposes and may be:
(i) A direct loan by SBA;
(ii) An immediate participation loan by a Lender and SBA; or
(iii) A guaranteed loan (deferred participation) by which SBA
guarantees a portion of a loan made by a Lender.
(2) A guaranteed loan is initiated by a Lender agreeing to make an
SBA guaranteed loan to a small business and applying to SBA for SBA's
guarantee under a blanket guarantee agreement (participation agreement)
between SBA and the Lender. If SBA agrees to guarantee (authorizes) a
portion of the loan, the Lender funds and services the loan. If the
small business defaults on the loan, SBA's guarantee requires SBA to
purchase its portion of the outstanding balance, upon demand by the
Lender and subject to specific conditions. Regulations specific to 7(a)
loans are found in subpart B of this part.
(b) Microloans. SBA makes loans and loan guarantees to non-profit
Intermediaries that make short-term loans up to $25,000 to eligible
small businesses for general business purposes, except payment of
debts. SBA also gives grants to Intermediaries for use in providing
management assistance and counseling to small businesses. Regulations
specific to these loans are found in subpart G of this part.
(c) 504 loans. Projects involving 504 loans require long-term
fixed-asset financing for small businesses. A Certified Development
Company (CDC) provides the final portion of this financing with a 504
loan made from the proceeds of a Debenture issued by the CDC,
guaranteed 100 percent by SBA (with the full faith and credit of the
United States), and sold to investors. The regulations specific to
these loans are found in subpart H of this part.
Sec. 120.3 Pilot programs.
The Administrator of SBA may from time to time suspend, modify, or
waive rules for a limited period of time to test new programs or ideas.
The Administrator shall publish a document in the Federal Register
explaining the reasons for these actions.
Definitions
Sec. 120.10 Definitions.
The following terms have the same meaning wherever they are used in
this part. Defined terms are capitalized wherever they appear.
Associate. (1) An Associate of a Lender or CDC is:
(i) An officer, director, member, or key employee, or an agent
involved in the loan-making process;
(ii) A Close Relative of any individual in paragraph (1)(i) of this
definition; and
(iii) Any entity in which one or more individuals referred to in
paragraphs (1) (i) and (ii) of this definition own or control at least
10 percent.
(2) An Associate of a small business is:
(i) An officer, director, member, owner, principal, key employee,
or agent authorized to act on behalf of the small business;
(ii) A Close Relative of any individual in paragraph (2)(i) of this
definition;
(iii) Any entity in which one or more individuals referred to in
paragraphs (2) (i) and (ii) of this definition owns or controls at
least 10 percent; and
(iv) Any individual or entity in control of or controlled by the
small business (except a Small Business Investment Company (``SBIC'')
licensed by SBA).
(3) For purposes of this definition, the time during which an
Associate relationship exists commences six months before the following
dates and continues as long as the certification, participation
agreement, or loan is outstanding:
(i) For a CDC, the date of certification by SBA;
(ii) For a Lender, the date of application for a loan guarantee on
behalf of an applicant; or
(iii) For a small business, the date of the loan application to
SBA, the CDC, the Intermediary, or the Lender.
Authorization is SBA's written agreement providing the terms and
conditions under which SBA will make or guarantee business loans. It is
not a contract to make a loan.
Borrower is the obligor of an SBA business loan.
Certified Development Company (``CDC'') is an entity authorized by
SBA to deliver 504 financing to small businesses.
Close Relative is a spouse; a parent; or a child or sibling, or the
spouse of any such person.
Eligible Passive Company is a small entity which does not engage in
regular and continuous business activity, which leases real or personal
property to an Operating Company for use in the Operating Company's
business, and which complies with the conditions set forth in
Sec. 120.111.
Intermediary is the entity in the Microloan program that receives
SBA financial assistance and makes loans to small businesses in amounts
up to $25,000.
Lender is an institution that has executed a participation
agreement with SBA under the guaranteed loan program.
Loan Instruments are the Authorization, note, instruments of
hypothecation, and all other agreements and documents related to a
loan.
Operating Company is an eligible small business actively involved
in conducting business operations now or about to be located on real
property owned by a Passive Company, or using or about to use in its
business
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operations personal property owned by a Passive Company.
Preference is any arrangement giving a Lender or a CDC a preferred
position compared to SBA relating to the making of a business loan with
respect to such things as repayment, collateral, guarantees, control,
maintainance of a compensating balance, purchase of a Certificate of
deposit or acceptance of a separate or companion loan, without SBA's
consent.
Rural Area is a political subdivision or unincorporated area in a
non-metropolitan county (as defined by the Department of Agriculture),
or, if in a metropolitan county, any such subdivision or area with a
resident population under 20,000 which is designated by SBA as rural.
Service Provider is an entity that contracts with a Lender or CDC
to perform management, marketing, legal or other services.
Subpart A--Policies Applying to All Business Loa
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