Standards for Conducting Business With SBA

SMALL BUSINESS ADMINISTRATION

13 CFR Part 103

Standards for Conducting Business With SBA

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: In response to President Clinton's regulatory review

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

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

streamlining its regulations by eliminating many rules and simplifying

and improving those that remain. This final rule reorganizes and

streamlines the entire Part 103, which covers the standards one must

meet to conduct business with SBA. It makes the standards clearer and

more understandable to those who are regulated, and easier for SBA to

enforce.

EFFECTIVE DATE: This rule is effective February 28, 1996.

FOR FURTHER INFORMATION CONTACT: Michael Dowd, Director, Office of Loan

Programs, at (202) 205-6490.

SUPPLEMENTARY INFORMATION: Title 13 CFR Part 103 contains SBA's

policies governing the standards for suspending

[[Page 2680]]

or revoking the privileges of persons who conduct business with SBA on

behalf of applicants or lenders. This final rule reorganizes and

streamlines Part 103, making it easier to understand and enforce. It

changes the title of the Part to ``Standards for Conducting Business

with SBA'' to describe more clearly the scope of the regulations. The

sections stating the statutory provisions underlying the Part and its

purpose--103.13 and 103.13-1--are eliminated as unnecessary. The rule

renumbers the sections that remain: present Secs. 103.13-2 through

103.13-6 would become Secs. 103.1-103.5. The final rule clarifies the

existing definition of agents who appear before SBA on behalf of

applicants for assistance, adds definitions for ``packagers'', ``lender

service providers,'' and ``referral agents'', and provides that these

categories of agents are specifically covered by SBA's requirements

governing conduct of business. It also amends, in certain respects, and

adds greater specificity to the definition of ``good cause'' for which

the Administrator may revoke or suspend the privilege for conducting

business with SBA. It adds provisions prescribing the use and form of

lender service provider agreements which must contain certain

provisions regarding services to be provided and compensation,

including a prohibition on secondary market premium sharing. In

addition to these substantive changes, the final rule is written in

clearer, more straightforward language than the present Part.

The proposed rule was published on November 24, 1995 at 60 FR

57980. A total of 26 commenters, virtually all Certified Development

Companies, contacted SBA during the comment period with suggestions and

observations about the proposed rule. All commenters expressed at least

some level of concern about the proposal. In general, these concerns

were based on the breadth of the proposed rule.

A majority of the commenters offered negative observations about

the scope of the definitions in section 103.1. Most of these comments

focused on subsections (a) and (b) and criticized the definitions of

the terms ``agent'' and ``conduct business with SBA.'' Many of these

commenters were particularly concerned about the definitions in light

of SBA's expressed intention (in the preamble to the proposed rule) to

register and train agents, and to require under section 103.5 that all

agents execute and provide to SBA a compensation agreement.

The final rule addresses this concern by clarifying that only those

persons or entities conducting business with SBA--those who actually

prepare or submit on behalf of an applicant an application for

assistance and those contractors who provide services to participants

in SBA's business loan program pursuant to written agreements with

those participants--will be considered ``agents''. SBA does not intend

to regulate persons or entities, such as real estate appraisers and

environmental specialists, who simply supply information that is used

in the preparation of an application.

Fourteen commenters criticized section 103.4, which defines ``good

cause'' for suspension or revocation of the privilege to conduct

business with SBA. In general, the comments about section 103.4

criticized terms such as ``unethical activity'' and ``reasonable fees''

as too broad and vague. More specifically, three commenters complained

that persons and entities should be allowed under subsection 103.4(d)

to use the words ``Small Business Administration'' or ``SBA'' in

advertising. Four commenters felt that the ``two master'' prohibition

in subsection 103.4(g) should be clarified.

SBA intends to provide guidelines in its Standard Operating

Procedures (SOP) for what will constitute ``unethical activity'' and

``reasonable fees.'' The final rule states that persons may use the

words ``Small Business Administration'' or ``SBA'' in advertisements if

the advertisement does not imply endorsement or sponsorship by SBA. The

final rule continues to prohibit the use of the SBA seal or symbol in

advertisements. The ``two master'' rule and the exceptions to it have

been substantially altered in the final rule. The two master rule will

now only apply when a person or entity acts as both a lender service

provider or referral agent and packager for an applicant on the same

business loan and receives compensation for such activity from both the

lender and applicant. The two exceptions stated in the proposed rule

have therefore been deleted and replaced by only one: cases in which a

referral agent also acts as a packager and is compensated by both the

lender for referral agent activities and the applicant for packaging

activities.

Finally, 14 commenters noted problems with section 103.5, which

governs the regulation of an agent's fees and provision of services.

These complaints related directly to many of the same commenters'

concerns about the scope of the definition of ``agent'' in section

103.1. The changes in the definition of ``agent'' discussed above

address this problem. Several commenters questioned SBA's ability to

review all compensation agreements for reasonableness. Section 103.5

does not require such a review and SBA does not intend to evaluate each

compensation agreement for reasonableness; it will only undertake a

review if an applicant requests that it do so. Two commenters also

noted that use of the terms ``compensation agreement'' and ``lender

service provider agreement'' should be made consistent in subsections

103.5 (a) and (b). The final rule has been amended to make clear the

distinction between the terms and the intended treatment of each type

of agreement.

As noted above and in the preamble to the proposed rule, SBA

intends to require all packagers and lender service providers to

register with SBA for purposes of keeping track of who is performing

such activities on behalf of applicants for assistance or lenders. SBA

will provide training for anyone or any entity that wishes to represent

applicants for SBA assistance or provide services to lenders. The

development of these initiatives will take place over the next fiscal

year, in consultation with representatives of the affected industries.

To the extent that they require modifications of this final rule, such

modifications will be made in later rulemakings.

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

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

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

SBA certifies that this rule involves internal administrative

procedures and is not a significant rule within the meaning of

Executive Order 12866 and will not have a significant economic impact

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

Regulatory Flexibility Act, 5 U.S.C. 601, 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 rule contains no new reporting or recordkeeping

requirements.

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

does 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.

[[Page 2681]]

List of Subjects in 13 CFR Part 103

Administrative practice and procedure.

Accordingly, pursuant to the authority set forth in sections 5 and

13 of the Small Business Act, 15 U.S.C. 634 and 642, SBA hereby revises

part 103 of Title 13, Code of Federal Regulations (CFR), to read as

follows:

PART 103--STANDARDS FOR CONDUCTING BUSINESS WITH SBA

103.1 Key definitions.

103.2 Who may conduct business with SBA?

103.3 May SBA suspend or revoke an Agent's privilege?

103.4 What is ``good cause'' for suspension or revocation?

103.5 How does SBA regulate an Agent's fees and provision of

service?

Authority: Secs. 5, 13, 72 Stat. 385, 394 (15 U.S.C. 634, 642).

Sec. 103.1 Key definitions.

(a) Agent means an authorized representative, including an

attorney, accountant, consultant, packager, lender service provider, or

any other person representing an applicant or participant by conducting

business with SBA.

(b) The term conduct business with SBA means:

(1) Preparing or submitting on behalf of an applicant an

application for financial assistance of any kind, assistance from the

Investment Division of SBA, or assistance in procurement and technical

matters;

(2) Preparing or processing on behalf of a lender or a participant

in any of SBA's programs an application for federal financial

assistance;

(3) Participating with or communicating in any way with officers or

employees of SBA on an applicant's, participant's, or lender's behalf;

(4) Acting as a lender service provider; and

(5) Such other activity as SBA reasonably shall determine.

(c) Applicant means any person, firm, concern, corporation,

partnership, cooperative or other business enterprise applying for any

type of assistance from SBA.

(d) Lender Service Provider means an Agent who carries out lender

functions in originating, disbursing, servicing, or liquidating a

specific SBA business loan or loan portfolio for compensation from the

lender. SBA determines whether or not one is a ``Lender Service

Provider'' on a loan-by-loan basis.

(e) Packager means an Agent who is employed and compensated by an

Applicant or lender to prepare the Applicant's application for

financial assistance from SBA. SBA determines whether or not one is a

``Packager'' on a loan-by-loan basis.

(f) Referral Agent means a person or entity who identifies and

refers an Applicant to a lender or a lender to an Applicant. The

Referral Agent may be employed and compensated by either an Applicant

or a lender.

(g) Participant means a person or entity that is participating in

any of the financial, investment, or business development programs

authorized by the Small Business Act or Small Business Investment Act

of 1958.

Sec. 103.2 Who may conduct business with SBA?

(a) If you are an Applicant, a Participant, a partner of an

Applicant or Participant partnership, or serve as an officer of an

Applicant, Participant corporation, or limited liability company, you

may conduct business with SBA without a representative.

(b) If you are an Agent, you may conduct business with SBA on

behalf of an Applicant, Participant or lender, unless representation is

otherwise prohibited by law or the regulations in this part or any

other part in this chapter. For example, persons debarred under the SBA

or Government-wide debarment regulations may not conduct business with

SBA. SBA may request that any Agent supply written evidence of his or

her authority to act on behalf of an Applicant, Participant, or lender

as a condition of revealing any information about the Applicant's,

Participant's, or lender's current or prior dealings with SBA.

Sec. 103.3 May SBA suspend or revoke an Agent's privilege?

The Administrator of SBA or designee may, for good cause, suspend

or revoke the privilege of any Agent to conduct business with SBA. Part

134 of this chapter states the procedures for appealing the decision to

suspend or revoke the privilege. The suspension or revocation remains

in effect during the pendency of any administrative proceedings under

Part 134 of this chapter.

Sec. 103.4 What is ``good cause'' for suspension or revocation?

Any unlawful or unethical activity is good cause for suspension or

revocation of the privilege to conduct business. This includes:

(a) Attempting to influence any employee of SBA or a lender, by

gifts, bribes or other unlawful or unethical activity, with respect to

any matter involving SBA assistance.

(b) Soliciting for the provision of services to an Applicant by

another entity when there is an undisclosed business relationship

between the two parties.

(c) Violating ethical guidelines which govern the profession or

business of the Agent or which are published at any time by SBA.

(d) Implying or stating that the work to be performed for an

Applicant will include use of political or other special influence with

SBA. Examples include indicating that the entity is affiliated with or

paid, endorsed or employed by SBA, advertising using the words Small

Business Administration or SBA in a manner that implies SBA's

endorsement or sponsorship, use of SBA's seal or symbol, and giving a

``guaranty'' to an Applicant that the application will be approved.

(e) Charging or proposing to charge any fee that does not bear a

necessary and reasonable relationship to the services actually rendered

or expenses actually incurred in connection with a matter before SBA or

which is materially inconsistent with the provisions of an applicable

compensation agreement or Lender Service Provider agreement. A fee

based solely on a percentage of a loan or guarantee amount can be

reasonable, depending on the circumstances of a case and the services

actually rendered.

(f) Engaging in any conduct indicating a lack of business integrity

or business honesty, including debarment, criminal conviction, or civil

judgment within the last seven years for fraud, embezzlement, theft,

forgery, bribery, falsification or destruction of records, false

statements, conspiracy, receiving stolen property, false claims, or

obstruction of justice.

(g) Acting as both a Lender Service Provider or Referral Agent and

a Packager for an Applicant on the same SBA business loan and receiving

compensation for such activity from both the Applicant and lender. A

limited exception to this ``two master'' prohibition exists when an

Agent acts as a Packager and is compensated by the Applicant for

packaging services; also acts as a Referral Agent and is compensated by

the lender for those activities; discloses the referral activities to

the Applicant; and discloses the packaging activities to the lender.

(h) Violating materially the terms of any compensation agreement or

Lender Service Provider agreement provided for in Sec. 103.5.

(i) Violating or assisting in the violation of any SBA regulations,

policies, or procedures of which the Applicant has been made aware.

[[Page 2682]]

Sec. 103.5 How does SBA regulate an Agent's fees and provision of

service?

(a) Any Applicant, Agent, or Packager must execute and provide to

SBA a compensation agreement, and any Lender Service Provider must

execute and provide to SBA a Lender Service Provider agreement. Each

agreement governs the compensation charged for services rendered or to

be rendered to the Applicant or lender in any matter involving SBA

assistance. SBA provides the form of compensation agreement and a

suggested form of Lender Service Provider agreement to be used by

Agents.

(b) Compensation agreements must provide that in cases where SBA

deems the compensation unreasonable, the Agent or Packager must: reduce

the charge to an amount SBA deems reasonable, refund any sum in excess

of the amount SBA deems reasonable to the Applicant, and refrain from

charging or collecting, directly or indirectly, from the Applicant an

amount in excess of the amount SBA deems reasonable.

(c) Each Lender Service Provider must enter into a written

agreement with each lender for whom it acts in that capacity. SBA will

review all such agreements. Such agreements need not contain each and

every provision found in the SBA's suggested form of agreement.

However, each agreement must indicate that both parties agree not to

engage in any sharing of secondary market premiums, that the services

to be provided are accurately described, and that the agreement is

otherwise consistent with SBA requirements. Subject to the prohibition

on splitting premiums, lenders have reasonable discretion in setting

compensation for Lender Service Providers. However, such compensation

may not be directly charged to an Applicant or borrower.

Dated: January 22, 1996.

John T. Spotila,

Acting Administrator.

[FR Doc. 96-1350 Filed 1-26-96; 8:45 am]

BILLING CODE 8025-01-P