Business Loan Programs

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 108, 116, 120, 122, 131

Business Loan Programs

Agency: Small Business Administration (SBA).

Action: Final rule.

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Summary: SBA has completed an extensive review of all of its

regulations, and it has decided to eliminate some regulations and

consolidate, clarify, and simplify the remainder. This final rule

consolidates five current CFR parts into one Part to be known as Part

120. This 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: This rule is effective March 1, 1996. This rule applies with

respect to all applications for financial assistance filed on or after

March 1, 1996.

[[Page 3227]]

FOR FURTHER INFORMATION CONTACT: John R. Cox, (202) 205-6490.

SUPPLEMENTARY INFORMATION: On December 15, 1995, SBA published in the

Federal Register (60 FR 64356) a notice of proposed rulemaking with

respect to the consolidation of five current CFR parts into one Part to

be known as Part 120. SBA received and considered 136 timely comments

in response to the proposed rule. SBA has adopted many of the comments

in issuing this final rule. Each of the significant comments is

addressed below. In addition, SBA has made technical changes and

clarifications in this final rule, where appropriate.

This final rule combines Parts 108, 116, 120, 122 and 131 of 13 CFR

into one new Part to be known as Part 120. This 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 are eliminated in this final rule. 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 this final 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 are 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 are in Subpart C. Subparts D, E, and F

contain rules regarding lenders, program administration, and the

secondary market currently found in Part 120. The loan moratorium

provisions presently in Part 131 are located in subpart E. Subpart G

contains rules specific to Microloans currently in Part 122.

Regulations applying to 504 loans currently located in Part 108 are in

subpart H.

Definitions

Many comments were received which addressed the definition of

Associate in Sec. 120.10. Most commenters expressed the opinion that

the definition was too broad and, if promulgated, would adversely

affect the ability of small businesses to use SBA's lending programs.

Of particular concern was the inclusion of a ``Close Relative'' of a

principal of an entity in the definition of Associate of a small

business, Lender or CDC. As a result of the comments, SBA re-examined

this definition and modified it. An Associate of a Lender or CDC will

include a holder of 20 percent or more of the value of a Lender's or

CDC's stock or debt instruments, as well as an entity in which the

Close Relative of an Officer, Director, key employee, or holder of at

least a 20 percent interest in the Lender or CDC. The definition of an

Associate of a small business was amended to include an owner of more

than 20 percent of the equity of the small business, but not an entity

in which a Close Relative of such an owner is also an owner.

Subpart A

Numerous commenters indicated that Sec. 120.101, pertaining to the

unavailability of credit, needed clarification with respect to the

substantiation required to support a Lender's or CDC's certification.

SBA is promulgating this section as proposed because it plans to

provide information on how to provide the required substantiation in

its Standard Operating Procedures (SOPs).

Proposed Sec. 120.102, which imposed a requirement that the

personal resources of the owners of an applicant for a business loan be

injected into the applicant generated more than 80 comments from the

public. The overwhelming majority of the responses objected to the

application of a personal resources test to the 504 program because

that program is an economic development program. After considering the

responses received, SBA has revised the final rule to require an

injection of personal resources at a level dependent on the amount of a

total financing package which includes an SBA business loan. This means

that the injection of personal resources will bear a designated

correlation to the total financing package of SBA and non-SBA

assistance. This regulation will ensure that applicants for SBA

financial assistance will be able to ascertain the demand on their

personal resources, with some certainty, before they seek SBA financial

assistance.

Section 120.110 lists types of businesses which are not eligible

for SBA financial assistance. Several commenters suggested SBA further

explain when a business is engaged in a religious activity for purposes

of ineligibility under Sec. 120.110(k), and to eliminate the proposed

requirement that a business be principally engaged in the activity. SBA

has decided to retain the prohibition on providing assistance to a

business principally engaged in a religious activity. SBA believes that

this standard comports with Constitutional requirements. SBA intends to

administer the standard in a manner which balances the needs of small

businesses with applicable legal requirements. However, given the

uncertainty of the state of legal precedent relative to the

Establishment Clause, SBA will continue to review this issue, and may

make such prospective changes in the regulation as may be required.

In addition, for purposes of consistency SBA will use a standard of

no more than one-third of gross annual revenue derived from the

prescribed activity to determine the eligibility of businesses engaged

in legal gambling activities or packaging SBA loans for purposes of

Secs. 120.110 (g) and (m).

Proposed Sec. 120.111 would permit an Eligible Passive Company to

be eligible for 7(a) and 504 loan assistance if it leases real or

personal property to an otherwise eligible small business. SBA received

many comments suggesting that it permit a revocable or irrevocable

trust to be such an entity. SBA has decided to delete the requirement

that when a trust is an Eligible Passive Company it must be an

irrevocable trust in favor of one permitting eligibility for revocable

trusts in prescribed circumstances. In order to be eligible, the

trustor must warrant and certify that the trust will not be revoked or

substantially amended without SBA's consent, and the trustor's personal

guarantee will be required to provide adequate assurances of continuity

and financial support. SBA will monitor its experience with revocable

trusts and make modification to this provision if such experience

warrants it.

Under current rules, an Eligible Passive Company may not use the

proceeds of a business loan for working capital. Only an active company

may obtain working capital as part of a business loan. SBA recognizes

that this requirement has been burdensome and has caused some

applicants to obtain two separate loans for the benefit of the same

Operating Company. Accordingly, Sec. 120.120(b) will allow an Eligible

Passive Company to use part of business loan funds for the working

capital of the Operating Company if the Operating Company is a co-

Borrower.

With respect to proposed Sec. 120.195, which required the reporting

of fees

[[Page 3228]]

paid in connection with obtaining business loan assistance by a Lender,

CDC, Intermediary Lender, and Borrower, SBA has decided to retain only

a requirement relating to the Borrower since other regulations cover

the obligation by the other parties to report fees. By eliminating a

reference to other parties, SBA avoids unnecessary duplication.

Subpart B

Proposed Sec. 120.200 specified that bonding is required as

collateral for a 7(a) loan in which construction is financed. Two

commenters recommended that a minimum amount of construction should be

designated in Sec. 120.200 before payment and performance bonds and

builder's risk insurance would be required. Another commenter expressed

concern that the proposed regulation would require formal waivers of

bonding and insurance requirements on a case-by-case basis. Another

comment noted that the revised provision does not appear to cover

direct loans approved by SBA. SBA has made minor changes in the

language of the provision to clarify that the provision covers direct

and guaranteed loans. SBA has decided not to establish a specific size

limit on the construction project which would trigger the bonding and

insurance requirements, electing instead to address the specific

construction project size in an SOP.

One commenter suggested that the proposed revised language in

Sec. 120.201 was so restrictive as to disqualify any refinancing of

unsecured or undersecured debt regardless of circumstances. That was

not the intent of the proposal. However, the final regulation specifies

that SBA will not permit 7(a) financing to be used to shift a

creditor's potential loss to SBA.

SBA has decided to delete proposed Sec. 120.203 relating to

revolving credit, as unnecessary. Revolving line of credit financing is

currently authorized under Sec. 120.390 for the CapLines program, and

the Agency wants the flexibility to consider special finance needs of

small business, such as ``floor plan'' financing, at a later date.

With respect to proposed Sec. 120.213, SBA carefully considered

suggestions to add language to the regulation pertaining to preemptive

federal interest rates and the quarterly publication by SBA of maximum

allowable fixed interest rates in the Federal Register. SBA has decided

that it is unnecessary to address in the regulations the legal

conclusion that maximum interest rates prescribed by SBA are exempt by

statute from any maximum rates established under state law. It is SBA's

intent to publish on a quarterly basis in the Federal Register notice

of the maximum fixed interest rate permitted on guaranteed and direct

loans. The final rule retains the language in the proposed rule.

Proposed Sec. 120.214(f) has been rewritten in order to clarify

that SBA has the authority to establish higher interest for smaller

loans, and that the authority applies to both variable and fixed rate

loans. The proposal has been finalized at Sec. 120.215. Proposed

Sec. 120.214(g), has been renumbered and is now Sec. 120.214(f).

A number of commenters suggested that SBA should amend proposed

Sec. 120.220(b), claiming that the policy of terminating a guarantee

for nonpayment of the guarantee fee is too harsh. SBA has considered

the comments, but has decided to retain the present policy of

terminating guarantees for nonpayment of guarantee fees as one means of

assuring timely submission of guarantee fees. In addition, under the

Lender's agreement with SBA, payment of the guarantee fee is the

consideration necessary to support SBA's guarantee commitment. Minor

editorial changes have been made in this section to reflect that a

guarantee fee payment may be reimbursed to the Lender from funds

allocated in the working capital portion of a guaranteed loan.

Two commenters suggested that SBA should clarify in Sec. 120.220(c)

that the annual fee payable by a Lender cannot be charged to a

Borrower. SBA has adopted the suggestion.

SBA has deleted proposed Sec. 120.221(b), relating to commitment

fees for Export Working Capital loans. This provision was based on the

former Export Revolving Line of Credit program and is no longer

applicable to any program.

A commenter suggested that SBA define the term ``Extraordinary

servicing'' as proposed in Sec. 120.221(c). SBA believes that any

further description of special or extraordinary servicing practices

would be more appropriate for its SOPs, and therefore declines to adopt

the suggestion. The suggestion to permit prepayment fees, which were

prohibited under proposed Sec. 120.221(e), has not been adopted by SBA.

The Agency believes that a small business should be allowed to prepay a

7(a) loan without incurring additional costs, and the prohibition on

charging prepayment fees is a positive marketing tool for making 7(a)

financial assistance available to small business.

SBA has added referral fees to the list of fees in Sec. 120.222(b)

which a Lender or Associate may not charge a Borrower since such fees

are not fees which relate to services normally provided by a Lender.

SBA has included a Service Provider as an entity in Sec. 120.222(d)

with which a Lender or Associate cannot share a premium received from

the sale of an SBA guaranteed loan in the secondary market. The

inclusion of a Service Provider in the prohibition reduces further the

possibility of a conflict of interest or the appearance thereof.

Subpart C

Two commenters noted that under the provisions of proposed

Sec. 120.314, SBA was precluded from requiring personal guarantees for

DAL-2 financial assistance. SBA intended the prohibition for requiring

personal guarantees to be applicable only to DAL-1 financial

assistance, and the provision has been corrected to reflect that

intent.

One commenter suggested that SBA should state in the provisions

pertaining to the Export Working Capital Program (EWCP) that limits on

lender fees and interest rates are not prescribed. In final

Sec. 120.344, SBA has addressed the issue of extraordinary fees and

interest rates pertaining to the EWCP. SBA does not set a maximum rate

of interest which may be charged for this program.

At the suggestion of a commenter, the reference to loan proceeds to

develop or penetrate foreign markets has been deleted from Sec. 120.342

and moved to Sec. 120.347, pertaining to eligible use of proceeds for

International Trade Loans. EWCP loan proceeds are to be used only to

finance export transactions.

Two commenters noted that proposed Sec. 120.348 did not address a

limitation on the fixed-asset portion of International Trade Loans. The

provision has been amended to specify limitations on portions of loan

amounts allocated for fixed assets and non-fixed assets.

At the suggestion of one commenter, SBA has clarified Sec. 120.377

to provide that only a manufacturing concern may use loan proceeds for

working capital for this particular loan program.

Two commenters suggested SBA should address the DELTA loan program

in Sec. 120.380. While the DELTA loan program is not a permanently

funded SBA program, SBA has elected to briefly describe it in

Sec. 120.381(c).

Subpart D

Although Sec. 120.420, which allows nondepository lenders to pledge

notes evidencing SBA guaranteed loans or to sell the unguaranteed

portions is not new, two commenters asked that depository lenders be

allowed the same

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option. SBA has rejected this suggestion. This option is not available

to depository lenders because they have a depository base which

provides liquidity, whereas the nondepository lenders have no such

base. They have only a capital base which must be left unimpaired. To

provide them with some liquid assets, SBA allows them to sell the

unguaranteed portions of SBA guaranteed loans.

Two commenters wrote that a conflict exists between

Secs. 120.420(a) and 120.453(c). SBA adopted the commenter's suggestion

to include language which makes clear that nondepository lenders who

are also PLP lenders may sell the entire unguaranteed portion, not just

90 percent, of SBA guaranteed loans with SBA's consent.

Section 120.420(b)(2) concerning retention of economic risk, has

been revised to require a nondepository lender which has sold the

unguaranteed portion of a loan, to establish a sufficient reserve fund

at the time of sale. The two other options available in the current

regulations have not been used and are not being retained, and SBA has

only approved proposals that have included a reserve fund.

One commenter proposed that Sec. 120.441, concerning the Certified

Lenders Program, be amended to permit certification of individual loan

officers rather than the lending institution. SBA has considered this

idea previously. SBA relies on the capability of its lenders, not

individual loan officers. Therefore, SBA has decided not to alter the

present procedure at this time. The current selection criteria already

permit consideration of the experience of individual loan officers in

certifying lenders.

Concerning the provision at Sec. 120.442 which sets forth grounds

for suspension or revocation of eligibility to participate in the CLP

program, one commenter suggested including ethics violations as a basis

for suspension or revocation. SBA will consider including this in its

SOP which, if violated, would fall within the language ``violations of

applicable * * * published SBA policies and procedures.'' SBA will

follow suit with the PLP program, which has a similar revocation and

suspension provision. SBA also emphasizes that the reasons listed in

Sec. 120.442 are simply examples of causes for suspension or revocation

and not an exclusive list.

One commenter requested that PLP lenders be allowed to process

loans which refinance interim loans under Sec. 120.452(a)(2). SBA has

decided to permit such loans if made for other than construction

purposes and if the interim loan was approved by the lender within 90

days of receipt of the PLP loan number or the refinancing.

SBA received two comments requesting clarification on whether a

lender was required to be a CLP lender before being eligible to apply

for PLP status. Both commenters approved of the eligibility

requirement. In the final rule, SBA is eliminating this requirement. It

is not necessary to develop lenders into PLP lenders in stages. If a

lender does not perform well as a PLP lender, SBA can revoke its PLP

status.

Several commenters suggested that SBLCs be allowed to extend credit

through other programs. SBA has been considering this for some time and

has decided to amend Sec. 120.470 by allowing SBLCs to provide SBA

guaranteed loans to Intermediaries participating in the SBA Microloan

program.

A commenter suggested raising the minimum bond coverage a Small

Business Lending Company is required to have, from $25,000 to $500,000.

SBA agrees with the commenter that $25,000 is too low and is adopting

the suggestion by amending Sec. 120.470(b)(10).

Subpart E

SBA received several comments concerning Sec. 120.524(a) which sets

forth grounds under which SBA may deny liability. The commenters

opposed the proposed language which would allow SBA to deny liability

upon any failure of a lender to take certain actions, as compared to

the current language of the regulation which allows SBA to deny

liability only upon substantial failure. SBA has decided not to adopt

this suggestion. The final regulation makes it clear that SBA may deny

liability on the basis of any material noncompliance with SBA's

regulations or the terms of applicable loan documentation.

The provisions of Sec. 120.532 et seq., which describe the loan

moratorium program, have been deleted from this final rule and will be

inserted into the Agency's SOPs. The requirements of this program are

already provided for by statute and the regulations are therefore

redundant. SBA has retained in the regulations a short description of

the program, and provides notice that complete information concerning

moratoriums is available at local SBA district offices.

One commenter opined that Sec. 120.540(a) requires additional

language concerning when SBA or a lender may liquidate collateral

securing a loan. SBA agrees and is including language that allows

liquidation if the loan is in default.

One commenter suggested that Sec. 120.540(c)(1) be revised to allow

lenders to liquidate collateral as they normally would, rather than

having to attempt to sell at auction. SBA has adopted the commenter's

suggestion and the section now allows a lender to use negotiated sales

if consistent with its usual practice for liquidating non-SBA-related

assets.

One commenter discussed the revisions to the homestead protection

provisions found at Sec. 120.550 et seq. Much of the details have been

removed with the intention of publishing them in an SOP. The writer was

concerned that persons interested in these provisions will not know

what is needed to comply with the requirements of this program. With

the publication of the procedures in an SOP, persons wishing to know

more about this program will be able to obtain the information easily

from any local SBA district office.

Subpart F

Only one comment was received on Subpart F. The commenter requested

that a definition of ``Associates of a Pool Assembler'' be added to the

definitional section. This comment was not adopted since ``Associate''

is defined in Sec. 120.10 and there is no need for a different

definition for this Subpart. Minor changes were made to this Subpart

for clarification.

Subpart G

Only one comment was received on Subpart G. The commenter suggested

that proposed Sec. 120.707(d) be revised to require Intermediaries to

assign all guarantees and liens from their Microloans to SBA. This

comment was not adopted. SBA believes that it is adequately protected

by the current requirement that the Intermediary pledge to SBA a first

lien position in the Microloan Revolving Fund, Loan Loss Reserve Fund,

and all notes receivable. Minor changes were made to this Subpart for

clarification.

Subpart H

Sec. 120.801. SBA received several comments regarding this

introductory section describing the 504 program in general terms. All

pointed out that a small business must apply for 504 financing through

a CDC servicing the area in which the Project is located, not in which

the business is located. SBA concurs and makes the correction in this

final rule. SBA also has made several other minor revisions to this

section in response to comments.

[[Page 3230]]

Sec. 120.810. Several comments suggested minor changes in one or

more definitions that apply to the 504 program. SBA disagrees with all

of the comments, except one regarding Substantial Increase in

Unemployment. The commenter questioned the need for such a definition,

questioning the SBA's ability to quantify the increases mentioned in

the definition. SBA concurs and has deleted the definition (see

Sec. 120.881).

Sec. 120.827. As a result of a comment, SBA amended this section to

make it clear that a CDC may itself provide financial and technical

assistance to small businesses, as well as help small businesses to

obtain such assistance from other sources.

Sec. 120.828. SBA received 13 comments on this section. As

discussed more thoroughly in the following discussion of expansion into

additional Areas of Operation, small businesses in some areas of the

country receive excellent 504 assistance measured, at least, by loan

activity, while in other areas, few, if any, small businesses have

received assistance. SBA attempted to address this fact by, among other

things, designating a minimum number of loan approvals which a CDC must

process in order to retain certification. The present rule requires a

minimum of 2 loan approvals averaged over the preceding 2 years. In the

proposed rule, SBA altered the requirement to be ``the minimum number

of 504 loans set by SBA in an annual program announcement.'' The

purpose of the proposed change was to give SBA the flexibility to

adjust the number as required to reflect an expected increase in loan

volumes.

Without exception, every comment opposed this change, believing it

imposed a burden both on the industry and SBA to adjust the standard

every year in a program announcement. The industry trade association

recommended changing the annual language to ``from time to time.'' Most

of the other comments suggested that SBA retain its existing

regulation. Based upon such comments, SBA has decided to retain the

standard of 2 per year. The only change from the existing regulation is

that SBA feels it is no longer necessary to use an average of the

previous two years.

Many of the comments confused this issue with the performance

standard for expansion into another Area of Operation. SBA wishes to

emphasize that the standard in Sec. 120.828 has nothing to do with

expansion or competition.

Sec. 120.829. Three comments were received regarding this section.

Title V of the Small Business Investment Act requires a CDC's portfolio

to reflect a Job Opportunity Average. At the present time, the

requirement is one Job Opportunity per $35,000 of 504 funding. That

figure has been in effect for many years. The current regulation

permits the AA/FA to allow a CDC's average to be up to 25 percent

higher in certain areas. In the proposed rule, SBA rounded the 25

percent maximum ($43,875) up to $45,000. Otherwise SBA retained the

current rule.

SBA received comments suggesting that SBA increase both the base

$35,000 and the exception because of inflation. In addition, one

comment recommended that SBA delete all of the exceptions in

Sec. 120.829 except Alaska and Hawaii because the rule is impossible to

administer. SBA rejects both suggestions, principally because it is not

aware that the industry has been having any problem complying with the

Job Opportunity Average requirement at its present level. However, SBA

does agree that redevelopment areas as defined in 42 U.S.C. 3161 should

be deleted from the provision. The purpose of the 25 percent

differential was to assist distressed geographical areas needing

development. However, once designated, redevelopment areas remain so

designated forever. Because they have become so common, the effect

would be to increase the Job Opportunity Average for entire Areas of

Operations to $45,000 rather than $35,000, if the CDC and SBA followed

the regulation exactly. From a review of the Job Opportunity Averages

submitted by CDCs in their annual reports, it is clear that the

increased average in redevelopment areas is not required by CDCs or is

not being followed. Furthermore, areas that were once distressed, but

no longer are, would continue to be eligible for the higher average,

even though it is no longer needed. For these reasons, SBA has

determined that redevelopment areas be deleted from the section.

Sec. 120.830. Several comments objected that the definition of

``Associates'' would cause increased and burdensome reporting

requirements. SBA believes that the amended definition of Associate

cures this problem.

Sec. 120.831. The proposed rule included a new requirement that a

CDC disclose to SBA and the Borrower any referral fees or other payment

made or received by the CDC from the Lender or other party to the 504

transaction. A comment from the industry trade association indicated

that it understood that SBA may want this disclosure, but that it

should be required of all SBA guaranteed lenders, not just CDCs. In the

interest of program consistency, SBA agrees, has broadened the language

to include all lenders, and has consolidated the section with

Sec. 120.195 so that it applies to all business loans.

Sec. 120.835. 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 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 1993, 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, SBA proposed in Sec. 120.835 that existing CDCs be

permitted to expand into Areas of Operations that are not being

adequately serviced. Under

[[Page 3231]]

the proposed rule, 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 did not propose any geographic or size limitation on CDCs applying

to service a location, but suggested that such factors would be

considered in evaluating the application. As proposed, a CDC would

apply in writing to the SBA district office serving the geographic area

in which the CDC proposes to expand.

In the proposed rule, SBA solicited comment on the factors to be

considered in determining whether an area is being adequately serviced.

As a result of many discussions with industry members, SBA had

concluded that, in general, the starting point for any determination

would be the number of loan approvals averaged by the existing CDCs in

the Area of Operations over the last two fiscal years. Even if the

number of loan approvals does not accurately represent the competence

of a CDC, it does accurately reflect the market penetration of 504

financing in the proposed area of expansion.

SBA had also 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. In the proposed rule, SBA advanced the population of an Area

of Operations as the base factor, but indicated that industry members

had suggested other possibilities such as the number of small

businesses in the Area of Operations.

As a result of numerous consultations with the industry and small

businesses, SBA had also concluded at the time of the proposed rule

that adequate service includes other factors in addition to the number

of loan approvals, including adequate servicing of loans. Thus, in the

proposed rule, SBA indicated that 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.

In the proposed rule, SBA solicited comments and recommendations

regarding the factors that should be included in a determination of

whether the existing CDCs are adequately servicing an Area of

Operations. SBA asked commenters to particularly focus on how to

incorporate a servicing component into its approach.

SBA received 35 comments in response to its solicitation. Only two

opposed the policy proposed by SBA. The remainder supported SBA's

efforts to assure availability of 504 financing everywhere in the

country by establishing limited competition. Most of the comments

discussed various factors which the commenter believed should be

incorporated into SBA's decision making process upon receipt of an

application for extension of one CDC into another's Area of Operations.

Among the comments received was a proposal submitted by the industry's

trade association, as well as many recommendations from individual CDCs

and financial institutions.

As a result of the comments received, SBA has determined to amend

its proposed rule in several respects. The proposed rule provided that

SBA would consider an Area of Operations inadequately served if the

existing CDCs in the Area of Operation have not averaged, over the last

two fiscal years, sufficient loan approvals for the population in the

CDCs' Area of Operation, as set by SBA in an annual program

announcement. All of the comments which were addressed to the issue

were concerned about the annual development of a standard. Commenters

expressed the opinion that annually revisiting the standard would

create a ``moving target'' for the industry to achieve and introduce

uncertainty and instability into the industry. Most indicated support

for a reviewable standard consistent with national performance levels.

Most comments were opposed to judging performance solely on the

number of loan approvals based upon population levels as suggested by

SBA in the proposed rule (along with a servicing component). The

comment submitted by the industry's trade association did utilize the

number of loan approvals per million of general population (and a

servicing component) as the criterion for determining that the CDCs in

an Area of Operations are adequately serving the area. However, many

individual CDCs presented numerous other elements which they

recommended be considered as part of the performance level ``formula''.

In addition to the number of loan approvals per population of the Area

of Operation, the various factors included: The number of small

businesses in the Area of Operations; the number of deals closed,

rather than approved (showing that the deals are ``real'' and the CDC

is capable of following through); the density of small businesses in

the Area of Operation; the character of the Area of Operations (urban,

suburban, or rural); the types of small businesses; the economic

conditions prevailing in the Area of Operations; amount loaned per

small business population; jobs created/retained; servicing record and

capabilities; currency rate; loss rates; other services provided to

small businesses (technical and financial assistance); relationship

with the local SBA office; ties to the local community and its

resources; and knowledge of the area and its economic and business

climate. In short, solely looking at loan approval volume is an

inadequate measure of a CDC's service to the community.

Several commenters pointed out potential problems that could result

from basing CDC performance solely on ``packaging'' and loan approval

volume.

SBA agrees with several commenters that level of activity is

probably an accurate barometer of past and future performance. However,

SBA has determined that loan approval volume based upon general

population alone should not be the sole determination of whether an

area is being adequately served.

Based upon the comments received, SBA has decided to amend its

proposed rule to delete the reference to any one factor determining

that an Area of Operations is being inadequately served. Rather, SBA

has determined that loan approval volume should be utilized only as a

benchmark upon which to support the application of a CDC to expand into

an Area of Operation which it presently does not serve. If the loan

approval volume of the existing CDCs in the area does not reach the

benchmark figure, the applying CDC will be able to proceed with its

application.

The application to expand must be in writing to the SBA District

Office serving the geographic area in which the CDC proposes to expand.

It must demonstrate to the satisfaction of SBA that the CDC is capable

of providing the additional territory the full range of services

expected of a CDC, including the ability to process, close, service,

and, if authorized, liquidate 504 loans. The existing CDC or CDCs in

the expansion area will then have at least 30 days in which to respond

to the District Office. The ``burden of proof'' shall be upon the

existing CDC or CDCs to explain why the SBA should not grant the

application for extension. In its deliberations, the SBA District

Office may, in its discretion, consider any factor presented to it, but

SBA will

[[Page 3232]]

consider particularly relevant information concerning the various

factors suggested in the comments to the proposed rule and previously

set forth in this preamble. The SBA District Office shall submit its

recommendation within 30 days of the end of the comment period to the

AA/FA for a final decision within 30 days of receipt of the District

Office's recommendation.

Seven comments cautioned that expansion should be permitted only

into contiguous areas, referencing the problems experienced by the

banking industry when interstate banking was first permitted. These

commenters suggested that ``leapfrogging'' financial institutions may

not know their new markets, leading to potential loan losses and damage

to the program. Two other commenters were concerned with ``cherry

picking'' of valuable markets to the detriment of markets where

business potential was less.

These are both matters which SBA will consider very carefully. The

expanding CDC's application must specify the exact territory into which

it proposes to expand. SBA will compare the loan approval volume of the

existing CDC or CDCs in that exact territory to the benchmark figure.

The expanding CDC will not be able to use an existing CDC's loan

approval volume for its entire Area of Operations (presumably lower) to

justify expansion into a smaller, valuable market, which is being

adequately served by the existing CDC or CDCs. If the more valuable

market is not being adequately served, then the expanding CDC is

justified in attempting to expand into it. SBA will at all times

maintain its focus on the ultimate customers, the small businesses

which both SBA and the CDC industry serve. If small businesses in a

``prime'' area are not being adequately served, the existing CDC or

CDCs will not be supported by SBA in any argument that the area is

being ``cherry picked''. If a CDC is concerned about potential

expansion into its territory, SBA believes, as do many of the

commenters, that competition will cause that CDC to better serve its

community.

Although sensitive to the advantages resulting from regional

experience and knowledge, SBA has determined not to limit applications

for expansion to contiguous areas. SBA will, however, require that an

expanding CDC have a local presence in a non-contiguous territory. As

part of its application, the expanding CDC must indicate how it intends

to provide that local presence, and must agree to have a local presence

in place before submitting any 504 loans for approval.

Finally, the comments presented to SBA several suggestions which it

has considered for establishing the benchmark figure. SBA recognizes

that each number suggested by any of the commenters was somewhat

arbitrary. Several comments presented data on loan approval volume in

the country or in specific regions. Based on the figures provided by

the industry trade association in its comment, total loan approvals for

FY 1993 were 2,388 resulting in an average loans per million of general

population of 5.37. In FY 1994 and 1995, the corresponding figures were

3,685 (8.29 loans per million) and 4,398 (9.89 per million). The

industry trade association suggested that an average of 5 loans per

million of general population, for the previous two years, or 2,

whichever is greater, be the standard. (In the proposed rule, the

standard would have been absolute and determined that a CDC was not

adequately serving its Area of Operation.)

SBA prefers to set a higher target. Unlike the performance standard

in Sec. 120.828, failure to attain the standard will not disqualify a

CDC in any way or cause it to be subject to decertification. So long as

a CDC provides 2 loan approvals per year, it will continue as an active

CDC if it so chooses. The standard in Sec. 120.835 is merely a

benchmark to determine whether another CDC may be able to expand into

the CDC's Area of Operations in order to compete with the CDC in order

to better serve the small business community.

Therefore, SBA has adopted the suggestions contained in the comment

of an individual CDC and has established in this final rule the

benchmark standard of one approved loan per 100,000 of general

population averaged over the last year 2 years. Both the industry and

SBA expect the number of loans approved to grow sharply over the next

several years. As discussed earlier in this preamble, the industry

prefers and SBA agrees that the benchmark remain constant and not

change on an annual basis so that CDCs will know that they have a

constant ``target'' to attain. SBA does not want to establish a

benchmark which is already outdated. The industry average is nearly 10

loan approvals per million (or one per 100,000). By adopting the

comment of 1 per 100,000, SBA feels it has established a figure which

may remain in effect for the foreseeable future and is already exceeded

by a majority of the industry. Further, the benchmark applies to a

total loan volume of all CDCs existing in an Area of Operations, not

each individual CDC.

SBA will continue to work with the industry to refine the

benchmark. One or more of the factors discussed previously may

supplement or ultimately replace loan approvals per 100,000 of general

population (such as small business population, job creation/retention,

loans closed, or dollar amount of loan volume).

Sec. 120.838. In the proposed rule, SBA determined that all

existing, temporary expansions of Areas of Operations would 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 believed that CDCs will best serve the small

business community by making a permanent commitment to an Area of

Operations. SBA received several comments in support of this provision

and none in opposition. Therefore, SBA adopts the proposed provision

without change in this final rule.

Sec. 120.839. In the proposed rule, SBA provided for a CDC, upon

showing good cause, 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. The SBA also proposed to permit an applicant

small business to write to the AA/FA to request the assistance of a CDC

not currently serving the area. SBA added this provision to give a

small business more flexibility if it had a concern about the ability

of a particular CDC to provide service.

SBA received 12 comments concerning this proposal, none of which

opposed the provision. Several supported the provision as proposed.

Others concurred that case-by-case extensions can help to assure access

to 504 financing, but should be limited to specific situations. Others

felt that the proposed regulations were too vague and permitted too

much discretion on the part of decision-makers. Most commenters favored

more explicit directions and alternatives.

SBA has determined to adopt, in most part, the suggestions of the

industry trade association in its comment. Provided that the applicant

CDC can demonstrate that it can adequately service the loan, a CDC may

apply to make an individual loan outside its Area of Operations if (1)

the applicant CDC has previously assisted the business to obtain a 504

loan, (2) the applicant small business or CDC can document in writing

to the AA/FA specific circumstances that would prevent the existing CDC

or CDCs serving the area from assisting the business adequately, or (3)

the existing CDC or CDCs serving the area agree to

[[Page 3233]]

permit the applicant CDC to make the loan. SBA has deleted from its

proposed rule the reference to an area not adequately served by other

CDCs. As discussed previously with respect to Sec. 120.835, this final

rule does not establish a standard of performance, but only a

benchmark. Thus, it would not be possible to establish that an area is

inadequately served without going through the entire process set forth

in Sec. 120.835, which is not SBA's intent in this section. Further,

the focus in this section is on the particular Project in question and

that is covered sufficiently by the situation (2) as recommended by the

industry trade association. The second circumstance in SBA's proposed

rule, Borrower initiation of the request, is also subsumed into

situation (2) in this final rule.

Sec. 120.840. SBA received one comment regarding this section,

pointing out that the section set forth only basic eligibility

standards for a CDC to become an Accredited Lender, which standards did

not refer to servicing or portfolio quality in any way. SBA concurs

with the comment and has amended the section to include additional

eligibility requirements, including that an applicant must have been a

CDC for a minimum of 12 months.

Sec. 120.845. SBA received two comments regarding this section. One

comment pointed out that the proposed language appeared to suggest that

SBA approved Premier Certified Lender loans in the same manner as any

other 504 loan. SBA has adopted the language of the comment, clarifying

that SBA's final approval is limited to eligibility of the guarantee.

The other comment requested SBA to include in the regulation the

specific amounts and payment schedule of contributions to the loss

reserve. SBA has concluded that this is not necessary. The schedule is

in the statute and will be expounded upon in SBA's SOP, to which PCLPs

will have access. Therefore, SBA declines to adopt this comment.

Sec. 120.862. This section sets forth community development and

public policy goals, the achievement of any one of which causes a

Project to be eligible for 504 financing if a CDC's overall portfolio

of 504 loans, including the subject loan, meets or exceeds the CDC's

Job Opportunity average. Also, qualifying under a public policy goal

makes a Project subject to an increased amount of funding. One comment

pointed out that assisting businesses in Labor Surplus Areas had been a

community development goal in the current regulation, but had been

included as a public policy goal. Another comment pointed out that

there must be a written revitalization plan in order to invoke

revitalizing a business district as a public policy goal. A third

comment pointed out that the rule should include assisting businesses

located in areas affected by Federal budget reduction, not just

businesses affected by such matters. SBA concurs in all three comments

and has made the revisions in this final rule. A fourth comment

contended that assisting manufacturing firms was a public policy goal,

not a community development goal. However, assisting manufacturing

firms has always been a community development goal in SBA's

regulations, and SBA declines to change this long-standing placement.

Sec. 120.871. Both the 7(a) and 504 loan programs limit the amount

of the rentable property which can be leased to a third-party, whether

the loan or Project involves new construction or an existing building.

Currently, there are minor differences between the programs in the

amount of space permitted to be leased. The 504 limitation is currently

set forth in a regulation, while the 7(a) limitations are set forth in

an SOP. Several commenters noted the differences between the programs

and suggested that the proposed regulation be made applicable to all

SBA business loan programs. SBA concurs with the comments and has moved

Secs. 120.871 and 120.872 from Part H to Part A as Secs. 120.131 and

120.132.

Sec. 120.880. SBA received five comments pointing out that the size

standard for 504 eligibility set forth in the proposed rule omitted the

word ``tangible'' to modify net worth. SBA concurs and adds the word

``tangible'' in this final rule.

Sec. 120.881. This section sets forth types of Projects ineligible

only for 504 loans (as opposed to 7(a) loans). In the current

regulation, a Project is ineligible, if the relocation of any of the

operations of the small business will cause a substantial increase in

unemployment in any area of the country or a net reduction of one-third

or more in the workforce of the relocating small business. In the

proposed rule, SBA attempted to limit the effect to distressed areas

rather than the entire country by creating a defined term. As discussed

earlier, commenters pointed out that SBA's proposed definition may have

been unworkable. Therefore, SBA has dropped the proposed change and

returned the relocation limitation to the language in the current

regulation.

One commenter pointed out that speculative projects are ineligible

in all business loan programs, not just 504. SBA concurs and has moved

Sec. 120.881(c) to Sec. 120.110(s).

Sec. 120.882. 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

notices 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 proposed in Sec. 120.882(a)(2) to eliminate

the requirement for written notice and allow as an eligible Project

cost any expense incurred toward a Project within six months of receipt

by SBA of a complete loan application.

SBA received 16 comments opposing the 6 month limit. Commenters

pointed out that in actual practice the time it takes to reach the

point of application is often far greater than 6 months. In many

metropolitan areas, the zoning use permits, building permits, and other

clearances can take 9 to 12 months. Often engineering plans and

architectural drawings may need to be completed or redone, and lengthy

environmental studies may be required. In states like Minnesota with

long winters, the delay between site preparations and construction may

span more than 6 months.

The intent of the proposed rule was to alleviate unnecessary

paperwork. It was not intended to limit eligible costs. Therefore, SBA

increases the limit in this final rule to 9 months and adopts a comment

suggesting a waiver of the limit by the SBA District Office for good

cause, which waiver should not be unreasonably withheld.

Sec. 120.883. This section sets forth eligible administrative costs

which may be paid with the proceeds of the 504 loan, thereby allowing

the small business to borrow the cost of the item so that it does not

have to be paid out of the Borrower's own resources. One of the

permitted costs is the CDC processing fee. Seven commenters pointed out

that in streamlining the language of the regulation, SBA had deleted

language in the current regulation describing at what point in time the

fee is considered earned and may be collected. SBA agrees that this is

important information for Borrowers to know and adds the requested

language in this final rule.

[[Page 3234]]

Another grouping of costs traditionally allowed by SBA to be paid

out of the proceeds of the 504 loan are closing costs. Currently, SBA

interprets closing costs to include fees of professionals, such as

engineers and attorneys, involved in the Project (see Sec. 120.961(a)).

Typically, many of the legal services required to close the 504

financing 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 to reimburse

the CDC for the legal expenses resulting from services performed by the

CDC counsel relating to the 504 financing. The Borrower must pay the

legal fees of Borrower's counsel, if retained. If CDC counsel desires

to charge the CDC more than $2,500, the CDC may only do so if SBA

approves the higher fee, in which case, the CDC must pay the difference

to the CDC counsel and may not be reimbursed by the Borrower. The CDC

collects the fee (up to $2,500) at closing and forwards it to the

closing attorney.

The $2,500 figure in the current regulation has engendered much

debate within the industry. Many CDCs feel the figure establishes a

minimum base for attorney fees and is, therefore, anti-competitive. On

the other hand, during the past year, 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

fees charged by CDC counsel for closing services.

Most CDCs try to minimize counsel fees to reduce costs to the

Borrower. One of the ways is for the CDC to use in-house counsel.

Another way is to use in-house paralegals and staff to prepare the

closing documents, close the loan, and present a completed loan closing

package after closing to outside counsel solely for review and legal

opinion. However, the current regulations allow a CDC to charge the

Borrower only for the legal bill of outside CDC counsel. A CDC that

retains its own counsel in-house or employs paralegals and other staff

to prepare and close the loan cannot recover its costs for providing

that service.

In the proposed regulation, SBA omitted reference to any legal fee

amount in either Sec. 120.883(d) or Sec. 120.961(a). Whether it is

viewed as a ceiling or a base, the $2,500 reference certainly appears

to have had an effect on legal fees charged. SBA believes legal fees

should be determined by the competitive market. There is no reason for

SBA to influence the market rate by referring to a specific fee level

in its regulation.

SBA received 15 comments concerning legal fees from the industry.

All but one strongly objected to the deletion of the $2,500 reference

from the regulations. In addition, several comments requested SBA to

allow CDCs to recover the staff and in-house counsel costs of closing a

loan.

SBA concurs with the comments recommending that CDCs be allowed to

charge the Borrower for the in-house costs of preparing the loan

documents and closing the loan. Since both the CDCs and SBA desire to

reduce the level of legal fees incurred by the Borrowers, it is self-

defeating to require CDCs to utilize outside counsel in order to

recover legal costs. Allowing the CDC to recover in-house costs from

the Borrower will still result in a savings to the Borrower because the

costs of CDC staff and in-house counsel are less than outside counsel.

Therefore, proposed rule Sec. 120.961(a) (which is Sec. 120.971(a)(2))

in this final rule has been amended to allow the CDC to charge the

Borrower an amount sufficient to reimburse it for reasonable legal

expenses of outside counsel, and in-house counsel and staff related to

closing the 504 financing.

Despite the near unanimous opposition to the deletion of the $2,500

reference, SBA declines to amend either Sec. 120.883(d) or

Sec. 120.971(a)(2) (Sec. 120.961(a) in the proposed rule). None of the

comments presented any persuasive arguments to cause SBA to change its

convictions. Many of the comments referred to the $2,500 reference as a

``cap'' which kept legal fees to the Borrower in line. Whether it

functioned more to inhibit or increase fees is open for discussion. But

exceeding the ``cap'' certainly did not affect the Borrower. If SBA

approved, the CDC paid the attorney without reimbursement. Thus, if the

reference functioned as a ``cap'', it did so to benefit the CDC, not

the Borrower.

As more attorneys become designated to perform expedited 504 loan

closings, as more attorneys become familiar with the 504 closing

process (because of the expected large increase in loan volume), and as

additional CDCs use in-house counsel or paralegal staff to prepare

documents and close loans, SBA expects competitive pressures to limit

increases in legal fees. In any event, SBA does not belong in the

business of setting or suggesting legal fees. That is a function of the

competitive market.

The comment process caused SBA to review carefully the whole issue

of legal fees as treated in the 504 program compared to commercial

lending generally. A number of comments present information concerning

CDC efforts to reduce Borrowers' legal costs. SBA has previously

interpreted legal fees to be eligible costs, either as Project costs or

administrative costs. Most of the legal fees for which a Borrower is

responsible are eligible Project costs directly attributable and

essential to the Project.

Legal fees associated with the closing of the 504 loan are not

eligible as Project costs. They are not directly attributable and

essential to the Project. If they are eligible at all, they would have

to be eligible administrative costs.

All of the eligible administrative costs in Sec. 120.883, with the

exception of legal fees, are fees imposed upon the Borrower by the

financing process itself over which the Borrower has no control. All

are defined by regulation or other government entities (recording fees,

for example). The only variable cost is legal fees.

Closing legal fees are not usually financed by commercial loan

proceeds. Closing legal fees are current costs. Why should they be

financed over 20 years? Legal fees are not usually financed over time.

SBA suspects that if claims are true that closing legal fees have been

maintained at an artificially high level, it is because the fees have

been able to be financed over a lengthy period of time and have been

``hidden'' in the Debenture. SBA has concluded that closing legal fees

should not be eligible administrative costs for 504 loans. CDCs and

Borrowers will now have a real incentive to reduce fees. Therefore, in

this final rule, SBA has eliminated legal fees from the eligible

administrative costs for 504 loans in Sec. 120.883(d).

Finally, several commenters recommended that the specific fees for

the items in Sec. 120.883 be identified. SBA concurs. These fees have

been set forth with specific numbers in Sec. 120.971.

Sec. 120.891. This section of the proposed rule required the

interim lender to certify to the amount of the interim loan disbursed

and the CDC to certify that the Project was completed in accordance

with the plans and specifications. Three comments noted that the

wording of the first requirement implied that the interim lender must

certify to much more than just the amount disbursed. SBA concurs that

the language could be misleading. In this final rule, SBA clarifies

that the interim lender must certify only the amount disbursed.

[[Page 3235]]

Sec. 120.892. This sections deals with certifications to SBA by the

CDC, interim lender, and Borrower that there has been no adverse change

in the ability of the Borrower to repay the 504 loan. For over 15 years

the standard phrase used was ``unremedied substantial adverse change.''

In the proposed rule, SBA substituted ``adverse change,'' believing

that if there were insubstantial adverse changes or remedied changes,

it did not affect whether the Borrower could repay the loan. However,

after receiving seven comments requesting a return to the familiar

language, SBA amends the three subsections of Sec. 120.892 to insert in

this final rule ``unremedied substantial adverse change.''

Sec. 120.911. The current regulations state that the Borrower's

contribution to the permanent financing may be land or cash. The

regulations have never permitted the value of buildings or other

structures on the land to be counted toward the Borrower's

contribution. SBA did not propose any change in this section in the

proposed rule.

However, SBA received 10 comments suggesting that SBA consider

including the value of site improvements such as buildings on

contributed property if the Project is for the purpose of renovating

the building or constructing an addition to the building. According to

the comments, older buildings that need renovation are often not

financed under the 504 program due to this restriction. SBA sees no

reason why it should not agree to these suggestions. Whatever the

original purpose of the restriction may have been, it appears to have

no logical reason, credit or otherwise, for continuing it. Therefore,

SBA adopts the comments in this final rule and allows Borrowers to

contribute the value of buildings, structures and other site

improvements which will be part of the Project Property, previously

acquired by the Borrower or CDC.

Sec. 120.921. As a result of comments received, two subsections

have been added to Sec. 120.921. First, Sec. 120.923(b) in the proposed

rule has become Sec. 120.921(d). The language of the proposed rule has

been changed to clarify that a Third-Party lienholder must subordinate

to the CDC/SBA lien any future advance in excess of the outstanding

principal balance and accrued interest of the Third-Party Loan at the

time of such advance. The new Sec. 120.921(e) prohibits a Third-Party

lender from escalating the rate of interest upon default to an amount

greater than the maximum rate in Sec. 120.921(b).

Sec. 120.930. SBA received five comments pointing out that the

language was confusing. In the proposed rule, SBA attempted to indicate

what happens if the cost of the completed Project is less than the

Debenture amount. Since five commenters all felt the language was

confusing, SBA returns in this final rule to the language in the

present regulation.

Sec. 120.938. This section defines when SBA will look to the CDC

for recourse in the event it defaults on a Debenture. SBA received 6

comments contending that negligence is too high a standard. SBA

examined the Debenture which CDCs sign. The language in the Debenture

includes fraud, negligence, or misrepresentation. Therefore, SBA has

adopted the language in the Debenture.

Sec. 120.961(b). SBA received 4 comments contending that the

referral fee which a CDC may charge a Third-Party lender is excessive.

However, none of the comments presented any reasons or support for such

assertions. Therefore, SBA declines to change the proposed rule.

However, commenters did point out an error in the section in that the

fee applies to the Third-Party loan, not the 504 loan. In addition, SBA

refers to the fee in the final rule as a referral fee, rather than a

finder's fee. SBA further indicates in this final rule that a CDC

receiving such a fee must comply with the regulations under Part 103 of

this chapter.

Sec. 120.971. In this final rule, SBA has consolidated into this

section the fees which were previously set forth in Sec. 120.883, so

that a Borrower may find in one section all allowable fees to which it

may be subject.

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 final rule involves internal administrative

procedures and does not constitute a significant rule within the

meaning of Executive Order 12866 and does 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 final rule contains no new reporting or record

keeping requirements.

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

has no 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 amends Chapter I of Title 13, Code of

Federal Regulations (CFR), as follows:

1. Part 120 is 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.

[[Page 3236]]

Subpart A--Policies Applying to All Business Loans

Eligibility Requirements

120.100 What are the basic eligibility requirements for all

applicants for SBA business loans?

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.

120.131 Leasing part of new construction or existing building to

another business.

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.

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.

Reporting of Fees

120.195 Disclosure of 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.

Maturities; Interest Rates; Loan and Guarantee Amounts

120.210 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?

120.215 What interest rates apply to smaller loans?

Fees for Guaranteed Loans

120.220 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 Unique requirements of the EWCP.

International Trade Loans

120.345 Policy.

120.346 Eligibility.

120.347 Use of proceeds.

120.348 Amount 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.

Builders Loan Program

120.391 What is the Builders Loan 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 Loan Guarantee 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 a PLP Lender in servicing and

liquidating SBA guaranteed loans?

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.

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120.475 Audits.

120.476 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

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 payment default''?

120.524 When is SBA released from liability on its guarantee?

Deferment, Extension of Maturity and Loan Moratorium

120.530 Deferment of payment.

120.531 Extension of maturity.

120.532 What is a loan 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.

120.554 Conflict of laws.

Subpart F--Secondary Market

Fiscal and Transfer Agent (FTA)

120.600 Definitions.

120.601 SBA Secondary Market.

Certificates

120.610 Form and terms of Certificates.

120.611 Pools backing Pool Certificates.

120.612 Loans eligible to back Certificates.

120.613 Secondary Participation Guarantee Agreement.

The SBA Guarantee of a Certificate

120.620 SBA guarantee of a Pool Certificate.

120.621 SBA guarantee of an Individual Certificate.

Pool Assemblers

120.630 Qualifications to be a Pool Assembler.

120.631 Suspension or termination of Pool Assembler.

Miscellaneous Provisions

120.640 Administration of the Pool and Individual Certificates.

120.641 Disclosure to purchasers.

120.642 Requirements before the FTA issues Pool Certificates.

120.643 Requirements before the FTA issues Individual Certificate.

120.644 Transfers of Certificates.

120.645 Redemption of Certificates.

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 limitations on who can be an Intermediary or on

where an Intermediary may operate?

120.703 How does an organization apply to become an Intermediary?

120.704 How are applications evaluated?

120.705 What is a Specialized Intermediary?

120.706 What are the terms and conditions of an Intermediary SBA

loan?

120.707 What conditions apply to loans by Intermediaries to

Microloan borrowers?

120.708 What is the Intermediary's financial contribution?

120.709 What is the Microloan Revolving Fund?

120.710 What is the Loan Loss Reserve Fund?

120.711 What rules govern Intermediaries?

120.712 How does an Intermediary get a grant to assist Microloan

Borrowers?

120.713 Does SBA provide technical assistance to Intermediaries?

120.714 How does a non-Intermediary get a grant?

120.715 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.

108.821 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 Minimum level of CDC lending activity.

120.829 Job Opportunity average a CDC must maintain.

120.830 Reports a CDC must submit.

Extending a CDC's Area of Operations

120.835 Application to extend an Area of Operations.

120.836 Public notice and opportunity for response.

120.837 SBA decision on application for extension.

120.838 Expiration of existing, temporary expansions.

120.839 Case-by-case extensions.

Accredited Lenders Program

120.840 Accredited Lenders Program (ALP).

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 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.

120.926 Referral fees.

504 Loans and Debentures

120.930 Amount.

120.931 504 lending limits.

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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.

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 Construction escrow accounts.

Servicing and Fees

120.970 Servicing of 504 loans and Debentures.

120.971 Allowable fees paid by Borrower.

120.972 Oversight and evaluation of CDCs and ADCs.

CDR 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) of the Small Business Act (``the Act''), 15 U.S.C. 636(a),

its microloan demonstration loan program (``Microloans'') authorized by

section 7(m) of the Act, 15 U.S.C. 636(m), 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

personal debts. SBA also makes 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.

Subpart A--Policies Applying to All Business Loans

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, key employee, or holder of 20 percent or

more of the value of the Lender's or CDC's stock or debt instruments,

or an agent involved in the loan process;

(ii) Any entity in which one or more individuals referred to in

paragraphs (1)(i) of this definition or a Close Relative of any such

individual owns or controls at least 20 percent.

(2) An Associate of a small business is:

(i) An officer, director, owner of more than 20 percent of the

equity, or key employee of the small business;

(ii) Any entity in which one or more individuals referred to in

paragraphs (2)(i) of this definition owns or controls at least 20

percent; and

(iii) 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 or trust 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.

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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 an Eligible Passive Company, or using or about to use

in its business operations personal property owned by an Eligible

Passive Company.

Preference is any arrangement giving a Lender or a CDC a preferred

position compared to SBA relating to the making, servicing, or

liquidation of a business loan with respect to such things as

repayment, collateral, guarantees, control, maintenance 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 Loans

Eligibility Requirements

Sec. 120.100 What are the basic eligibility requirements for all

applicants for SBA business loans?

To be eligible for an SBA business loan, a small business applicant

must:

(a) Be an operating business (except for loans to Eligible Passive

Companies);

(b) Be organized for profit;

(c) Be located in the United States;

(d) Be small under the size requirements of Part 121 of this

chapter (including affiliates). See subpart H of this part for the size

standards of Part 121 of this chapter which apply only to 504 loans;

and

(e) Be able to demonstrate a need for the desired credit.

Sec. 120.101 Credit not available elsewhere.

SBA provides business loan assistance only to applicants for whom

the desired credit is not otherwise available on reasonable terms from

non-Federal sources. SBA requires the Lender or CDC to certify or

otherwise show that the desired credit is unavailable to the applicant

on reasonable terms and conditions from non-Federal sources without SBA

assistance, taking into consideration the prevailing rates and terms in

the community in or near where the applicant conducts business, for

similar purposes and periods of time. Submission of an application to

SBA by a Lender or CDC constitutes certification by the Lender or CDC

that it has examined the availability of credit to the applicant, has

based its certification upon that examination, and has substantiation

in its file to support the certification.

Sec. 120.102 Funds not available from alternative sources, including

personal resources of principals.

(a) An applicant for a business loan must show that the desired

funds are not available from the personal resources of any owner of 20

percent or more of the equity of the applicant. SBA will require the

use of personal resources from any such owner as an injection to reduce

the SBA funded portion of the total financing package (i.e., any SBA

loans and any other financing, including loans from any other source)

when that owner's liquid assets exceed the amounts specified in

paragraphs (a)(1) through (3) of this section. When the total financing

package:

(1) Is $250,000 or less, each 20 percent owner of the applicant

must inject any personal liquid assets which are in excess of two times

the total financing package or $100,000, whichever is greater;

(2) Is between $250,001 and $500,000, each 20 percent owner of the

applicant must inject any personal liquid assets which are in excess of

one and one-half times the total financing package or $500,000,

whichever is greater;

(3) Exceeds $500,000, each 20 percent owner of the applicant must

inject any personal liquid assets which are in excess of one times the

total financing package or $750,000, whichever is greater.

(b) Any liquid assets in excess of the applicable amount set forth

in paragraph (a) of this section must be used to reduce the SBA portion

of the total financing package. These funds must be injected prior to

the disbursement of the proceeds of any SBA financing.

(c) For purposes of this section, liquid assets means cash or cash

equivalent, including savings accounts, CDs, stocks, bonds, or other

similar assets. Equity in real estate holdings and other fixed assets

are not to be considered liquid assets.

Sec. 120.103 Are farm enterprises eligible?

Federal financial assistance to agricultural enterprises is

generally made by the United States Department of Agriculture (USDA),

but may be made by SBA under the terms of a Memorandum of Understanding

between SBA and USDA. Farm-related businesses which are not

agricultural enterprises are eligible businesses under SBA's business

loan programs.

Sec. 120.104 Are businesses financed by SBICs eligible?

SBA may make or guarantee loans to a business financed by an SBIC

if SBA's collateral position will be superior to that of the SBIC. SBA

may also make or guarantee a loan to an otherwise eligible small

business which temporarily is owned or controlled by an SBIC under the

regulations in part 107 of this chapter. SBA neither guarantees SBIC

loans nor makes loans jointly with SBICs.

Sec. 120.105 Special consideration for veterans.

SBA will give special consideration to a small business owned by a

veteran or, if the veteran chooses not to apply, to a business owned or

controlled by one of the veteran's dependents. If the veteran is

deceased or permanently disabled, SBA will give special consideration

to one survivor or dependent. SBA will process the application of a

business owned or controlled by a veteran or dependent promptly,

resolve close questions in the applicant's favor, and pay particular

attention to maximum loan maturity. For SBA loans, a veteran is a

person honorably discharged from active military service.

Ineligible Businesses and Eligible Passive Companies

Sec. 120.110 What businesses are ineligible for SBA business loans?

The following types of businesses are ineligible:

(a) Non-profit businesses (for-profit subsidiaries are eligible);

(b) Financial businesses primarily engaged in the business of

lending, such as banks, finance companies, and factors (pawn shops,

although engaged in lending, may qualify in some circumstances);

(c) Passive businesses owned by developers and landlords that do

not actively use or occupy the assets acquired or improved with the

loan proceeds (except Eligible Passive Companies under Sec. 120.111);

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(d) Life insurance companies;

(e) Businesses located in a foreign country (businesses in the U.S.

owned by aliens may qualify);

(f) Pyramid sale distribution plans;

(g) Businesses deriving more than one-third of gross annual revenue

from legal gambling activities;

(h) Businesses engaged in any illegal activity;

(i) Private clubs and businesses which limit the number of

memberships for reasons other than capacity;

(j) Government-owned entities (except for businesses owned or

controlled by a Native American tribe);

(k) Businesses principally engaged in teaching, instructing,

counseling or indoctrinating religion or religious beliefs, whether in

a religious or secular setting;

(l) Consumer and marketing cooperatives (producer cooperatives are

eligible);

(m) Loan packagers earning more than one third of their gross

annual revenue from packaging SBA loans;

(n) Businesses with an Associate who is incarcerated, on probation,

on parole, or has been indicted for a felony or a crime of moral

turpitude;

(o) Businesses in which the Lender or CDC, or any of its Associates

owns an equity interest;

(p) Businesses which:

(1) Present live performances of a prurient sexual nature; or

(2) Derive directly or indirectly more than de minimis gross

revenue through the sale of products or services, or the presentation

of any depictions or displays, of a prurient sexual nature;

(q) Unless waived by SBA for good cause, businesses that have

previously defaulted on a Federal loan or Federally assisted financing,

resulting in the Federal government or any of its agencies or

Departments sustaining a loss in any of its programs, and businesses

owned or controlled by an applicant or any of its Associates which

previously owned, operated, or controlled a business which defaulted on

a Federal loan (or guaranteed a loan which was defaulted) and caused

the Federal government or any of its agencies or Departments to sustain

a loss in any of its programs. For purposes of this section, a

compromise agreement shall also be considered a loss;

(r) Businesses primarily engaged in political or lobbying

activities; and

(s) Speculative businesses (such as oil wildcatting).

Sec. 120.111 What conditions must an Eligible Passive Company satisfy?

An Eligible Passive Company must use loan proceeds to acquire or

lease, and/or improve or renovate real or personal property (including

eligible refinancing) that it leases to an Operating Company for the

conduct of the Operating Company's business. Any ownership structure or

legal form may qualify as an Eligible Passive Company.

(a) Conditions that apply to all legal forms:

(1) The Operating Company must be an eligible small business, and

the proposed use of the proceeds must be an eligible use if the

Operating Company were obtaining the financing directly;

(2) The Eligible Passive Company (with the exception of a trust)

and the Operating Company each must be small under the appropriate size

standards in part 121 of this chapter;

(3) The lease between the Eligible Passive Company and the

Operating Company must be in writing and must be subordinated to SBA's

mortgage, trust deed lien, or security interest on the property. Also,

the Eligible Passive Company (as landlord) must furnish as collateral

for the loan an assignment of all rents paid under the lease;

(4) The lease between the Eligible Passive Company of the Operating

Company, including options to renew exercisable solely by the Operating

Company, must have a remaining term at least equal to the term of the

loan;

(5) The Operating Company must be a guarantor or a co-borrower

(with the Eligible Passive Company) of the loan (in a 7(a) loan

including working capital, the Operating Company must be a co-

borrower); and

(6) Each holder of an ownership interest constituting at least 20

percent of the Eligible Passive Company and the Operating Company must

guarantee the loan (the trustee shall execute the guarantee on behalf

of any trust).

(b) Additional conditions that apply to trusts. The eligibility

status of the trustor will determine trust eligibility. All donors to

the trust will be deemed to have trustor status for eligibility

purposes. A trust qualifying as an Eligible Passive Company may engage

in other activities as authorized by its trust agreement. The trustee

must warrant and certify that the trust will not be revoked or

substantially amended for the term of the loan without the consent of

SBA. The trustor must guarantee the loan. For purposes of this section,

the trustee shall certify to SBA that:

(1) The trustee has authority to act;

(2) The trust is not regarded as a grantor trust for tax purposes;

(3) The trust has the authority to borrow funds, pledge trust

assets, and lease the property to the Operating Company;

(4) The trustee has provided accurate, pertinent language from the

trust agreement confirming the above; and

(5) The trustee has provided and will continue to provide SBA with

a true and complete list of all trustors and donors.

Uses of Proceeds

Sec. 120.120 What are eligible uses of proceeds?

A small business must use an SBA business loan for sound business

purposes. The uses of proceeds are prescribed in each loan's

Authorization.

(a) A Borrower may use loan proceeds from any SBA loan to:

(1) Acquire land (by purchase or lease);

(2) Improve a site (e.g., grading, streets, parking lots,

landscaping), including up to 5 percent for community improvements such

as curbs and sidewalks;

(3) Purchase one or more existing buildings;

(4) Convert, expand or renovate one or more existing buildings;

(5) Construct one or more new buildings; and/or

(6) Acquire (by purchase or lease) and install fixed assets (for a

504 loan, these assets must have a useful life of at least 10 years and

be at a fixed location, although short-term financing for equipment,

furniture, and furnishings may be permitted where essential to and a

minor portion of the 504 Project).

(b) A Borrower may also use 7(a) and microloan proceeds for:

(1) Inventory;

(2) Supplies;

(3) Raw materials; and

(4) Working capital (if the Operating Company is a co-Borrower with

an Eligible Passive Company, part of the loan proceeds may be applied

for working capital if used for that purpose only by the Operating

Company).

(c) A Borrower may use 7(a) loan proceeds for refinancing certain

outstanding debts.

Sec. 120.130 Restrictions on uses of proceeds.

SBA will not authorize nor may a Borrower use loan proceeds for the

following purposes (including the replacement of funds used for any

such purpose):

(a) Payments, distributions or loans to Associates of the applicant

(except for ordinary compensation for services rendered);

(b) Refinancing a debt owed to a Small Business Investment Company

(``SBIC'');

(c) Floor plan financing or other revolving line credit, except

under Sec. 120.390;

[[Page 3241]]

(d) Investments in real or personal property acquired and held

primarily for sale, lease, or investment (except for a loan to an

Eligible Passive Company or to a small contractor under Sec. 120.310);

(e) A purpose which does not benefit the small business; or

(f) Any use restricted by Secs. 120.201 through 120.203 and 120.884

(specific to 7(a) loans and 504 loans respectively).

Sec. 120.131 Leasing part of new construction or existing building to

another business.

(a) If the SBA business loan involves the construction of a new

building, a Borrower may lease up to 33% of the square footage of

rentable property (total square footage of all buildings or facilities

used for business operations) for a short term to any third party if

reasonable growth projections show that the Borrower will need

additional space within three years and will use all of the additional

space within ten years. If the Borrower is an Eligible Passive Company

leasing 100 percent of the Project space to an Operating Company, the

Operating Company may sublease up to 33 percent to a third party under

the same conditions.

(b) If the SBA business loan involves the acquisition, renovation,

or reconstruction of an existing building, the Borrower (or Operating

Company, if the Borrower is an Eligible Passive Company) must occupy at

least 51 percent of the Rentable Property. The balance of the Rentable

Property may be leased out to any third party, if the loan proceeds

were not used to remodel or convert the space to be leased out. (For

504 loans, see also Sec. 120.871.)

Ethical Requirements

Sec. 120.140 What ethical requirements apply to participants?

Lenders, Intermediaries, CDCs, and Associate Development Companies

(``ADCs'') (in this section, collectively referred to as

``Participants''), must act ethically and exhibit good character.

Ethical indiscretion of an Associate of a Participant or a member of a

CDC will be attributed to the Participant. A Participant must promptly

notify SBA if it obtains information concerning the unethical behavior

of an Associate. The following are examples of such unethical behavior.

A Participant may not:

(a) Self-deal;

(b) Have a real or apparent conflict of interest with a small

business with which it is dealing (including any of its Associates or

an Associate's Close Relatives) or SBA;

(c) Own an equity interest in a business that has received or is

applying to receive SBA financing (during the term of the loan or

within 6 months prior to the loan application);

(d) Be incarcerated, on parole, or on probation;

(e) Knowingly misrepresent or make a false statement to SBA;

(f) Engage in conduct reflecting a lack of business integrity or

honesty;

(g) Be a convicted felon, or have an adverse final civil judgment

(in a case involving fraud, breach of trust, or other conduct) that

would cause the public to question the Participant's business

integrity, taking into consideration such factors as the magnitude,

repetition, harm caused, and remoteness in time of the activity or

activities in question;

(h) Accept funding from any source that restricts, prioritizes, or

conditions the types of small businesses that the Participant may

assist under an SBA program or that imposes any conditions or

requirements upon recipients of SBA assistance inconsistent with SBA's

loan programs or regulations;

(i) Fail to disclose to SBA all relationships between the small

business and its Associates (including Close Relatives of Associates),

the Participant, and/or the lenders financing the Project of which it

is aware or should be aware;

(j) Fail to disclose to SBA whether the loan will:

(1) Reduce the exposure of a Participant or an Associate of a

Participant in a position to sustain a loss;

(2) Directly or indirectly finance the purchase of real estate,

personal property or services (including insurance) from the

Participant or an Associate of the Participant;

(3) Repay or refinance a debt due a Participant or an Associate of

a Participant; or

(4) Require the small business, or an Associate (including Close

Relatives of Associates), to invest in the Participant (except for

institutions which require an investment from all members as a

condition of membership, such as a Production Credit Association);

(k) Issue a real estate forward commitment to a builder or

developer; or

(l) Engage in any activity which taints its objective judgment in

evaluating the loan.

Credit Criteria for SBA Loans

Sec. 120.150 What are SBA's lending criteria?

The applicant (including an Operating Company) must be

creditworthy. Loans must be so sound as to reasonably assure repayment.

SBA will consider:

(a) Character, reputation, and credit history of the applicant (and

the Operating Company, if applicable), its Associates, and guarantors;

(b) Experience and depth of management;

(c) Strength of the business;

(d) Past earnings, projected cash flow, and future prospects;

(e) Ability to repay the loan with earnings from the business;

(f) Sufficient invested equity to operate on a sound financial

basis;

(g) Potential for long-term success;

(h) Nature and value of collateral (although inadequate collateral

will not be the sole reason for denial of a loan request); and

(i) The effect any affiliates (as defined in part 121 of this

chapter) may have on the ultimate repayment ability of the applicant.

Sec. 120.151 What is the statutory limit for total loans to a

Borrower?

The aggregate amount of the SBA portions of all loans to a single

Borrower, including the Borrower's affiliates as defined in part 121 of

this chapter, may not exceed a guarantee amount of $750,000, except as

otherwise authorized by statute for a specific loan program. The amount

of any loan received by an Eligible Passive Company applies to the loan

limit of both the Eligible Passive Company and the Operating Company.

Sec. 120.160 Loan conditions.

The following requirements are normally required by SBA for all

business loans:

(a) Personal guarantees. Holders of at least a 20 percent ownership

interest generally must guarantee the loan. SBA, in its discretion,

consulting with the Participating Lender, may require other appropriate

individuals to guarantee the loan as well, except SBA will not require

personal guarantees from those owning less than 5% ownership.

(b) Appraisals. SBA may require professional appraisals of the

applicant's and principals' assets, a survey, or a feasibility study.

(c) Hazard Insurance. SBA requires hazard insurance on all

collateral.

(d) Taxes. The applicant may not use any of the proceeds to pay

past-due Federal and state payroll taxes.

Requirements Imposed Under Other Laws and Orders

Sec. 120.170 Flood insurance.

Under the Flood Disaster Protection Act of 1973 (Sec. 205(b) of

Pub. L. 93-234; 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a loan

recipient must obtain flood insurance if any building (including

[[Page 3242]]

mobile homes), machinery, or equipment acquired, installed, improved,

constructed, or renovated with the proceeds of SBA financial assistance

is located in a special flood hazard area. The requirement applies also

to any inventory (business loan program), fixtures or furnishings

contained or to be contained in the building. Mobile homes on a

foundation are buildings. SBA, Lenders, CDCs, and Intermediaries must

notify Borrowers that flood insurance must be maintained.

Sec. 120.171 Compliance with child support obligations.

Any holder of 50% or more of the ownership interest in the

recipient of an SBA loan must certify that he or she is not more than

60 days delinquent on any obligation to pay child support arising

under:

(a) An administrative order;

(b) A court order;

(c) A repayment agreement between the holder and a custodial

parent; or

(d) A repayment agreement between the holder and a State agency

providing child support enforcement services.

Sec. 120.172 Flood-plain and wetlands management.

(a) All loans must conform to requirements of Executive Orders

11988, ``Flood Plain Management'' (3 CFR, 1977 Comp., p. 117) and

11990, ``Protection of Wetlands'' (3 CFR, 1977 Comp., p. 121). Lenders,

Intermediaries, CDCs, and SBA must comply with requirements applicable

to them. Applicants must show:

(1) Whether the location for which financial assistance is proposed

is in a floodplain or wetland;

(2) If it is in a floodplain, that the assistance is in compliance

with local land use plans; and

(3) That any necessary construction or use permits will be issued.

(b) Generally, there is an 8-step decision making process with

respect to:

(1) Construction or acquisition of anything, other than a building;

(2) Repair and restoration equal to more than 50% of the market

value of a building; or

(3) Replacement of destroyed structures.

(c) SBA may determine for the following types of actions, on a

case-by-case basis, that the full 8-step process is not warranted and

that only the first step (determining if a proposed action is in the

base floodplain) need be completed:

(1) Actions located outside the base floodplain;

(2) Repairs, other than to buildings, that are less than 50% of the

market value;

(3) Replacement of building contents, materials, and equipment;

(4) Hazard mitigation measures;

(5) Working capital loans; or

(6) SBA loan assistance of $1,500,000 or less.

Sec. 120.173 Lead-based paint.

If loan proceeds are for the construction or rehabilitation of a

residential structure, lead-based paint may not be used on any interior

surface, or on any exterior surface that is readily accessible to

children under the age of seven years.

Sec. 120.174 Earthquake hazards.

When loan proceeds are used to construct a new building or an

addition to an existing building, the construction must conform with

the ``National Earthquake Hazards Reduction Program (``NEHRP'')

Recommended Provisions for the Development of Seismic Regulations for

New Buildings'' (which can be obtained from the Federal Emergency

Management Agency, Publications Office, Washington, D.C.) or a code

identified by SBA as being substantially equivalent.

Sec. 120.175 Coastal barrier islands.

SBA and Intermediaries may not make or guarantee any loan within

the Coastal Barrier Resource System.

Sec. 120.176 Compliance with other laws.

All SBA loans are subject to all applicable laws, including

(without limitation) the civil rights laws (see Parts 112, 113, 117 and

136 of this chapter), prohibiting discrimination on the grounds of

race, color, national origin, religion, sex, marital status, disability

or age. SBA requests agreements or evidence to support or document

compliance with these laws, including reports required by applicable

statutes or the regulations in this chapter.

Enforceability Despite Rule Changes

Sec. 120.180 Are rules enforceable if they are changed later?

Regulations and contractual provisions in effect at the time of a

transaction govern an SBA loan financing transaction, notwithstanding

subsequent rule or contract changes. SBA may conduct an enforcement

action regarding any violation of provisions of regulations or

contracts applicable at the time, but no longer in effect or in use.

Loan Applications

120.190 Where does an applicant apply for a loan?

An applicant for a business loan should apply to:

(a) A Lender for a guaranteed or immediate participation loan;

(b) A CDC for a 504 loan;

(c) An Intermediary for a Microloan; or

(d) SBA for a direct loan.

Sec. 120.191 The contents of a business loan application.

For most business loans, SBA requires that an application for a

business loan contain, among other things, a description of the history

and nature of the business, the amount and purpose of the loan, the

collateral offered for the loan, current financial statements,

historical financial statements (or tax returns if appropriate) for the

past three years, IRS tax verification, and a business plan, when

applicable. Personal histories and financial statements will be

required from principals of the applicant (and the Operating Company,

if applicable).

Sec. 120.192 Approval or denial.

Applicants receive notice of approval or denial by the Lender, CDC,

Intermediary, or SBA, as appropriate. Notice of denial will include the

reasons. If a loan is approved, an Authorization will be issued.

Sec. 120.193 Reconsideration after denial.

An applicant or recipient of a business loan may request

reconsideration of a denied loan or loan modification request within 6

months of denial. Applicants denied due to a size determination can

appeal that determination under part 121 of this chapter. All others

must be submitted to the office that denied the original request. To

prevail, the applicant must demonstrate that it has overcome all

legitimate reasons for denial. Six months after denial, a new

application is required. If the reconsideration is denied, a second and

final reconsideration may be considered by the Associate Administrator

for Financial Assistance (AA/FA), whose decision is final.

Computerized SBA Forms

Sec. 120.194 Use of computer forms.

Any Applicant or Participant may use computer generated SBA

application forms, closing forms, and other forms designated by SBA if

the forms are exact reproductions of SBA forms.

Reporting of Fees

[[Page 3243]]

Sec. 120.195 Disclosure of fees.

An Applicant for a business loan must identify to SBA the name of

each Agent as defined in part 103 of this chapter that helped the

applicant obtain the loan, describing the services performed, and

disclosing the amount of each fee paid or to be paid by the applicant

to the Agent in conjunction with the performance of those services.

Subpart B--Policies Specific to 7(a) Loans

Bonding Requirements

Sec. 120.200 What bonding requirements exist during construction?

On 7(a) loans which finance construction, the Borrower must supply

a 100 percent payment and performance bond and builder's risk

insurance, unless waived by SBA.

Limitations on Use of Proceeds

Sec. 120.201 Refinancing unsecured or undersecured loans.

A Borrower may not use 7(a) loan proceeds to pay any creditor in a

position to sustain a loss causing a shift to SBA of all or part of a

potential loss from an existing debt.

Sec. 120.202 Restrictions on loans for changes in ownership.

A Borrower may not use 7(a) loan proceeds to purchase a portion of

a business or a portion of another owner's interest. One or more

current owners may use loan proceeds to purchase the entire interest of

another current owner, or a Borrower can purchase ownership of an

entire business.

Maturities; Interest Rates; Loan and Guarantee Amounts

Sec. 120.210 What percentage of a loan may SBA guarantee?

SBA's guarantee percentage must not exceed the applicable

percentage established in section 7(a) of the Act. The maximum

allowable guarantee percentage on a loan will be determined by the loan

amount. As of October 12, 1995, the percentages are: Loans of $100,000

or less may receive a maximum guarantee of 80 percent. All other loans

may receive a maximum guarantee of 75 percent, not to exceed $750,000,

unless otherwise authorized by SBA.

Sec. 120.211 What limits are there on the amounts of direct loans?

(a) The statutory limit for direct loans made under the authority

of section 7(a)(1)-(19) of the Small Business Act is $350,000. SBA has

established an administrative limit of $150,000 for direct loans. The

AA/FA may authorize acceptance of an application up to the statutory

limit.

(b) The statutory limit for direct loans made under the authority

of section 7(a)(20) is $750,000. SBA has established an administrative

limit of $150,000. The Associate Administrator for Minority Enterprise

Development may authorize the acceptance of an application that exceeds

the administrative limit.

(c) The statutory limit on SBA's portion of an immediate

participation loan is $350,000. The administrative limit is the lesser

of 75 percent of the loan or $150,000. The AA/FA may authorize

exceptions to the administrative limit up to $350,000.

Sec. 120.212 What limits are there on loan maturities?

The term of a loan shall be:

(a) The shortest appropriate term, depending upon the Borrower's

ability to repay;

(b) Ten years or less, unless it finances or refinances real estate

or equipment with a useful life exceeding ten years; and

(c) A maximum of 25 years, including extensions. (A portion of a

loan used to acquire or improve real property may have a term of 25

years plus an additional period needed to complete the construction or

improvements.)

Sec. 120.213 What fixed interest rates may a Lender charge?

(a) Fixed Rates for Guaranteed Loans. A loan may have a reasonable

fixed interest rate. SBA periodically publishes the maximum allowable

rate in the Federal Register.

(b) Direct loans. A statutory formula based on the cost of money to

the Federal government determines the interest rate on direct loans.

SBA publishes the rate periodically in the Federal Register.

Sec. 120.214 What conditions apply for variable interest rates?

A Lender may use a variable rate of interest, upon SBA's approval.

SBA's maximum allowable rates apply only to the initial rate on the

date SBA received the loan application. SBA shall approve the use of a

variable interest rate under the following conditions:

(a) Frequency. The first change may occur on the first calendar day

of the month following initial disbursement, using the base rate (see

paragraph (c) of this section) in effect on the first business day of

the month. After that, changes may occur no more often than monthly.

(b) Range of fluctuation. The amount of fluctuation shall be equal

to the movement in the base rate. The difference between the initial

rate and the ceiling rate may be no greater than the difference between

the initial rate and the floor rate.

(c) Base rate. The base rate shall be the prime rate in effect on

the first business day of the month, printed in a national financial

newspaper published each business day, or the SBA Optional Peg Rate

which SBA publishes quarterly in the Federal Register.

(d) Maturities under 7 years. For loans with maturities under seven

years, the maximum interest rate shall not exceed two and one-quarter

(2 1/4 ) percentage points over the base rate.

(e) Maturities of 7 years or more. For loans with maturities of

seven or more years, the maximum interest rate shall not exceed two and

three-quarters (2 3/4 ) percentage points over the base rate.

(f) Amortization. Initial amortization of principal and interest

may be recomputed and reassessed as interest rates fluctuate, as

directed by SBA. With prior approval of SBA, the Lender may use certain

other amortization methods, except that SBA does not allow balloon

payments.

Sec. 120.215 What interest rates apply to smaller loans?

For a loan over $25,000 but not exceeding $50,000, the interest

rate may be one percent more than the maximum interest rate described

above. For a variable rate loan of $25,000 or less, the maximum

interest rate described above may be increased by two percentage

points.

Fees for Guaranteed Loans

Sec. 120.220 Fees that Lender pays SBA.

(a) The Lender pays a guarantee fee to SBA for each loan as

follows:

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

Fee measured as Lender may get

Guaranteed portion of loan percentage of When payable fee from When SBA refunds fee

guaranteed portion borrower from borrower

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

12 Months or less............. 25%.................. With Guarantee When SBA If Application

Application. Approves Loan. Withdrawn or

Denied.\1\

[[Page 3244]]

More Than 12 months and Total 2.0% of Guaranteed Within 90 days After First If Loan Cancelled and

Guaranteed Portion Is $80,000 Portion. of SBA Approval. Disbursement. Never Disbursed.

or Less.

More Than 12 Months and Amount 3%................... Within 90 Days After First If Loan Cancelled and

of Guaranteed Portion of Loan of SBA Approval. Disbursement. Never Disbursed.

That Is $250,000 or Less.

More Than 12 Months and Amount 3.0% of 1st $250,000 Within 90 Days After First If Loan Cancelled and

of Guaranteed Portion of Loan plus 3.5% of balance. of SBA Approval. Disbursement. Never Disbursed.

Between $250,000 and $500,000.

More Than 12 Months and Amount 3.0% of 1st $250,000 Within 90 Days After First If Loan Cancelled and

of Guaranteed Portion of Loan plus 3.5% of next of SBA Approval. Disbursement. Never Disbursed.

Exceeding $500,000. $250,000 plus 3.875%

of the Amount

Exceeding $500,000.

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

\1\ Also, if SBA substantially changes the Lender's loan terms and approves the loan, but the modified terms are

unacceptable to the Borrower or Lender. (The Lender must request refund in writing within 30 calendar days of

the approval).

(b) If the guarantee fee is not paid, SBA may terminate the

guarantee. The Borrower may use working capital loan proceeds to

reimburse the Lender for the guarantee fee. Acceptance of the guarantee

fee by SBA shall not waive any right of SBA arising from the Lender's

misconduct or violation of any provision of this part, the guarantee

agreement, the Authorization, or other loan documents.

(c) The Lender shall also pay SBA an annual service fee equal to

0.5 percent of the outstanding balance of the guaranteed portion of

each loan. The service fee cannot be charged to the Borrower. SBA may

institute a late fee charge for delinquent payments of the annual

service fee to cover administrative costs associated with collecting

delinquent fees.

Sec. 120.221 Fees which the Lender may collect from a loan applicant.

(a) Service and packaging fees. The Lender may charge an applicant

reasonable fees (customary for similar Lenders in the geographic area

where the loan is being made) for packaging and other services. The

Lender must advise the applicant in writing that the applicant is not

required to obtain or pay for unwanted services. The applicant is

responsible for deciding whether fees are reasonable. SBA may review

these fees at any time. Lender must refund any such fee considered

unreasonable by SBA.

(b) Extraordinary servicing. Subject to prior written SBA approval,

if all or part of a loan will have extraordinary servicing needs, the

Lender may charge the applicant a service fee not to exceed 2 percent

per year on the outstanding balance of the part requiring special

servicing.

(c) Out-of-pocket expenses. The Lender may collect from the

applicant necessary out-of-pocket expenses such as filing or recording

fees.

(d) Late payment fee. The Lender may charge the Borrower a late

payment fee not to exceed 5 percent of the regular loan payment.

(e) No prepayment fee. The Lender may not charge a fee for full or

partial prepayment of a loan.

Sec. 120.222 Fees which the Lender or Associate may not collect from

the Borrower or share with third parties.

The Lender or its Associate may not:

(a) Require the applicant or Borrower to pay the Lender, an

Associate, or any party designated by either, any fees or charges for

goods or services, including insurance, as a condition for obtaining an

SBA guaranteed loan (unless permitted by this part);

(b) Charge an applicant any commitment, bonus, broker, commission,

referral or similar fee;

(c) Charge points or add-on interest;

(d) Share any premium received from the sale of an SBA guaranteed

loan in the secondary market with a Service Provider, packager, or

other loan-referral source; or

(e) Charge the Borrower for legal services, unless they are hourly

charges for requested services actually rendered.

Subpart C--Special Purpose Loans

Sec. 120.300 Statutory authority.

Congress has authorized several special purpose programs in various

subsections of section 7(a) of the Act. Generally, 7(a) loan policies,

eligibility requirements and credit criteria enumerated in Subpart B of

this part apply to these programs. The sections of this subpart

prescribe the special conditions applying to each special purpose

program. As with other business loans, special purpose loans are

available only to the extent funded by annual appropriations.

Disabled Assistance Loan Program (DAL)

Sec. 120.310 What assistance is available for the disabled?

Section 7(a)(10) of the Act authorizes SBA to guarantee or make

direct loans to the disabled. SBA distinguishes two kinds of

assistance:

(a) DAL-1. DAL-1 Financial Assistance is available to non-profit

public or private organizations for disabled individuals that employ

such individuals; or

(b) DAL-2. DAL-2 Financial Assistance is available to:

(1) Small businesses wholly owned by disabled individuals; and

(2) Disabled individuals to establish, acquire, or operate a small

business.

Sec. 120.311 Definitions.

(a) Organization for the disabled means one which:

(1) Is organized under federal or state law to operate in the

interest of disabled individuals;

(2) Is non-profit;

(3) Employs disabled individuals for seventy-five percent of the

time needed to produce commodities or services for sale; and

(4) Complies with occupational and safety standards prescribed by

the Department of Labor.

(b) Disabled individual means a person who has a permanent

physical, mental or emotional impairment, defect, ailment, disease or

disability which limits the type of employment for which the person

would otherwise be qualified.

Sec. 120.312 DAL-1 use of proceeds and other program conditions.

(a) DAL-1 applicants must submit appropriate documents to establish

program eligibility.

[[Page 3245]]

(b) Generally, applicants may use loan proceeds for any 7(a) loan

purposes. Loan proceeds may not be used:

(1) To purchase or construct facilities if construction grants and

mortgage assistance are available from another Federal source; or

(2) For supportive services (expenses incurred by a DAL-1

organization to subsidize wages of low producers, health and

rehabilitation services, management, training, education, and housing

of disabled workers).

(c) SBA does not consider a DAL-1 organization to have a conflict

of interest if one or more of its Associates is an Associate of the

Lender.

Sec. 120.313 DAL-2 use of proceeds and other program conditions.

(a) The DAL-2 loan proceeds may be used for any 7(a) loan purposes.

(b) An applicant may use DAL-2 loan proceeds to acquire an eligible

small business without complying with the change of ownership

conditions in Sec. 120.202.

(c) A DAL-2 applicant must submit evidence from a physician,

psychiatrist, or other qualified professional as to the permanent

nature of the disability and the limitation it places on the applicant.

Sec. 120.314 Resolving doubts about creditworthiness.

For the purpose of the DAL Program, SBA shall resolve doubts

concerning the creditworthiness of an applicant in favor of the

applicant. However, the applicant must present satisfactory evidence of

repayment ability. Personal guarantees of Associates are not required

for purposes of DAL-1 financial assistance.

Sec. 120.315 Interest rate and loan limit.

The interest rate on direct DAL loans is three percent. There is an

administrative limit of $150,000 on a direct DAL loan.

Businesses Owned by Low Income Individuals

Sec. 120.320 Policy.

Section 7(a)(11) of the Act authorizes SBA to guarantee or make

direct loans to establish, preserve or strengthen small business

concerns:

(a) Located in an area having high unemployment according to the

Department of Labor;

(b) Located in an area in which a high percentage of individuals

have a low income inadequate to satisfy basic family needs; and

(c) More than 50 percent owned by low income individuals.

Energy Conservation

Sec. 120.330 Who is eligible for an energy conservation loan?

SBA may make or guarantee loans to assist a small business to

design, engineer, manufacture, distribute, market, install, or service

energy devices or techniques designed to conserve the Nation's energy

resources.

Sec. 120.331 What devices or techniques are eligible for a loan?

Eligible energy conservation devices or techniques include:

(a) Solar thermal equipment;

(b) Photovoltaic cells and related equipment;

(c) A product or service which increases the energy efficiency of

existing equipment, methods of operation or systems which use fossil

fuels, and which is on the Energy Conservation Measures list of the

Secretary of Energy;

(d) Equipment producing energy from wood, biological waste, grain

or other biomass energy sources;

(e) Equipment for cogeneration of energy, district heating or

production of energy from industrial waste;

(f) Hydroelectric power equipment;

(g) Wind energy conversion equipment; and

(h) Engineering, architectural, consulting, or other professional

services necessary or appropriate for any of the devices or techniques

in paragraphs (a) through (g) of this section.

Sec. 120.332 What are the eligible uses of proceeds?

(a) Acquire property. The Borrower may use the loan proceeds to

acquire land necessary for imminent plant construction, buildings,

machinery, equipment, furniture, fixtures, facilities, supplies, and

material needed to accomplish any of the eligible program purposes in

Sec. 120.330.

(b) Research and development. Up to 30% of loan proceeds may be

used for research and development:

(1) Of an existing product or service; or

(2) A new product or service.

(c) Working capital. The Borrower may use proceeds for working

capital for entering or expanding in the energy conservation market.

Sec. 120.333 Are there any special credit criteria?

In addition to regular credit evaluation criteria, SBA shall weigh

the greater risk associated with energy projects. SBA shall consider

such factors as quality of the product or service, technical

qualifications of the applicant's management, sales projections, and

financial status.

Export Working Capital Program (EWCP)

Sec. 120.340 What is the Export Working Capital Program?

Under the EWCP, SBA guarantees short-term working capital loans

made by participating lenders to exporters (section 7(a)(14) of the

Act). Loan maturities may be for up to three years with annual

renewals. Proceeds can be used only to finance export transactions.

Loans can be for single or multiple export transactions. An export

transaction is the production and payment associated with a sale of

goods or services to a foreign buyer.

Sec. 120.341 Who is eligible?

In addition to the eligibility criteria applicable to all 7(a)

loans, an applicant must be in business for one full year at the time

of application, but not necessarily in the exporting business. SBA may

waive this requirement if the applicant has sufficient export trade

experience or other managerial experience.

Sec. 120.342 What are eligible uses of proceeds?

Loan proceeds may be used:

(a) To acquire inventory;

(b) To pay the manufacturing costs of goods for export;

(c) To purchase goods or services for export;

(d) To support standby letters of credit;

(e) For pre-shipment working capital; and

(f) For post-shipment foreign accounts receivable financing.

Sec. 120.343 Collateral.

A Borrower must give SBA a first security interest sufficient to

cover 100 percent of the EWCP loan amount (such as insured accounts

receivable or letters of credit). Collateral must be located in the

United States, its territories or possessions.

Sec. 120.344 Unique requirements of the EWCP.

(a) An applicant must submit cash flow projections to support the

need for the loan and the ability to repay. After the loan is made, the

loan recipient must submit continual progress reports.

(b) SBA does not limit the amount of extraordinary servicing fees,

as referenced in Sec. 120.221(b), under the EWCP.

(c) SBA does not prescribe the interest rates for the EWCP, but

will monitor these rates for reasonableness.

International Trade Loans

[[Page 3246]]

Sec. 120.345 Policy.

Section 7(a)(16) of the Act authorizes SBA to guarantee loans to

small businesses that are:

(a) Engaged or preparing to engage in international trade; or

(b) Adversely affected by import competition.

Sec. 120.346 Eligibility.

(a) An applicant must establish that:

(1) The loan proceeds will significantly expand an existing export

market or develop new export markets; or

(2) The applicant business is adversely affected by import

competition; and

(3) Upgrading facilities or equipment will improve the applicant's

competitive position.

(b) The applicant must have a business plan reasonably supporting

its projected export sales.

Sec. 120.347 Use of proceeds.

The Borrower may use loan proceeds to acquire, construct, renovate,

modernize, improve, or expand facilities and equipment to be used in

the United States to produce goods or services involved in

international trade, and to develop and penetrate foreign markets.

Sec. 120.348 Amount of guarantee.

SBA can guarantee up to $1,250,000 for a combination of fixed-asset

financing and working capital, supplies and EWCP assistance. The fixed-

asset portion of the loan cannot exceed $1,000,000 and the non-fixed-

asset portion cannot exceed $750,000.

Qualified Employee Trusts (ESOP)

Sec. 120.350 Policy.

Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to a

qualified employee trust (``ESOP'') to:

(a) Help finance the growth of its employer's small business; or

(b) Purchase ownership or voting control of the employer.

Sec. 120.351 Definitions.

All terms specific to ESOPs have the same definition for purposes

of this section as in the Internal Revenue Service (IRS) Code (title 26

of the United States Code) or regulations (26 CFR chapter I).

Sec. 120.352 Use of proceeds.

Loan proceeds may be used for two purposes.

(a) Qualified employer securities. A qualified employee trust may

relend loan proceeds to the employer by purchasing qualified employer

securities. The small business concern may use these funds for any

general 7(a) purpose.

(b) Control of employer. A qualified employee trust may use loan

proceeds to purchase a controlling interest (51 percent) in the

employer. Ownership and control must vest in the trust by the time the

loan is repaid.

Sec. 120.353 Eligibility.

SBA may assist a qualified employee trust (or equivalent trust)

that meets the requirements and conditions for an ESOP prescribed in

all applicable IRS, Treasury and Department of Labor (DOL) regulations.

In addition, the following conditions apply:

(a) The small business must provide the funds needed by the trust

to repay the loan; and

(b) The small business must provide adequate collateral.

Sec. 120.354 Creditworthiness.

In determining repayment ability, SBA shall not consider the

personal assets of the employee-owners of the trust. SBA shall consider

the earnings history and projected future earnings of the employer

small business. SBA may consider the business and management experience

of the employee-owners.

Veterans Loan Program

Sec. 120.360 Which veterans are eligible?

SBA may guarantee or make direct loans to a small business 51

percent owned by one or more of the following eligible veterans:

(a) Vietnam-era veterans who served for a period of more than 180

days between August 5, 1964, and May 7, 1975, and were discharged other

than dishonorably;

(b) Disabled veterans of any era with a minimum compensable

disability of 30 percent; or

(c) A veteran of any era who was discharged for disability.

Sec. 120.361 Other conditions of eligibility.

(a) Management and daily operations of the business must be

directed by one or more of the veteran owners whose veteran status was

used to qualify for the loan.

(b) This direct loan program is available only if private sector

financing and guaranteed loans are not available.

(c) A veteran may qualify only once for this program on a direct

loan basis.

Pollution Control Program

Sec. 120.370 Policy.

Section 7(a)(12) of the Act authorizes SBA to guarantee loans up to

$1,000,000 to an eligible small business to plan, design or install a

pollution control facility. An applicant must meet the eligibility

requirements for 7(a) loans.

Loans to Participants in the 8(a) Program

Sec. 120.375 Policy.

Section 7(a)(20) of the Act authorizes SBA to provide direct

(unilaterally or together with Lenders) or guaranteed loans to firms

participating in the 8(a) Program.

Sec. 120.376 Special requirements.

The following special conditions apply (otherwise, 7(a) loan

eligibility criteria apply):

(a) The Associate Administrator of Minority Enterprise Development

(``MED'') may waive the direct loan administrative ceiling of $150,000,

and raise it to $750,000.

(b) The SBA portion of a guaranteed loan must not exceed $750,000.

(c) The interest rate on a guaranteed loan shall be the same as on

7(a) guaranteed business loans. The interest rate on a direct loan

shall be one percent less than on a regular direct loan.

(d) For a direct loan or SBA's portion of an immediate

participation loan, SBA shall subordinate its security interest on all

collateral to other debt of the applicant.

Sec. 120.377 Use of proceeds.

The loan proceeds shall not be used for debt refinancing. Only a

manufacturing concern may use loan proceeds for working capital.

Defense Economic Transition Assistance

Sec. 120.380 Program.

Section 7(a)(21) of the Act authorizes SBA to guarantee loans to

help eligible small businesses transition from defense to civilian

markets, or eligible individuals adversely impacted by base closures or

defense cutbacks to acquire or open and operate a small business.

Sec. 120.381 Eligibility.

(a) Eligible small businesses. A small business is eligible if it

has been detrimentally impacted by the closure (or substantial

reduction) of a Department of Defense installation, or the termination

(or substantial reduction) of a Department of Defense Program on which

the small business was a prime contractor, subcontractor, or supplier

at any tier.

(b) Eligible individual. An eligible individual, for purposes of

this program, includes the following persons involuntarily separated

from their position or voluntarily terminated under a program offering

inducements to encourage early retirement:

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(1) A member of the Armed Forces of the United States (honorably

discharged);

(2) A civilian employee of the Department of Defense; or

(3) An employee of a prime contractor, sub-contractor, or supplier

at any tier of a Department of Defense program.

(c) Defense loan and technical assistance (DELTA). The DELTA

program provides financial and technical assistance to defense

dependent small businesses which have been adversely affected by

defense reductions. The goal of the program is to assist these

businesses to diversify into the commercial market while remaining part

of the defense industrial base. Complete information on eligibility and

other rules is available from each SBA district office.

Sec. 120.382 Repayment ability.

SBA shall resolve reasonable doubts concerning the small business'

proposed business plan for transition to non-defense-related markets in

favor of the loan applicant in determining the sound value of the

proposed loan.

Sec. 120.383 Restrictions on loan processing.

Since greater risk may be associated with a loan to an applicant

under this program, a Certified Lender or Preferred Lender shall not

make a defense economic assistance loan under the PLP or CLP programs.

CapLines Program

Sec. 120.390 Revolving credit.

(a) CapLines finances eligible small businesses' short-term,

revolving and non-revolving working-capital needs. SBA regulations

governing the 7(a) loan program govern business loans made under this

program. Under CapLines, SBA generally can guarantee up to $750,000.

(b) CapLines proceeds can be used to finance the cyclical,

recurring, or other identifiable short-term operating capital needs of

small businesses. Proceeds can be used to create current assets or used

to provide financing against the current assets that already exist.

Builders Loan Program

Sec. 120.391 What is the Builders Loan Program?

Under section 7(a)(9) of the Act, SBA may make or guarantee loans

to finance small general contractors to construct or rehabilitate

residential or commercial property for resale. This program provides an

exception under specified conditions to the general rule against

financing investment property. ``Construct'' and ``rehabilitate'' mean

only work done on-site to the structure, utility connections and

landscaping.

Sec. 120.392 Who may apply?

A construction contractor or home-builder with a past history of

profitable construction or rehabilitation projects of comparable type

and size may apply. An applicant may subcontract the work. Subcontracts

in excess of $25,000 may require 100 percent payment and performance

bonds.

Sec. 120.393 Are there special application requirements?

(a) An applicant must submit documentation from:

(1) A mortgage lender indicating that permanent mortgage money is

available to qualified purchasers to buy such properties;

(2) A real estate broker indicating that a market exists for the

proposed building and that it will be compatible with its neighborhood;

and

(3) An architect, appraiser or engineer agreeing to make

inspections and certifications to support interim disbursements.

(b) The Borrower may substitute a letter from a qualified Lender

for one or more of the letters.

Sec. 120.394 What are the eligible uses of proceeds?

A Borrower must use the loan proceeds solely to acquire, construct

or substantially rehabilitate an individual residential or commercial

building for sale. ``Substantial'' means rehabilitation expenses of

more than one-third of the purchase price or fair market value at the

time of the application. A Borrower may use up to 20 percent of the

proceeds to acquire land, and up to 5 percent for community

improvements such as curbs and sidewalks.

Sec. 120.395 What is SBA's collateral position?

SBA will require a lien on the building which must be in no less

than a second position.

Sec. 120.396 What is the term of the loan?

The loan must not exceed sixty (60) months plus the estimated time

to complete construction or rehabilitation.

Sec. 120.397 Are there any special restrictions?

The borrower must not use loan proceeds to purchase vacant land for

possible future construction or to operate or hold rental property for

future rehabilitation. SBA may allow rental of the property only if the

rental will improve the ability to sell the property. The sale must be

a legitimate change of ownership.

Subpart D--Lenders

Sec. 120.400 Loan Guarantee Agreements.

SBA may enter into a Loan Guarantee Agreement with a Lender to make

deferred participation (guaranteed) loans. Such an agreement does not

obligate SBA to participate in any specific proposed loan that a Lender

may submit. The existence of a Loan Guarantee Agreement does not limit

SBA's rights to deny a specific loan or establish general policies. See

also Secs. 120.441(b) and 120.451(d) concerning Supplemental Guarantee

Agreements.

Participation Criteria

Sec. 120.410 Requirements for all participating Lenders.

A Lender must:

(a) Have a continuing ability to evaluate, process, close,

disburse, service and liquidate small business loans;

(b) Be open to the public for the making of such loans (not be a

financing subsidiary, engaged primarily in financing the operations of

an affiliate);

(c) Have continuing good character and reputation, and otherwise

meet and maintain the ethical requirements of Sec. 120.140; and

(d) Be supervised and examined by a State or Federal regulatory

authority, satisfactory to SBA.

Sec. 120.411 Preferences.

An agreement to participate under the Act may not establish any

Preferences in favor of the Lender.

Sec. 120.412 Other services Lenders may provide Borrowers.

Subject to Sec. 120.140 Lenders, their Associates or the designees

of either may provide services to and contract for goods with a

Borrower only after full disbursement of the loan to the small business

or to an account not controlled by the Lender, its Associate, or the

designee. A Lender, an Associate, or a designee providing such services

must do so under a written contract with the small business, based on

time and hourly charges, and must maintain time and billing records for

examination by SBA. Fees cannot exceed those charged by established

professional consultants providing similar services. See also

Sec. 120.195.

Sec. 120.413 Advertisement of relationship with SBA.

A Lender may refer in its advertising to its participation with

SBA. The advertising may not:

(a) State or imply that the Lender, or any of its Borrowers, has or

will receive preferential treatment from SBA;

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(b) Be false or misleading; or

(c) Make use of SBA's seal.

Pledging Notes or Transferring Unguaranteed Portion

Sec. 120.420 Financings by Nondepository Lenders.

(a) A Small Business Lending Company regulated by SBA or a Business

and Industrial Development Company (``Nondepository Lender'') may

pledge the notes evidencing SBA guaranteed loans or sell the

unguaranteed portions of such loans if SBA, notwithstanding the

provisions of Sec. 120.453(c), in its sole discretion, gives its prior

written consent. The Lender must be secure financially and have a

history of compliance with SBA's regulations and any other applicable

state or Federal statutory and regulatory requirements.

(b) The Nondepository Lender, SBA, and any third party involved in

the transaction, as determined by SBA in its sole discretion, must

enter into a written agreement satisfactory to SBA acknowledging SBA's

interest as guarantor of the subject loans and accepting that all

relevant third parties agree to recognize and uphold those interests

under the Act, this part, and the contractual provisions of SBA's Loan

Guarantee Agreement. In any such agreement, the parties must agree to

the following conditions:

(1) The Nondepository Lender, SBA, or a third party custodian

agreeable to SBA, will hold all pertinent Loan Instruments, and the

Nondepository Lender will continue to service the loans after the

pledge or transfer is made; and

(2) The Nondepository Lender must retain an economic risk in and

bear the ultimate risk of loss on the unguaranteed portions. This must

be demonstrated to SBA's satisfaction by establishing a sufficient

reserve fund at the time of sale of the unguaranteed portions and, in

the case of pledging notes, by retaining all of the economic interest

in the unguaranteed portion of any loan which a note evidences.

(c) The Nondepository Lender may not use SBA guaranteed loans or

the collateral supporting such loans as collateral for any borrowing

not related to financing of the guaranteed or unguaranteed portion of

SBA loans.

Miscellaneous Provisions

Sec. 120.430 SBA access to Lender files.

A Lender must allow SBA's authorized representatives, during normal

business hours, access to its files to review, inspect and copy all

records and documents relating to SBA guaranteed loans.

Sec. 120.431 Suspension or revocation of eligibility to participate.

SBA may suspend or revoke the eligibility of a Lender to

participate in the 7(a) program because of a violation of SBA

regulations, a breach of any agreement with SBA, a change of

circumstance resulting in the Lender's inability to meet operational

requirements, or a failure to engage in prudent lending practices.

Proceedings for such purposes will be conducted in accordance with the

provisions of part 134 of this chapter. A suspension or revocation will

not invalidate a guarantee previously provided by SBA.

Certified Lenders Program (CLP)

Sec. 120.440 What is the Certified Lenders Program?

Under the Certified Lenders Program (CLP), designated Lenders

process, close, service, and may liquidate, SBA guaranteed loans. SBA

gives priority to applications and servicing actions submitted by

Lenders under this program, and attempts to respond within three days

of submission to SBA. All other rules in this part 120 relating to the

operations of Lenders apply to CLP Lenders.

Sec. 120.441 How does a Lender become a CLP Lender?

(a) An SBA field office may nominate a Lender or a Lender may

request a field office to consider it for CLP status. SBA district

directors may approve and renew a Lender's CLP status. The district

director will consider whether the Lender:

(1) Has the ability to process, close, service and liquidate loans;

(2) Has a satisfactory performance history with SBA, including the

submission of complete and accurate loan guarantee application

packages;

(3) Has an acceptable SBA purchase rate; and

(4) Has shown the ability to work well with the local SBA office.

(b) If the district director does not approve a request for CLP

status, the Lender may appeal to the AA/FA, whose decision will be

final. If SBA grants CLP status, it applies only in the field office

that processed the CLP designation. A CLP Lender must execute a

Supplemental Guarantee Agreement that will specify a term not to exceed

two years.

Sec. 120.442 Suspension or revocation of CLP status.

The AA/FA may suspend or revoke CLP status upon written notice

providing the reasons at least 10 business days prior to the effective

date of the suspension or revocation. Reasons for suspension or

revocation may include a loan performance record unacceptable to SBA,

failure to make the required number of loans under the expedited

procedures, or violations of applicable statutes, regulations or

published SBA policies and procedures. A CLP Lender may appeal the

suspension or revocation made under this section under procedures found

in part 134 of this chapter. The action of the AA/FA remains in effect

pending resolution of the appeal.

Preferred Lenders Program (PLP)

Sec. 120.450 What is the Preferred Lenders Program?

Under the Preferred Lenders Program (PLP), designated Lenders

process, close, service, and liquidate SBA guaranteed loans with

reduced requirements for documentation to and prior approval by SBA.

Sec. 120.451 How does a Lender become a PLP Lender?

(a) An SBA field office serving the area in which a Lender's office

is located can nominate the Lender, or a Lender can request a field

office to consider it for PLP status. The SBA field office will forward

its recommendation to an SBA centralized loan processing center which

will submit its recommendation and supporting documentation to the AA/

FA for final decision.

(b) In making its decision, SBA considers whether the Lender:

(1) Has the required ability to process, close, service and

liquidate loans;

(2) Has the ability to develop and analyze complete loan packages;

and

(3) Has a satisfactory performance history with SBA.

(c) If the Lender is approved, the AA/FA will designate the area in

which it can make PLP loans.

(d) Before it can operate as a PLP Lender, the approved Lender must

execute a Supplemental Guarantee Agreement, which will specify a term

not to exceed two years.

(e) When a PLP's Supplemental Guarantee Agreement expires, SBA may

recertify it as a PLP Lender for an additional term not to exceed two

years. Prior to recertification, SBA will review a PLP Lender's loans,

policies and procedures. The recertification decision of the AA/FA is

final.

(f) A PLP Lender may request an expansion of the territory in which

it can process PLP loans by submitting its request to a loan processing

center. The center will obtain the recommendation of each SBA office in

the area into which the PLP Lender would like to expand its PLP

operations. The center

[[Page 3249]]

will forward the recommendations to the AA/FA for final decision. If a

PLP Lender is not a CLP Lender in a territory into which it seeks to

expand its PLP status, it automatically obtains CLP status in that

territory when it is granted PLP status for the territory.

Sec. 120.452 What are the requirements of PLP loan processing?

(a) Subparts A and B of this part govern the making of PLP loans,

except for the following:

(1) Certain types of businesses, loans, and loan programs are not

eligible for PLP, as detailed in published SBA policy and procedures.

(2) A Lender may not make a PLP business loan which reduces its

existing credit exposure for any Borrower, except in cases where an

interim loan(s) has been made for other than real estate construction

purposes to the Borrower which was approved by the Lender within 90

days of receipt of the issuance fo a subsequent PLP loan number.

(3) SBA will not guarantee more than the specified statutory

percentage of any PLP loan.

(b) A PLP Lender notifies SBA of its approval of a PLP loan by

submitting to SBA's loan processing center appropriate documentation

signed by two of the PLP's authorized representatives. SBA will attach

the SBA guarantee and notify the PLP Lender of the SBA loan number (if

it does not identify a problem with eligibility, and funds are

available).

(c) The PLP Lender is responsible for all PLP loan decisions

regarding eligibility (including size) and creditworthiness. The PLP

Lender is also responsible for confirming that all PLP loan closing

decisions are correct, and that it has complied with all requirements

of law and SBA regulations.

Sec. 120.453 What are the requirements of a PLP Lender in servicing

and liquidating SBA guaranteed loans?

The PLP Lender must service and liquidate its SBA guaranteed loan

portfolio (including its non-PLP loans) using generally accepted

commercial banking standards employed by prudent lenders. The PLP

Lender must liquidate any defaulted SBA guaranteed loan in its

portfolio unless SBA advises in writing that SBA will liquidate the

loan. The PLP Lender must submit a liquidation plan to SBA prior to

commencing liquidation action. The PLP Lender may take any necessary

servicing action, or liquidation action consistent with a plan, for any

SBA guaranteed loan in its portfolio, except it may not:

(a) Take any action that confers a Preference on the Lender;

(b) Accept a compromise settlement without prior written SBA

consent; and

(c) Sell or pledge more than 90 percent of a PLP loan.

Sec. 120.454 PLP performance review.

SBA may review the performance of a PLP Lender. SBA may charge the

PLP Lender a fee to cover the costs of this review.

Sec. 120.455 Suspension or revocation of PLP status.

The AA/FA may suspend or revoke PLP status upon written notice

providing the reasons at least 10 business days prior to the effective

date of the suspension or revocation. Reasons for suspension or

revocation may include loan performance unacceptable to SBA, failure to

make the required number of loans under the expedited procedures, or

violations of applicable statutes, regulations or published SBA

policies and procedures. A PLP Lender may appeal the suspension or

revocation made under this section under procedures found in part 134

of this chapter. The action of the AA/FA remains in effect pending

resolution of the appeal.

Small Business Lending Companies (SBLC)

Sec. 120.470 What is an SBLC?

A Small Business Lending Company (SBLC) is a nondepository lending

institution licensed by SBA. SBA supervises, examines, and regulates

SBLCs. An SBLC is subject to all applicable SBA regulations, including

those governing Lenders. SBA has imposed a moritorium on licensing new

SBLC's since January, 1982.

(a) An SBLC may only make:

(1) Loans under section 7(a) (except section 7(a)(13)) of the Act

in participation with SBA; and/or

(2) SBA guaranteed loans to micro-Lenders in the SBA Microloan

program (see subpart G of this part). Such loans are subject to the

same conditions as guaranteed loans made to SBA-designated microlenders

by SBA participating Lenders.

(b) In addition to complying with Secs. 120.400 through 120.413, an

SBLC must meet the following requirements:

(1) Business structure. It must be a corporation (profit or non-

profit).

(2) Written agreement. It must sign a written agreement with SBA.

(3) Capital structure. It must have unencumbered paid-in capital

and paid-in surplus of at least $1,000,000, or ten percent of the

aggregate of its share of all outstanding loans, whichever is more.

(4) Capital impairment. It must avoid capital impairment at all

times. Impairment exists if the retained earnings deficit of an SBLC

exceeds 50 percent of combined paid-in capital and paid-in-surplus,

excluding treasury stock. An SBLC must give SBA prompt written notice

of any capital impairment within 30 calendar days of the month-end

financial report that first reflects the impairment. Until the

impairment is cured, an SBLC may not present any loans to SBA for

guarantee.

(5) Issuance of securities. Without prior written SBA approval, it

must not issue any securities (including stock options and debt

securities) except stock dividends and common stock issued for cash or

direct obligations of, or obligations fully guaranteed as to principal

and interest by, the United States.

(6) Voluntary capital reduction. Without prior written SBA

approval, it must not voluntarily reduce its capital, or purchase and

hold more than 2 percent of any class or combination of classes of its

stock.

(7) Reserves for losses. It must maintain a reserve in the amount

of anticipated losses on loans and receivables.

(8) Internal control. It must adopt a plan designed to safeguard

its funds and other assets, to assure the reliability of its personnel,

and to maintain the accuracy of its financial data.

(9) Dual control. It must maintain dual control over disbursement

of funds and withdrawal of securities. An SBLC may disburse funds only

by checks or wire transfers authorized by signatures of two or more

officers covered by the SBLC's fidelity bond, except that checks in an

amount of $1,000 or less may be signed by one bonded officer. There

must be two or more bonded officers, or one bonded officer and a bonded

employee to open safe deposit boxes or withdraw securities from

safekeeping. The SBLC shall furnish to each deposit

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