Business Loan Programs

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Business Loan Programs

AGENCY: Small Business Administration.

ACTION: Interim final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) is modifying its

rules regarding the financing and securitization of the unguaranteed

portion of loans it guarantees under Section 7(a) of the Small Business

Act. Present SBA regulations allow only non-depository lenders to

engage in these practices (13 CFR 120.420, revised as of March 1,

1996). This interim rule will permit both depository and non-depository

lenders to pledge or sell the unguaranteed portions of SBA guaranteed

loans.

During the pendency of this interim final rule, subject to

compliance with all other aspects of the interim final rule, SBA

expects to give favorable review to any transaction which complies with

the retainage requirements described in the notice of proposed

rulemaking relevant to financing and securitization which appeared in

the Federal Register on February 26, 1997. If SBA is presented with a

transaction which is not structured in a manner consistent with such

retainage requirements, SBA will need to assure itself as to safety and

soundness considerations and compliance with the interim rule before

giving its approval.

DATES: Effective: April 2, 1997.

Comments must be submitted on or before May 2, 1997.

ADDRESSES: Please mail all comments to Jane Palsgrove Butler, Acting

Associate Administrator for Financial Assistance, U.S. Small Business

Administration, 409 Third Street, SW, Room 8200, Washington, D.C.

20416.

FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Acting Deputy

Associate Administrator for Financial Assistance, (202) 205-7505.

SUPPLEMENTARY INFORMATION: Over the past several years, the average SBA

guarantee under its guaranteed business loan program (program) has

decreased from nearly 90% to approximately 75%. This 150% increase in

lender exposure requires lenders participating in the program to commit

substantially more of their own capital in order to support their

dollar volume of SBA guaranteed loans. In 1992, SBA promulgated

regulations that permitted non-depository lenders participating in the

program to pledge or sell the unguaranteed portions of SBA guaranteed

loans, thereby permitting them to fund unguaranteed portions of SBA

guaranteed loans with the proceeds of loans or securities offerings

(securitizations). (See 13 CFR Sec. 120.420, revised as of March 1,

1996.)

Since that time, bank (depository) participants have asked SBA to

modify its regulations to provide them the same ability to offset the

increase in commitment of capital needed for them to continue

participation in the program. These lenders have told SBA that, in many

cases, it is more efficient to raise funds through a pledge or

securitization than to attract additional deposits.

Congress has now recognized the need to permit all participants in

the program to have a level playing field in raising capital needed to

fund the increased requirement for unguaranteed portions. Therefore,

recent legislation prohibits the sale of unguaranteed portions under

SBA's present regulations after March 31, 1997, unless SBA develops

regulations permitting all participating lenders to sell the

unguaranteed portions of their SBA guaranteed loans. See Sec. 103(e) of

Public Law 104-408, Oct. 1, 1996, which directs SBA to promulgate a

final regulation ``that applies uniformly to both depository

institutions and other lenders * * * setting forth the terms and

conditions under which such sales can be permitted, including

maintenance of appropriate reserve requirements and other safeguards to

protect the safety and soundness of the program.''

On November 29, 1996, SBA published an advance notice of proposed

rulemaking which requested the views of interested parties on how this

statutory requirement might be satisfied. 61 FR 60649, Nov. 29, 1996.

SBA received nine responses, including one response which had four

signatories. The comments addressed several questions posed in the

advance notice of proposed rulemaking regarding how the statutory

mandate should be satisfied.

On February 26, 1997, at 62 FR 8640, SBA published a notice of

proposed rulemaking on this subject. The proposed rulemaking took the

comments on the advance notice of proposed rulemaking fully into

consideration. The public was given 30 days to comment on the proposal.

As of March 21, 1997, SBA had not received any comments from the public

in response to the proposed rulemaking.

SBA recognizes the complexity of the issues surrounding the various

means for implementing the statutory mandate. It is clear that

additional time will be necessary to develop a full spectrum of comment

on the notice of proposed rulemaking. It is SBA's desire to have the

broadest possible public involvement in this rulemaking. At the same

time, SBA does not wish to penalize any lender seeking to conduct a

pledging or sale transaction after March 31, 1997.

Under these circumstances, SBA has decided to extend, for an

additional 30 days, the comment period on its proposed rule. Pending

its review of all comments received and its issuance of a final rule on

the subject, SBA also will promulgate an interim final rule which will

allow all lenders in the program to proceed with securitizations,

subject to prior SBA approval on a case by case basis. In this regard,

SBA will extend to all of its lenders, on an interim basis, an existing

regulation which previously has been applicable only to non-depository

lenders. This will afford SBA the opportunity to obtain further public

comment, to consider how best to implement the statutory directive that

a new rule be finalized, and to permit interim transactions to go

forward on a basis consistent with safety and soundness in the program.

SBA is convinced that it can review any transactions which take

place during the interim period in a manner sufficient to protect such

safety and soundness. It should be noted that all pledging or sale

transactions which have taken place since 1992 have been

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carefully reviewed by SBA personnel. SBA has ensured that language

adequate to protect its interest has been built into the documentation

for all of these transactions and that the transactions themselves do

not add undue risk to the program. It will employ similar procedures in

reviewing any transactions taking place during the pendency of the

interim rule.

While interested in receiving extensive comments on its proposed

rule, SBA still believes that it sets out a reasonable approach to

approving sales of the unguaranteed portions of SBA loans. Accordingly,

subject to compliance with all other aspects of the interim rule, SBA

expects to give favorable review to any interim period transaction

which complies with the retainage requirements described in the notice

of proposed rulemaking. If it is presented with a transaction which is

not structured in a manner consistent with such retainage requirements,

SBA will need to assure itself as to safety and soundness

considerations and compliance with the interim rule before giving its

approval.

As expressed in both the advance notice and the notice of proposed

rulemaking, SBA is concerned that there are multiple issues which need

to be fully explored before this extremely complex matter is finally

resolved. It is SBA's expectation that the public will comment on the

substance of both the advance notice and the proposed rule during the

pendency of this interim final rule, and that such comment will serve

as the basis for a new final rule to be published shortly after the

extended comment period closes.

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 interim final rule does not constitute a

significant rule within the meaning of Executive Order 12866 and will

not have a significant economic impact on a substantial number of small

entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C.

601 et seq. It believes this rule is not likely to have an annual

economic effect of $100 million or more, but requests comment from the

public on its perception of the costs and benefits associated with this

rule to enable it to decide whether to prepare a cost benefit analysis

in conjunction with the final rule. SBA believes that the rule will not

result in a major increase in costs or prices, or have a significant

adverse effect on competition or the United States economy.

The rule is consistent with the mandate of section 103(e) of Public

Law 104-208 that it set forth terms and conditions under which sales

for the purpose of securitization can be permitted, including the

maintenance of appropriate reserve requirements and other safeguards to

protect the safety and soundness of the program. SBA believes that the

reserve requirements and other safeguards built into the rule satisfy

this concern. For the reasons set forth above, SBA believes that the

rule will help SBA lenders support an increased volume of SBA lending.

Finally, the rule has no negative impact on State, local, or tribal

governments.

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 in 13 CFR Part 120

Business loans.

For the reasons set forth above, SBA amends Part 120 of Title 13,

Code of Federal Regulations, as follows:

PART 120--BUSINESS LOANS

1. The authority citation for part 120 continues to read as

follows:

Authority: 15 U.S.C. 634(b)(6) and 636 (a) and (h).

2. Section 120.420 is revised to read as follows:

Sec. 120.420 Financings by participating lenders.

(a) A 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 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 Lender, SBA, or third party custodian agreeable to SBA,

will hold all pertinent Loan Instruments, and the Lender will

continue to service the loans after the pledge or transfer is made;

and

(2) The 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 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.

Dated: March 26, 1997.

Ginger Ehn Lew,

Acting Administrator.

[FR Doc. 97-8416 Filed 4-1-97; 8:45 am]

BILLING CODE 8025-01-P