Business Loan Program

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Interim final rule.

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SUMMARY: This interim final rule implements Pub. L. 105-135, enacted on

December 2, 1997, with respect to SBA financing in the pilot Premier

Certified Lenders Program (PCLP). The interim final rule extends the

pilot to October 1, 2000, and expands the authority of a Certified

Development Company (CDC) participating in the PCLP (Premier CDC).

DATES: This rule is effective May 4, 1998. Comments must be submitted

on or before July 6, 1998. SBA will publish a final rule after the end

of the comment period.

ADDRESSES: Comments should be mailed to Jane Palsgrove Butler, Acting

Associate Administrator for Financial Assistance, Small Business

Administration, 409 Third Street, S.W., Washington, D.C. 20416.

FOR FURTHER INFORMATION CONTACT: LeAnn M. Oliver, 202-205-6485.

SUPPLEMENTARY INFORMATION: Pub. L. 105-135, the ``Small Business

Reauthorization Act of 1997'' (1997 legislation), enacted on December

2, 1997, amends Section 504 of the Small Business Investment Act of

1958 (15 U.S.C. 601 et seq.) and requires SBA to promulgate regulations

to carry out the amendments. SBA is promulgating this regulation in

interim final rule form to enable qualified CDCs to participate in the

PCLP Program as soon as possible. Because this regulation merely

implements provisions contained in the1997 legislation, SBA is

satisfied that the interim final rule poses no risk to SBA's PCLP

program. SBA is seeking comments in regards to this interim final

regulation. After the 60 day comment period has expired, SBA will issue

a final rule.

Changes to PCLP

The current SBA PCLP is limited to 15 CDCs. The interim

final rule will open the program to all qualified CDCs.

The interim final rule expands and clarifies the authority

of a Premier CDC to foreclose, litigate, and liquidate 504 loans made

under PCLP.

The interim final rule clarifies that SBA makes the

eligibility determination regarding 504 loans and Borrowers. The

Premier CDC makes all other determinations regarding loan approval.

The interim final rule requires that if there is a default

on a Debenture issued under PCLP, the Premier CDC must reimburse SBA

for 10 percent of any loss incurred as a result of the default. The

amount for which a CDC is liable is referred to as ``Exposure.'' To

cover its Exposure, a Premier CDC must maintain a loss reserve of

segregated assets. This interim final rule codifies SBA's current

interpretation of a loan loss reserve and, in addition, permits a

Premier CDC to use irrevocable letters of credit to fund the loss

reserve. The criterion for an eligible letter of credit is based on its

terms and the strength of the institution making the commitment. The

interim final rule defines an eligible letter of credit as one that:

(1) is issued by a ``well capitalized bank'' as defined by the Federal

Deposit Insurance Corporation (FDIC); (2) has a term equal to or

greater than the term of the financings it secures; and (3) is

otherwise acceptable to SBA. SBA plans to review the terms of each

irrevocable letter of credit to ensure that SBA is protected adequately

against loss.

Currently a Premier CDC is required to maintain a loss

reserve equal to the greater of its historic loss rate on its

Debentures or 10 percent of its Exposure. The interim final rule limits

the calculation of the loss reserve to 10 percent of the Premier CDC's

Exposure or 1 percent of the Debentures it issues under PCLP. The

Premier CDC must contribute 50 percent of required funds to the loss

reserve when a 504 Debenture is closed, 25 percent within 1 year after

the Debenture is closed, and 25 percent within 2 years after the

Debenture is closed.

Although a Premier CDC's Exposure is 10 percent of any

loss incurred by SBA from a default on a 504 Debenture processed

through PCLP, the CDC must contribute only 10 percent of its Exposure

(which is only 1 percent of SBA's loss from the default) on each

Debenture to the loss reserve. The interim final rule amends the

current regulations to clarify that SBA may use all assets in a Premier

CDC's loss reserve to reimburse the Agency for the full 10 percent of

its loss. If there is not enough in the loss reserve, the interim final

rule requires that a Premier CDC pay SBA, within 45 days of demand for

the payment, the difference between the Premier CDC's Exposure and the

amount withdrawn by SBA from the loss reserve.

The interim final rule specifies that a Premier CDC must

replenish withdrawn loss reserve assets within 30 days with an

equivalent amount of assets.

The interim final rule requires SBA to allow a Premier CDC

to withdraw loss reserve assets attributable to any paid off Debenture.

The interim final rule extends the pilot PCLP to October

1, 2000.

The interim final rule requires a CDC seeking to

participate in PCLP to apply to the SBA field office in which it is

most active.

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, since it

is not likely to have an annual effect on the economy of $100 million

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

significant adverse effect on competition or the U.S. economy.

SBA certifies that this interim final rule 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. Last year, SBA made approximately four thousand 504 loans.

Currently there are approximately 300 CDCs, less than 15 of which are

Premier CDCs. While the 1997 legislation removes the limit on the

number of CDCs that can become Premier CDCs, SBA anticipates that, at

most, only half of the CDCs would be affected by this rule. Thus the

changes to the PCLP implementing the 1997

[[Page 24740]]

legislation do not constitute a significant impact on a substantial

number of small businesses.

SBA certifies that this interim final rule does not impose any

additional reporting or recordkeeping requirements under the Paperwork

Reduction Act, 44 U.S.C. chapter 35.

For purposes of Executive Order 12612, SBA certifies that this

interim final rule has no federalism implications warranting

preparation of a Federalism Assessment.

For purposes of Executive Order 12778, SBA certifies that this

interim final rule is drafted, to the extent practicable, to accord

with the standards set forth in section 2 of that Order.

List of Subjects in 13 CFR Part 120

Loan programs--business, Small businesses.

Accordingly, pursuant to authority contained in section 5(b)(6) of

the Small Business Act (15 U.S.C. 634(b)(6)), SBA amends part 120,

chapter I, 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. Revise Sec. 120.845 to read as follows:

Sec. 120.845 Premier Certified Lenders Program (PCLP).

The SBA has established a pilot program to designate a number of

CDCs as Premier Certified Lenders (``Premier CDCs''), and to authorize

them to approve, close, service, foreclose, litigate, and liquidate 504

loans subject to SBA regulations, procedures, and policies. A Premier

CDC's authority to approve loans under the Program is subject to SBA's

determination that the loan and Borrower meet SBA's eligibility

requirements.

(a) PCLP loan approvals. A Premier CDC notifies SBA of its approval

of a PCLP loan by submitting appropriate documentation to SBA's loan

processing center. SBA will notify the Premier CDC of the SBA loan

number (if it does not identify a problem with eligibility, and funds

are available).

(b) Premier CDC Exposure. A Premier CDC must reimburse SBA for 10

percent of any loss incurred by SBA as a result of a default by the

Premier CDC on a Debenture issued under the PCLP (``Exposure'').

(c) Loss reserve. A Premier CDC must establish a loss reserve to

pay its Exposure to SBA.

(1) Assets. A Premier CDC's loss reserve must be composed of any

combination of: segregated funds on deposit in one or more federally

insured depository institutions; or irrevocable letters of credit. All

loss reserve deposits and letters of credit must be assigned by the

Premier CDC to SBA in a manner acceptable to SBA. A Premier CDC's loss

reserve deposits in an institution may exceed the institution's insured

amount, but only if the institution is ``well capitalized'' as defined

in regulations of the Federal Deposit Insurance Corporation, as amended

(12 CFR 325.103) (``well capitalized bank''). A loss reserve

irrevocable letter of credit must (i) be issued by a well capitalized

bank, (ii) have a term equal to or longer than the term of the

financings it secures, and (iii) be otherwise acceptable to the SBA.

(2) Contributions. A Premier CDC's loss reserve must total 1

percent of the Debentures it issues under the PCLP Program. A Premier

CDC must contribute 50 percent of the required loss reserve

attributable to each financing when the Debenture it issues to fund the

financing is closed, 25 percent within 1 year after the Debenture is

closed, and 25 percent within 2 years after the Debenture is closed.

(3) Reimbursement. SBA determines a Premier CDC's Exposure on a

loan and withdraws the amount necessary to cover the Exposure. If,

after full use of any assets in the loss reserve, there are not enough

loss reserve assets to cover a Premier CDC's Exposure, the Premier CDC

must pay SBA any difference between the Exposure and the loss reserve

assets withdrawn by SBA to cover the Exposure within 45 days of a

demand for payment by SBA.

(4) Replenishment. If SBA withdraws assets from the loss reserve to

cover a Premier CDC's Exposure, the CDC must replace the withdrawn loss

reserve assets within 30 days of the withdrawal with contributions

equal to or greater than the amount of the assets withdrawn.

(5) Withdrawal. A Premier CDC may withdraw loss reserve assets

attributable to any repaid Debenture upon written approval by SBA.

(d) Review. SBA will review a Premier CDC's financings annually.

(e) Suspension and revocation. The AA/FA may suspend or revoke a

CDC's Premier designation upon written notice stating the reasons for

the suspension or revocation 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 meet loss reserve or eligibility criteria, or violations of

applicable statutes, regulations, or published SBA policies and

procedures. A Premier CDC may appeal the suspension or revocation made

under this section pursuant to the procedures set forth in part 134 of

this chapter. The action of the AA/FA shall remain in effect pending

resolution of the appeal.

(f) Applications. A CDC may obtain information concerning this

pilot program from the Office of Program Development in the Office of

Financial Assistance at SBA's Headquarters. A CDC may submit its

application to the SBA field office in which it is most active. The SBA

field office will send the application with its recommendation to the

AA/FA for a final decision.

(g) Acceptance into program. When determining a CDC's application,

SBA will consider the CDC's ability to work with the local SBA office

and the quality of past performance.

(h) Program period. The PCLP pilot program ends on October 1, 2000.

Dated: April 28, 1998.

Aida Alvarez,

Administrator.

[FR Doc. 98-11848 Filed 5-4-98; 8:45 am]

BILLING CODE 8025-01-P