Business Loan Program

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: This final rule implements the Small Business Reauthorization

Act of 1997, enacted on December 2, 1997, with respect to SBA financing

in the pilot Premier Certified Lenders Program (PCLP). The final rule

extends the authority of a Certified Development Company (CDC)

participating in the PCLP (Premier CDC).

DATES: This rule is effective on May 14, 1999.

FOR FURTHER INFORMATION CONTACT: LeAnn M. Oliver, 202-205-6490.

SUPPLEMENTARY INFORMATION: On May 5, 1998 (63 FR 24739), SBA published

in the Federal Register an interim final rule in order to implement

Pub. L. 105-135, the ``Small Business Reauthorization Act of 1997''

(1997 legislation), enacted on December 2, 1997, which amends Section

504 of the Small Business Investment Act of 1958 (15 U.S.C. 661-697f)

(Act). SBA promulgated the regulation in interim final rule form to

enable qualified CDCs to participate in the PCLP Program as soon as

possible. SBA received 4 timely comments on its interim final rule.

These comments addressed several issues, each of which is discussed

below.

The 1997 legislation established a goal of the PCLP to have each

Premier CDC process 50% of its loans made under Section 504 of the Act

(``504 loans'') under PCLP procedures. Two commenters suggested that

SBA make it clear in the regulation that it is a goal and not a

requirement. The commenters noted that SBA stated in an internal

procedural notice that a Premier CDC was ``required'' to process 50% of

its 504 loans under PCLP rather than correctly stating that the 50%

level is a goal. SBA agrees with the commenters but believes that the

issue should be addressed in a new procedural notice and not in SBA

regulations.

One commenter suggested that we substitute the term ``loan'' in

place of ``financing'' in several places in the rule. The commenter

noted that in certain other sections of SBA regulations the term

``financing'' or ``504 financing'' refers to the combination of the CDC

loan, the Third Party Lender's loan, and the Borrower's equity

injection and not just the CDC loan. In order to eliminate any possible

confusion, SBA will use the term ``loan'' or ``PCLP loan'' in place of

``financing'' throughout this preamble and the final rule.

One commenter objected to SBA's requirement in the interim final

rule that a letter of credit comprising any portion of a Premier CDC's

loss reserve must have a term ``equal to or longer than the term of the

financings it secures''. The commenter stated that: ``While I

understand that the intent of this provision is to protect SBA from

excessive exposure or loss, I believe that this requirement is not

commercially reasonable and that it imposes an unnecessary burden on

both the CDC and ultimately the borrowing small business concerns.''

The commenter suggested that SBA amend the requirement so that each

letter of credit supporting a PCLP loan (1) has a term of at least one

year and (2) provides for at least 90 days prior written notice to SBA

and the Premier CDC if the issuer intends to decline issuing a letter

of credit on substantially similar terms for another term. While SBA

has considered the commenter's suggestion, SBA believes that it is

inappropriate to develop and implement regulations for the program that

do not fully protect SBA from undue exposure to risk of non-

reimbursement resulting from a mismatch in maturity of a PCLP loan and

the period a letter of credit providing protection is outstanding. SBA

will continue to require that a letter of credit have a term equal to

or longer than the maturity of the PCLP loan which triggered the

requirement for

[[Page 26274]]

the Premier CDC to contribute to the loss reserve.

The comments SBA received regarding the terms of letters of credit

contributed to the loss reserve made it clear to SBA that it should

clarify what SBA would do if an issuer of a letter of credit did not

remain ``well capitalized'' throughout the term of the letter of credit

it has issued. The interim final rule stated that an issuer of a letter

of credit must be well-capitalized (as that term is defined in

regulations of the Federal Deposit Insurance Corporation, as amended

(12 CFR 325.103)), but did not say what SBA would do if the issuer

became insolvent or otherwise failed to remain well-capitalized during

the term of the letter of credit. Accordingly, the final rule expressly

states that SBA may require an additional loss reserve contribution by

a Premier CDC if an issuer of a contributed letter of credit fails to

remain well-capitalized.

The last sentence of Sec. 120.845 (c) (1) of the interim final rule

stated that ``A loss reserve irrevocable letter of credit must * * * ''

and then listed conditions applicable to the letters of credit. To

clarify that all letters of credit contributed to the loss reserve must

be irrevocable and that the listed conditions apply to all letters of

credit, SBA moved the term ``irrevocable'' from the introductory phrase

of that sentence and explicitly made it condition (iii).

A commenter requested clarification regarding the requirement to

replenish withdrawn loss reserve assets with contributions ``equal to

or greater than the amount of the assets withdrawn.'' The PCLP

regulations require Premier CDCs to contribute 1% of each PCLP loan to

the loss reserve. If there is a default on a PCLP loan, the Premier CDC

must pay to SBA 10% of any loss, after recoveries, incurred by SBA as a

result of the default by the Premier CDC on the Debenture issued under

PCLP (the Premier CDC's ``Exposure''). The commenter suggested that the

proper minimum amount a Premier CDC must replenish to the loss reserve

is the amount realized from the loss reserve less the 1% the Premier

CDC contributed to the loss reserve when it made the PCLP loan that

defaulted. SBA understands the logic underlying the request but

declines to make the change because the 1997 legislation explicitly

requires Premier CDCs to reimburse at least what has been withdrawn.

The 1997 legislation permitted a Premier CDC to contribute letters

of credit to its loss reserve. The legislation required the letters of

credit to be assigned to SBA. It did not state how the Premier CDC

should do so, for either loss reserve deposits or letters of credit.

Commenters generally requested more guidance with respect to the loss

reserve. In order to provide such guidance, SBA decided to clarify ``in

a manner acceptable to SBA'' and state expressly in the final rule how

a Premier CDC will ``assign'' its deposits and letters of credit to

SBA. Accordingly, the final rule states, to secure its obligations to

SBA under PCLP, a Premier CDC must grant SBA a first priority perfected

security interest in any segregated funds comprising any portion of a

Premier CDC's loss reserve. Since the letter of credit would be used as

credit support for the Premier CDC's obligations to SBA, SBA normally

would be the direct beneficiary of the letter of credit, rather than

the assignee of a letter of credit naming the Premier CDC as

beneficiary. Therefore, SBA has decided to require ``assignment'' of

any letter of credit to SBA by having the Premier CDC directly name SBA

as the beneficiary of the letter of credit.

A Premier CDC commenter questioned whether this final rule would

apply to Premier CDCs already participating in the PCLP pilot, and

whether their original agreements with SBA and SBA regulations in

effect when they first entered the PCLP pilot would apply after

promulgation of this final rule. This final rule applies to all Premier

CDCs. This final rule supersedes all prior regulations applicable to

the PCLP pilot. If any provision in any agreement between a Premier CDC

and SBA relating to the PCLP pilot is inconsistent with any provision

of this final rule, the provision of this final rule will govern. If

SBA develops a new form of agreement for Premier CDCs, all Premier CDCs

will have to enter that agreement, which then would govern all

subsequent transactions under the PCLP pilot.

Finally, a commenter wanted to know what happens to a Premier CDC's

loss reserve account if SBA suspends or removes the Premier CDC from

the PCLP. SBA plans to release an SBA Procedural Notice to address the

issue.

Compliance With Executive Orders 12612, 12988, and 12866, the

Regulatory Flexibility Act (5 U.S.C. 601-612.), and the Paperwork

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

SBA certifies that this 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 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. 601-612. Last year,

SBA made approximately 4,000 504 loans. Currently there are

approximately 300 CDCs, less than 25 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 legislation do not constitute a significant

impact on a substantial number of small businesses.

SBA certifies that this final rule does not impose any additional

reporting or record-keeping requirements under the Paperwork Reduction

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

For purposes of Executive Order 12612, SBA certifies that this

final rule has no federalism implications warranting preparation of a

Federalism Assessment.

For purposes of Executive Order 12988, SBA certifies that this

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

standards set forth in section 3 of that Order.

List of Subjects in 13 CFR Part 120

Loan programs--business, Reporting and recordkeeping requirements,

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 (``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

[[Page 26275]]

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%

of any loss (including attorney's fees and litigation costs and

expenses) 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

provide funds to pay its Exposure to SBA.

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

any combination of:

(A) Segregated funds on deposit in one or more federally insured

depository institutions in which the Premier CDC has granted to SBA, in

a manner acceptable to SBA, a first priority perfected security

interest to secure the Premier CDC's obligations to SBA under the PCLP;

or

(B) Irrevocable letters of credit.

(ii) SBA must be named as the beneficiary of all letters of credit.

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'').

(iii) A loss reserve letter of credit must:

(A) Be issued by a well-capitalized bank;

(B) Have a term equal to or longer than the maturity of the PCLP

loan which triggered the requirement for the Premier CDC to contribute

to the loss reserve;

(C) Be irrevocable;

(D) Be otherwise acceptable to the SBA;

(E) Have an issuer who remains well-capitalized throughout the term

of the letter of credit, or SBA may require an additional loss reserve

contribution by the contributing Premier CDC.

(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 PCLP loan when the Debenture it issues to fund the

PCLP loan 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 Premier 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 PCLP loans 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: May 5, 1999.

Aida Alvarez,

Administrator.

[FR Doc. 99-12100 Filed 5-13-99; 8:45 am]

BILLING CODE 8025-01-P