99-559. Business Loan Program  

  • [Federal Register Volume 64, Number 8 (Wednesday, January 13, 1999)]
    [Rules and Regulations]
    [Pages 2115-2119]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-559]
    
    
    
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    Federal Register / Vol. 64, No. 8 / Wednesday, January 13, 1999 / 
    Rules and Regulations
    
    [[Page 2115]]
    
    
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    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 Pub. L. 104-208, enacted on 
    September 30, 1996, and Pub. L. 105-135, enacted on December 2, 1997, 
    with respect to SBA financing in the 504 program, and clarifies 
    existing regulations applicable to the 504 program and, in some cases, 
    to the 7(a) program. In the 504 program, the final rule allows more 
    than one business to qualify for SBA financing for a specific 504 
    Project; allows a 504 Borrower to lease long term up to 20 percent of 
    the rentable space in a 504 Project; describes how much a Borrower must 
    contribute to a 504 Project under certain circumstances; modifies 
    allowable fees paid by the Borrower, Third Party Lender, and Certified 
    Development Company (CDC); and allows certain fees incurred by a CDC in 
    the closing of a 504 loan, up to $2,500 per closing, to be eligible 
    administrative costs.
    
    DATE: This rule is effective on January 13, 1999.
    
    FOR FURTHER INFORMATION CONTACT: Michael J. Dowd, 202-205-6660.
    
    SUPPLEMENTARY INFORMATION: On May 5, 1998, SBA published in the Federal 
    Register (63 FR 24753), proposed regulations which would implement 
    Public Law 105-135, the ``Small Business Reauthorization Act of 1997'' 
    (1997 legislation), enacted on December 2, 1997, and Public Law 104-208 
    (1996 legislation), enacted on September 30, 1996, that amended the 
    Small Business Investment Act of 1958 (15 U.S.C. Sec. 601 et seq.) 
    (Act). SBA received responses from three commenters and will address 
    each one. SBA published in the Federal Register on August 13, 1998, (63 
    FR 43330) a notice to reopen the comment period, with respect to 7(a) 
    loans, on the proposed rule's change to 13 CFR section 120.111 on 
    Eligible Passive Companies. SBA received one comment from a trade 
    association representing a large number of 7(a) lenders and we will 
    respond to that comment. These final regulations implement the 
    amendments required by the 1996 legislation and some of the amendments 
    required under the 1997 legislation, and make other changes.
    
    Change Affecting the 7(a) and 504 Programs.
    
        The 1997 legislation authorizes SBA to provide financial assistance 
    to more than one identifiable small business for a qualified 504 
    project.
         SBA is amending Section 120.10 to add the definition of 
    Rentable Property previously included in the text of Section 
    120.131(a).
         SBA is amending Section 120.111 with respect to Eligible 
    Passive Companies to make that rule consistent with the 1997 
    legislation. Current Section 120.111 allows SBA to assist an Eligible 
    Passive Company to use loan proceeds to acquire property for lease to 
    an Operating Company. SBA is amending Section 120.111 to authorize SBA 
    to provide financing to an Eligible Passive Company that uses the loan 
    proceeds to lease property to multiple unrelated Operating Companies. 
    This change makes the Eligible Passive Company provision consistent 
    with the change to Section 120.801 discussed in the next paragraph. SBA 
    is also adding a parenthetical to make it clear that references to 
    Operating Company throughout the subsections of section 120.111 mean 
    each Operating Company if there are multiple Operating Companies. This 
    change applies to loans under SBA's 7(a) and 504 programs.
         SBA is making a technical amendment to Section 121.131, 
    which covers leasing a part of new construction or existing buildings 
    to a third party. The amendment changes references to an Operating 
    Company to multiple Operating Companies to conform Section 121.131 to 
    the 1997 legislation and to the revised regulation Sections 120.111 and 
    120.801. SBA also revised the text of Section 120.131(a) and (b) by 
    using the new defined term ``Rentable Property'' throughout the section 
    and by making them more understandable and consistent. Two commenters 
    interpreted the changes to Section 120.111 to allow multiple Operating 
    Companies to join together to meet the occupancy requirements of 
    Section 120.131(b), allowing them to lease up to 33 percent for new 
    construction and 49 percent for an existing building. SBA agrees with 
    the commenters' interpretation since the indented effect of this change 
    is for the multiple operating companies to be in a position similar to 
    that of a single operating company and, as such, each Operating Company 
    must be a co-borrower or guarantor of the entire loan.
    
    Changes Affecting the 504 Program
    
        The 1996 and 1997 legislation require SBA to amend its regulations. 
    In addition, SBA is announcing other program changes.
         Section 502 of the Act authorizes SBA to provide financial 
    assistance to a small business through a CDC to acquire, construct, 
    convert, or expand its plant facility as a 504 Project under section 
    504 of the Act. SBA interpreted the statute to allow the Agency to 
    assist only one identifiable business for any particular project. In 
    response to the 1997 legislation, SBA is amending Section 120.801 of 
    its regulations to allow CDCs to assist two ore more unrelated small 
    businesses for any qualified 504 Project.
         The 1996 legislation amended the Act regarding the amount 
    of the Borrower's contribution to a 504 Project financing. SBA is 
    amending Section 120.910 of its regulations to comply with the 
    legislation. The regulation requires the Borrower to contribute at 
    least 15 percent of the total cost of the 504 Project if (i) the 
    Borrower (or Operating Company or Companies if the Borrower is an 
    Eligible Passive Company) has been in business for two years or less, 
    (ii) or if the Project is the acquisition, construction, conversion or 
    expansion of a limited or single purpose building. The Borrower must 
    contribute at least 20 percent of the total cost of the Project if both 
    conditions exist. The only comment received concerning this amendment 
    agreed with the proposed rule.
         The 1996 legislation requires that a Third Party Lender 
    finance at least 50 percent of a Project's cost if the Borrower's 
    contribution is made under either condition described above for
    
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    Section 120.910. One commenter disagreed with the statute. 
    Nevertheless, SBA must comply with the legislation and is amending 
    Section 120.920 to implement this change.
         The 1997 legislation amended the Act to permit a 504 
    Borrower to lease long term no more than 20 percent of a new 504 
    Project if the Borrower immediately occupies at least 60 percent of the 
    property. To comply with the 1997 legislation, SBA proposed to amend 
    Section 120.870 of its regulations to authorize a Borrower to lease 
    long term no more than 20 percent of the rentable space in a 504 
    Project to third parties if the Borrower occupies at least 60 percent 
    of the rentable space with plans to occupy the remaining rentable space 
    within three years. A commenter suggested that SBA apply the same 
    schedule to the occupancy of the remainder of the space as Section 
    120.831(a) now applies to the occupancy of the portion of the space in 
    a new building. SBA concurs with that suggestion and in the final rule 
    allows the Borrower to lease long term no more than 20 percent of the 
    rentable space in a 504 Project to one or more tenants if (i) the 
    Borrower immediately occupies at least 60 percent of the rentable 
    space, (ii) plans to occupy within 3 years some of the remaining space 
    not immediately occupied or leased long term, and (iii) plans to occupy 
    within 10 years all of the remaining space not leased long term. This 
    change will allow a business to build in a good location without having 
    to show that it will use all of the space immediately.
         Section 120.862(b) sets forth specific public policy goals 
    a CDC may use to qualify a 504 Project or support an increased amount 
    of 504 financing. Section 120.862(b)(3) lists expanding Minority 
    Enterprise development as one of the public policy goals. SBA is 
    amending Section 120.862(b)(3) to tell the reader the section in SBA's 
    regulation designating the minority groups to which the subsection 
    applies. Section 120.862(b)(7) lists as one of the public policy goals 
    the assistance of businesses affected by Federal budget reductions. SBA 
    is amending Section 120.862(b)(7) to clarify that the public policy 
    goal is to assist any eligible small business in an area affected by 
    such reductions, not only to assist those businesses that can show that 
    budget reductions adversely affected them. Therefore, if Federal budget 
    reductions adversely affected a geographic area, SBA can assist a 
    business located in or moving to that area without showing that the 
    reductions affected the particular business.
         The 1996 legislation requires SBA to charge the Borrower a 
    fee of up to 0.9375 percent on the unpaid principal balance of the loan 
    as determined at five-year anniversary intervals. SBA is amending 
    Section 120.971 of its regulations to implement this change. In 
    addition, Section 120.971(a)(3) raises the minimum servicing fee from 
    .5 percent to .625 percent.
         SBA is inserting a new Section 120.972 in its regulations 
    to implement the 1996 legislation that requires SBA to collect (i) a 
    one-time fee, equal to 50 basis points, of a Third Party Lender's 
    participation in a Project when the Third Party Lender holds a senior 
    credit position to that of SBA, and (ii) an annual fee from each CDC 
    equal to 0.125 percent of the outstanding principal balance of any 
    Debenture guaranteed by SBA after September 30, 1996. The CDC must pay 
    this fee from the servicing fees collected by the CDC and not from 
    additional fees imposed on the Borrower.
         Currently, under Section 120.921(d), any future advance by 
    a Third Party Lender greater than the outstanding balance and accrued 
    interest must be subordinated to the CDC/SBA lien unless the future 
    advance is to collect payments, maintain collateral or protect the 
    Third Party Lender's lien position on the Third Party Loan. At times, 
    SBA has been unable to realize the full benefit of its lien position, 
    despite its regulations requiring that future advances be subordinate 
    to the CDC/SBA lien. If a Third Party Lender wants to make additional 
    capital available to a 504 Borrower, it easily can do so through 
    another loan. SBA is revising subsection (d) to state that the Third 
    Party Loan cannot be open-ended as to the amount, and after completion 
    of the 504 Project, a Third Party Lender may only make a future advance 
    under the Third Party Loan to collect amounts due on the Third Party 
    Loan note, maintain collateral or protect its lien.
         SBA also has been unable to realize the full benefit of 
    its lien position because of prepayment penalties, late fees, and 
    escalated interest after default due under the Third Party Loan. 
    Accordingly, SBA is adding a new subsection (e) to Section 120.921 that 
    states that the Third Party Lender's lien is subordinate to the CDC/SBA 
    lien regarding prepayment penalties, late fees and escalated interest 
    after default due under the Third Party lien.
         When a small business defaults on a Third Party Loan, SBA 
    may choose to assume the obligations of the Borrower. The 1996 
    legislation amended the Act to ensure that when SBA assumes such 
    obligation for Projects approved after September 30, 1996, it only will 
    pay the interest rate on the note in effect immediately before the date 
    of the Borrower's default. SBA is renumbering present subsection (e) of 
    Section 120.921 of its regulations as subsection (f) and SBA is 
    revising it to state that SBA only will pay the interest rate in effect 
    immediately before the date of the Borrower's default regarding a 
    Project approved after September 30, 1996.
         SBA is amending Section 120.802 to clarify the definition 
    of a Third Party Loan, and Section 120.801(c)(3) to reflect that 
    definition.
         Currently, Section 120.870(c)(1) of SBA's regulations 
    requires the term of a lease of the Project premises to be at least 
    equal to the term of the Debenture. However, this may not be necessary 
    if the Project is not a structure, but consists only of machinery and 
    equipment. Therefore, SBA is deleting machinery and equipment from the 
    definition to clarify that the length of a lease for machinery and 
    equipment is a credit issue.
    
    Changes to CDC Closing Fees
    
        Section 120.883 sets forth administrative costs that may be paid 
    with the proceeds of a loan funded by a 504 Debenture rather than out 
    of the Borrower's own resources. Section 120.971 sets forth the fees 
    that a CDC may charge the Borrower.
        Throughout the history of the 504 program, most of the services 
    required to prepare 504 loan documents and close a 504 loan have been 
    performed for CDCs, at CDC cost, by legal counsel, paralegals, and CDC 
    staff. The CDC has then charged its Borrower a fee at closing to 
    reimburse the CDC for these expenses (``CDC Closing Fee''). Although 
    this CDC Closing Fee reimburses the CDC for its own lawyers' expenses, 
    the Borrower is not considered to be paying a legal fee, since CDC 
    counsel does not represent the Borrower. The Borrower pays separately 
    the legal fees of its legal counsel.
        Under the 504 program, loan proceeds may be used to pay eligible 
    Project costs and eligible administrative costs. Eligible Project costs 
    are costs directly attributable to the Project including professional 
    fees necessary for Project services such as architecture, engineering, 
    and environmental studies. The Borrower's legal fees for Project-
    related matters such as zoning, title searches and recording fees, as 
    well as interest and points on the interim construction loan, are 
    eligible Project costs. The Borrower's legal fees
    
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    associated with the closing are not eligible Project costs.
        Eligible administrative costs are amounts the Borrower pays for 
    services connected with closing, but not directly attributable to the 
    Project itself. These include SBA's guarantee fee, the CDC's processing 
    fee, and 504 closing agent fees. The Borrower's legal fees associated 
    with the closing are not eligible administrative costs. Until March 1, 
    1996, the CDC Closing Fee was an eligible administrative cost, and, by 
    regulation, the Borrower could pay this fee out of 504 loan proceeds up 
    to a maximum of $2,500. Since then SBA has not recognized the CDC 
    Closing Fee as an eligible administrative cost, and the Borrower must 
    reimburse the CDC out of its own resources.
        CDCs, Borrowers, and SBA share a common interest in minimizing 
    legal fees to reduce costs to the Borrower. During the period before 
    March 1, 1996, some in the 504 industry felt that SBA's regulation 
    influenced the market rate for legal fees and other miscellaneous 
    expenses associated with 504 Closings. They argued that attorney fees 
    charged to CDCs by CDC counsel were artificially high because the CDC 
    Closing Fee was an eligible administrative cost financed out of the 
    loan proceeds. They further argued that the reference in the regulation 
    to a $2,500 limitation established a minimum base for the attorney 
    fees.
        SBA received 15 comments concerning these issues during the comment 
    period following publication of proposed rule changes on December 15, 
    1995. Most of them supported keeping the CDC Closing Fee as an eligible 
    administrative cost. SBA believed, however, that the marketplace should 
    determine the legal expenses associated with the 504 Closing and that 
    there was some merit in the argument that the eligibility of the CDC 
    Closing Fee as an administrative cost resulted in higher attorney fees. 
    Despite the opposition expressed in most of the comments, SBA decided 
    to exclude the CDC Closing Fee from eligible administrative costs and 
    eliminated the $2,500 reference in its final rule dated January 31, 
    1996.
        SBA expected that these regulatory changes would reduce attorney 
    fees. It also anticipated downward competitive pressure on such fees as 
    more attorneys became designated to perform expedited 504 loan 
    closings.
        CDCs have been closing loans under the new rules for over two 
    years. Approximately 140 attorneys are enrolled as designated closing 
    attorneys and more than 50 percent of all 504 loans close under the 
    expedited process. Yet fees associated with 504 closings charged to 
    CDCs by CDC counsel do not appear to have decreased.
        Legislation enacted since the rule became effective has imposed 
    additional fees upon Borrowers. Industry representatives indicate that 
    the combination of increased fees and the inability to pay CDC Closing 
    Fees out of the Debenture proceeds has reduced small businesses access 
    to the 504 program. Because the fees now are not eligible 
    administrative costs, they must be paid by Borrowers from other 
    resources. Not all Borrowers can afford to pay these costs without use 
    of the Debenture proceeds.
        To assist small businesses, SBA is amending Section 120.883 to make 
    CDC Closing Fees eligible administrative costs up to a maximum of 
    $2,500 per Closing. To conform Section 120.884, which lists ineligible 
    costs for 504 loans, to the change in Section 120.883, SBA is deleting 
    the reference to closing legal fees in Section 120.884.
        SBA received one comment asking SBA to clarify that $2,500 is not 
    the maximum CDC closing fee that a CDC may charge, but only the maximum 
    amount that may be paid out of the debenture proceeds as an eligible 
    administrative cost. SBA believes the text of Section 120.883 is clear, 
    and declines to make any change in the proposed rule. Under Section 
    120.971(a)(2), a CDC may charge a borrower a reasonable CDC closing 
    fee. Under Section 120.883, up to $2,500 is eligible to be paid out of 
    the debenture proceeds.
    
    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 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 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. 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, this Rule will 
    affect only half of the CDCs. Thus, the changes to the program in the 
    final rule, including the changes to the Closing Fee provisions and the 
    changes implementing P.L. 104-208 and P.L. 105-135 will not have a 
    significant impact on a substantial number of small businesses.
        SBA certifies that this 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 
    final rule has no federalism implications warranting preparation of a 
    Federalism Assessment.
        For purposes of Executive Order 12778, SBA certifies that this 
    final rule is drafted, to the extent practicable, to follow with the 
    standards set forth in section 2 of that Order.
    
    List of Subjects in 13 CFR Part 120
    
        Loan programs--business, Small businesses.
        For the reasons set forth in the preamble, SBA amends 13 CFR part 
    120 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. In Sec. 120.10, add a new definition as follows:
    
    
    Sec. 120.10  Definitions.
    
    * * * * *
        Rentable Property is the total square footage of all buildings or 
    facilities used for business operations.
    * * * * *
        3. Amend Sec. 120.111 by revising the first sentence to read as 
    follows:
    
    
    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 one or more Operating 
    Companies for conducting the Operating Company's business (references 
    to Operating Company in paragraphs (a) and (b) of this section mean 
    each Operating Company).
    * * * * *
        4. Revise Sec. 120.131 to read as follows:
    
    
    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
    
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    Borrower may lease up to 33 percent of the Rentable Property for a 
    short term to any third party if reasonable growth projections show 
    that the Borrower will need additional space within three years. If the 
    Borrower is an Eligible Passive Company leasing 100 percent of the 
    Project space to one or more Operating Company, the Operating Company, 
    or Operating Companies together, may sublease up to 33 percent of the 
    Rentable Property to a third party under the same conditions. (See 
    Sec. 120.870(c) for an exception with respect to 504 Projects.)
        (b) If the SBA business loan involves the acquisition, renovation, 
    or reconstruction of an existing building, the Borrower may lease up to 
    49 percent of the Rentable Property long term. If the Borrower is an 
    Eligible Passive Company leasing 100 percent of the Project space to 
    one or more Operating Companies, the Operating Company, or Operating 
    Companies together may sublease up to 49 percent of its Rentable 
    Property to a third party under the same conditions. (For 504 loans, 
    see Sec. 120.871).
        5. Amend section 120.801 to revise the first sentence of paragraph 
    (a) and paragraph (c)(3) to read as follows:
    
    
    Sec. 120.801  How is a 504 Project financed?
    
        (a) One or more small businesses may apply for 504 financing 
    through a CDC serving the area where the 504 Project is located.* * *
    * * * * *
        (c)* * *
        (3) A Third Party Loan comprising the balance of the financing, 
    collateralized by a first lien on the Project property (see 
    Sec. 120.920).
    * * * * *
        6. Amend Sec. 120.802 to revise the definition of Third Party Loan 
    to read as follows:
    
    
    Sec. 120.802  Definitions.
    
    * * * * *
        Third Party Loan is a loan from a commercial or private lender, 
    investor, or Federal (non-SBA), State or local government source that 
    is part of the Project financing.
    * * * * *
        7. Amend Sec. 120.862 to revise the parenthetical clause in 
    paragraph (b)(3), and to revise paragraph (b)(7), to read as follows:
    
    
    Sec. 120.862  Other economic development objectives.
    
    * * * * *
        (b) Public Policy goals: * * *
        (3) * * * (See Sec. 124.105(b) for minority groups who qualify for 
    this description.)
    * * * * *
        (7) Assisting businesses in or moving to areas affected by Federal 
    budget reductions, including base closings, either because of the loss 
    of Federal contracts or the reduction in revenues in the area due to a 
    decreased Federal presence.
        8. Amend Sec. 120.870 to revise paragraph (a)(1), and add a new 
    paragraph (c), to read as follows:
    
    
    Sec. 120.870  Leasing Project Property.
    
        (a) * * *
        (1) The remaining term of the lease, including options to renew, 
    exercisable only by the lessee, equals or exceeds the term of the 
    Debenture;
    * * * * *
        (c) If the Project is for new construction, the Borrower may lease 
    long term up to 20 percent of the Rentable Property in the Project to 
    one or more tenants if the Borrower immediately occupies at least 60 
    percent of the Rentable Property, plans to occupy within three years 
    some of the remaining space not immediately occupied and not leased 
    long term, and plans to occupy all of the remaining space not leased 
    long term within ten years.
        9. Revise Sec. 120.883 to read as follows:
    
    
    Sec. 120.883  Eligible administrative costs for 504 loans.
    
        The following administrative costs are not part of Project costs, 
    but may be paid with the proceeds of the 504 loan and the Debenture 
    (see Sec. 120.971):
        (a) SBA guarantee fee;
        (b) Funding fee (to cover the cost of a public issuance of 
    securities and the Trustee);
        (c) CDC processing fee;
        (d) Borrower's out-of-pocket costs associated with the closing of 
    the 504 loan (other than legal fees);
        (e) CDC Closing Fee (see Sec. 120.971(a)(2)) up to a maximum of 
    $2,500; and
        (f) Underwriters' fee.
    
    
    Sec. 120.884  [Amended]
    
        10. Amend Sec. 120.884 to remove paragraph (e).
        11. Revise Sec. 120.910 to read as follows:
    
    
    Sec. 120.910  How much must the Borrower contribute?
    
        (a) The Borrower must contribute to the Project cash (or property 
    acceptable to SBA obtained with the cash) or land (that is part of the 
    Project Property), in an amount equal to the following percentage of 
    the Project cost, excluding administrative costs:
        (1) At least 15 percent, if the Borrower (or Operating Company if 
    the Borrower is an Eligible Passive Company) has operated for two years 
    or less;
        (2) At least 15 percent, if the Project involves the acquisition, 
    construction, conversion, or expansion of a limited or single purpose 
    building or structure;
        (3) At least 20 percent, if the Project involves conditions 
    described in paragraphs (a)(1) and (2) of this section; or
        (4) At least 10 percent, in all other circumstances.
        (b) The source of the contribution may be a CDC or any other source 
    except an SBA business loan program (see Sec. 120.913 for SBIC 
    exception).
        12. Revise Sec. 120.920 to read as follows:
    
    
    Sec. 120.920  Required participation by the Third Party Lender.
    
        (a) Amount of Third Party Loans. A Project financing must include 
    one or more Third Party Loans totaling at least as much as the 504 
    loan. However, the Third Party Loans must total at least 50 percent of 
    the total cost of the Project if:
        (1) The Borrower (or Operating Company, if the Borrower is an 
    Eligible Passive Company) has operated for two years or less, or
        (2) The Project is for the acquisition, construction, conversion or 
    expansion of a limited or single purpose asset.
        (b) Third Party Loan collateral. Third Party Loans usually are 
    collateralized by a first lien on the Project property. The SBA cannot 
    guarantee these loans.
        13. Amend Sec. 120.921 to revise paragraphs (d) and (e) and 
    redesignate them as (e) and (f), respectively, and add a new paragraph 
    (d), to read as follows:
    
    
    Sec. 120.921  Terms of Third Party loans.
    
    * * * * *
        (d) Future advances. The Third Party Loan must not be open-ended. 
    After completion of the Project, the Third Party Lender may not make 
    future advances under the Third Party Loan except expenditures to 
    collect amounts due the Third Party Loan notes, maintain collateral and 
    protect the Third Party Lender's lien position on the Third Party Loan.
        (e) Subordination. The Third Party Lender's lien will be 
    subordinate to the CDC/SBA lien regarding any prepayment penalties, 
    late fees, other default charges, and escalated interest after default 
    due under the Third Party Loan.
        (f) Escalation upon default. A Third-Party Lender may not escalate 
    the rate of interest upon default to a rate greater
    
    [[Page 2119]]
    
    than the maximum rate set forth in paragraph (b) of this section. 
    Regarding any Project that SBA approved after September 30, 1996, SBA 
    will only pay the interest rate on the note in effect before the date 
    of the Borrower's default.
        14. Amend Sec. 120.971 by revising the first sentence and removing 
    the second sentence of paragraph (a)(2), and by revising paragraphs 
    (a)(3) and (d)(2) to read as follows:
    
    
    Sec. 120.971  Allowable Fees paid by Borrower.
    
        (a) * * *
        (2) Closing fee. The CDC may charge a reasonable closing fee 
    sufficient to reimburse it for the expenses of its in-house or outside 
    legal counsel, and other miscellaneous closing costs (CDC Closing Fee). 
    * * *
        (3) Servicing fee. The CDC will charge a monthly servicing fee of 
    at least 0.625 percent per annum and no more than 2 percent per annum 
    on the unpaid balance of the loan as determined at five-year 
    anniversary intervals. A servicing fee greater than 1.5 percent in a 
    rural area and 1 percent everywhere else requires SBA's prior written 
    approval, based on evidence of substantial need. The servicing fee may 
    be paid only from loan payments received. The fees may be accrued 
    without interest and collected from the CSA when the payments are made.
    * * * * *
        (d) * * *
        (2) For loans approved by SBA after September 30, 1996, SBA charges 
    a fee of not more than 0.9375 percent annually on the unpaid principal 
    balance of the loan as determined at five-year anniversary intervals.
    * * * * *
        15. Redesignate Sec. 120.972 as Sec. 120.973, and add a new 
    Sec. 120.972 to read as follows:
    
    
    Sec. 120.972  Third Party Lender participation fee and Development 
    Company fee.
    
        (a) Participation fee. For loans approved by SBA after September 
    30, 1996, SBA must collect a one-time fee from the Third Party Lender 
    equal to 50 basis points on its total participation in a Project when 
    the Third Party Lender occupies a senior credit position to SBA in the 
    project.
        (b) Development company fee. For loans approved by SBA after 
    September 30, 1996, SBA must collect an annual fee from the CDC equal 
    to 0.125 percent of the outstanding principal balance of the debenture. 
    The fee must be paid from the servicing fees collected by the CDC and 
    cannot be paid from any additional fees imposed on the Borrowers.
    
        Dated: December 23, 1998.
    Aida Alvarez,
    Administrator.
    [FR Doc. 99-559 Filed 1-12-99; 8:45 am]
    BILLING CODE 8025-01-P
    
    
    

Document Information

Effective Date:
1/13/1999
Published:
01/13/1999
Department:
Small Business Administration
Entry Type:
Rule
Action:
Final rule.
Document Number:
99-559
Dates:
This rule is effective on January 13, 1999.
Pages:
2115-2119 (5 pages)
PDF File:
99-559.pdf
CFR: (16)
13 CFR 120.920)
13 CFR 120.870(c)
13 CFR 120.10
13 CFR 120.111
13 CFR 120.131
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