01-28371. Business Loans and Development Company Loans

AGENCY:

Small Business Administration (SBA).

ACTION:

Direct final rule.

SUMMARY:

Recently enacted statutory amendments require changes to SBA rules concerning loan guaranty and loan amounts, minimum guaranteed dollar amount of 7(a) loans, percentages of financing which can be guaranteed by SBA, guarantee fees paid by lenders, real estate occupancy rules, and borrower prepayment penalties. This direct final rule conforms SBA rules to the statutory provisions.

DATES:

This rule is effective December 31, 2001 without further action, unless adverse comment is received by December 14, 2001. If adverse comment is received, SBA will publish a timely withdrawal of the rule in the Federal Register.

ADDRESSES:

Send written comments to LeAnn Oliver, Deputy Associate Administrator for Financial Assistance, Office of Financial Assistance, Small Business Administration, 409 Third Street, SW, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT:

James W. Hammersley, Director, Office of Loan Programs, Office of Financial Assistance, [phone].

SUPPLEMENTARY INFORMATION:

The Small Business Reauthorization Act of 2000, Pub. L. 106-554, Tit. II-III, 114 Stat. 2763A-681 to -689 (2000 Act) became effective on December 21, 2000. This direct final rule is necessary to amend SBA regulations to incorporate the legislative changes.

Previously, SBA was authorized to guarantee no more than 80% of a loan if the gross amount of the loan was $100,000 or less, and no more than 70% of a loan over that amount. Section 202 of the 2000 Act amends the 7(a) business loan program by authorizing SBA to guarantee up to 85% of a loan if the gross amount of the loan is no more than $150,000. Under the 2000 Act, the maximum SBA guaranty on a loan greater than $150,000 is 75%. To reflect these changes, SBA is amending § 120.210 of the regulations.

Section 203 of the 2000 Act increases the maximum amount that SBA may guarantee to a single borrower from $750,000 to $1 million. Section 203 provides that the gross amount of any SBA guaranteed loan can not exceed $2 million. Previously, there was no limit on the maximum gross loan amount. SBA is amending § 120.151 of its regulations to implement these changes.

Section 205 of the 2000 Act imposes a prepayment penalty on some borrowers with respect to certain SBA 7(a) guaranteed loans. A prepayment penalty applies if a prepaid loan has a maturity of not less than 15 years, the prepayment is voluntary, the amount of prepayment in the aggregate in any calendar year is more than 25% of the outstanding balance of the loan, and the prepayment is made within the first three years of the initial disbursement of the loan proceeds. The prepayment penalty is paid to SBA and applies to the full amount of the prepayment, not only to the guaranteed portion of the prepayment, as follows: if a borrower prepays during the first year after initial disbursement, the prepayment charge is 5% of the amount of the prepayment; if a borrower prepays during the second year after initial disbursement, the prepayment charge is 3% of the amount of the prepayment; and if a borrower prepays during the third year after initial disbursement, the prepayment charge is 1% of the amount of the prepayment. SBA is adding a new § 120.223 to its regulations to reflect this statutory amendment.

Section 206 of the 2000 Act simplifies the calculation of the guaranty fee payable to SBA by a participating lender. This provision does not change the ability of a lender to pass this fee on to the borrower. Under the new simplified calculation: for all loans with a maturity of over 12 months, if the total loan amount is $150,000 or less, a lender must pay a guaranty fee equal to 2% of the SBA guaranteed portion, however, the lender may retain 25% of the fee (50 basis points). In addition, for all loans with a maturity of over 12 months, if the total loan amount is more than $150,000, but not more than $700,000, a lender must pay a guaranty fee of 3% of the SBA guaranteed portion, and if the total amount is more than $700,000, a lender must pay a guaranty fee equal to 3.5% of the SBA guaranteed portion. SBA is revising § 120.220 to implement these provisions in narrative form replacing the current chart.

Section 207 of the 2000 Act added section 7(a)(28) to the Small Business Act with respect to the ability of a borrower in the 7(a) business loan program to lease out a portion of a building constructed with the proceeds of a guaranteed loan. Borrowers under the 7(a) business loan program will now be treated the same as borrowers under SBA's 504 program, established under sections 501 through 510 of the Small Business Investment Act (SBI Act). Specifically, when the use of proceeds is for new construction, section 7(a)(28) allows a 7(a) borrower to permanently lease to one or more tenants not more than 20 percent of any property constructed with the proceeds of a 7(a) guaranteed loan, if the borrower permanently occupies and uses not less than 60 percent of the total space at the outset.

To reflect this statutory change, SBA is revising section 120.131 of its regulations to cover the leasing of space in new and existing buildings in both the 7(a) and 504 programs. This direct final rule incorporates sections 502(4) and 502(5) of the SBI Act, section 7(a)(28) of the Small Business Act, and existing sections 120.131 and 120.870(c) of SBA's regulations. Under each of the subsections to section 120.131, if a borrower is an eligible passive company which leases 100 percent of the space to one or more operating companies, the operating company, or operating companies together, must follow the rules set forth in the respective subsection. As a result, SBA is revising section 120.870(c), which formerly provided leasing rules only for the 504 program, so that it merely references section 120.131.

Section 120.131(a), as revised, would permit a borrower to use SBA financing to construct a new building if it planned to use no less than 67 percent of the space. It could lease out 33 percent of the building if it planned to occupy and use within three years some of the space leased short term and use within ten years all of the space leased short term.

Section 120.131(b), as revised, would cover the construction of a new building financed with 7(a) or 504 financing. A borrower would be authorized to lease long term up to 20 percent of the space to one or more tenants if it permanently occupies and uses no less than 60 percent of the space. It would have to plan to permanently occupy and use within three years some of the remaining space not immediately occupied and not leased long term, and to plan to use within ten years all of the remaining space not leased long term.

Section 120.131(c), as revised, would apply if SBA financing under the 7(a) or 504 program would be used for the acquisition, renovation or reconstruction of an existing building. A borrower would be authorized to lease up to forty-nine percent of the space long term if it permanently occupies and uses no less than fifty-one percent of the space.

Section 209 of the 2000 Act allows the SBA guaranteed portions of export working capital loans to be sold in the secondary market. The provision accomplishes this by eliminating, for export working capital program (EWCP) loans only, the requirement that a loan be fully disbursed before it can be sold in the secondary market. Any other SBA guaranteed loan made under the agency's 7(a) business loan program still must be fully disbursed before a lender can sell the guaranteed portion in the secondary market. In making this change for EWCP loans, Congress recognized the uniqueness of the revolving feature of such loans. SBA is amending § 120.613(b) to reflect only this statutory change. Other provisions concerning export working capital loans remain the same.

Section 302 of the 2000 Act adds “women-owned business development” to the statutory list of public policy goals of the 504 program. SBA interprets women-owned business development to mean assisting small businesses owned and controlled by women. This interpretation is consistent with SBA's statutory authority to assist small businesses owned and controlled by women as set forth in section 29 of the Small Business Act (15 U.S.C. 656). Section 3(n) of the Small Business Act (15 U.S.C. 632(q)) defines a business “owned and controlled by women.” SBA is amending the public policy goals in § 120.862(b) to reflect this change.

SBA is changing the reference to “Minority Business Development (see § 124.105(b) for minority groups that qualify for this description)” in § 120.862(b) to “socially and economically disadvantaged persons as defined in §§ 124.103-124.104 of these regulations.” SBA no longer defines “minority” in its regulations, but instead references “socially and economically disadvantaged persons” in § 124.103 of its regulations. When Congress used the term “minority” in section 501(d)(3)(C) of the SBI Act (15 U.S.C. 695(d)(3)(C)), SBA equates that to “socially and economically disadvantaged persons” and that is the term SBA uses in § 120.862(b)(3). The cross-reference to §§ 124.103-.104 will provide the public a definition of “socially and economically disadvantaged.” SBA is amending the public policy goals in § 120.862(b) to reflect this change. This is consistent with § 124.101 of SBA's regulations which requires a small business to be “unconditionally owned and controlled” by one or more socially and economically disadvantaged individuals.

The Veterans Entrepreneurship and Small Business Development Act of 1999, Pub. L. 106-50, 113 Stat. 236 (August 17, 1999) added “expansion of small business concerns owned and controlled by veterans as defined in Section 3(q) of the Small Business Act (15 U.S.C. 632(q)) especially service-disabled veterans, as defined in such section 3(q).” Accordingly, SBA is adding businesses owned and controlled by veterans (especially service-disabled veterans) to the public policy goal set forth in § 120.862(b)(3) in order to comply with this 1999 statute.

Section 303 of the 2000 Act increases the maximum amount the SBA may guarantee to a single identifiable small business concern borrower under the 504 program from $750,000 to $1 million. The provision also increases from $1 million to $1.3 million the maximum amount of loans that meet the criteria of 15 U.S.C. 695(d)(3), expressed as the public policy goals provided in proposed § 120.862(b). SBA is making these changes in § 120.931.

Section 305 of the 2000 Act makes permanent the Premier Certified Lenders Program (PCLP), formerly a pilot program. SBA is amending § 120.845 to reflect this statutory change. SBA will issue a proposed rule in the near future setting forth requirements for CDCs desiring to participate in PCLP.

Section 306 of the 2000 Act amends Section 508 of the SBI Act (15 U.S.C. 697e), which relates to SBA's Premier Certified Lenders Program (PCLP). Section 306 requires that, if upon default in repayment, SBA acquires a loan guaranteed under this section (a PCLP loan) and identifies such loan for inclusion in a bulk asset sale of defaulted or repurchased loans or other financings, it shall give prior notice to any CDC which has a contingent liability under this section. Under SBA regulations, only a Premier CDC can make a PCLP loan and its contingent liability relates to its responsibility to reimburse SBA for 10 percent of any loss SBA incurs with respect to the PCLP loan. Thus, SBA makes clear in § 120.545(f) that section 306 only requires SBA to give notice to a Premier CDC which has a contingent liability with respect to a PCLP loan SBA intends to include in a bulk asset sale.

Section 306 requires that SBA give notice to the Premier CDC as soon as possible after the financing is identified, but not less than 90 days before the date SBA first makes any records on such financing available for examination by prospective purchasers prior to its offering in a package of loans for bulk sale. SBA is adding a new § 120.545(f) adding this requirement.

Compliance With Executive Orders 13132, 12988, and 12866, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 U.S.C., Ch. 35)

This regulation will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, for the purposes of Executive Order 13132, SBA determines that this direct final rule has no federalism implications warranting preparation of a federalism assessment.

The Office of Management and Budget (OMB) has determined that this rule does not constitute a “significant regulatory action” under section 3(f) of Executive Order 12866.

This action meets applicable standards set forth in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden. The action does not have retroactive or preemptive effect.

SBA has determined that this direct 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. 601-612. Most of the provisions of the rule simply conform the rule to statutory provisions amending the SBA 7(a) and CDC lending programs. This rule imposes no new requirements on these small entities.

SBA has determined that this direct final rule does not impose additional reporting or recordkeeping requirements under the Paperwork Reduction Act, 44 U.S.C., chapter 35.

List of Subjects in 13 CFR Part 120

• Loan programs—business
• Small businesses

For the reasons set forth above, SBA is amending 13 CFR part 120 as follows:

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

Authority: 15 U.S.C. 634(b)(6), 636(a) and (h), 696(3), and 697(a)(2).

2. Revise § 120.131 to read as follows:

§ 120.131

Leasing part of new construction or existing building to another business.

(a) If the SBA financing (whether 7(a) or 504) is for the construction of a new building, a Borrower may lease short term up to 33 percent of the Rentable Property to one or more tenants if the Borrower permanently occupies and uses no less than 67 percent of the Rentable Property, plans to permanently occupy and use within three years some of the space leased short term and plans to permanently occupy and use within ten years all of the space leased short term. If the Borrower is an Eligible Passive Company which leases 100 percent of new building's space to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph.

(b) If the SBA financing (whether 7(a) or 504) is for the construction of a new building, a Borrower may lease long term up to 20 percent of the Rentable Property to one or more tenants if the Borrower permanently occupies and uses no less than 60 percent of the Rentable Property, plans to permanently occupy and use within three years some of the remaining space not immediately occupied and not leased long term, and plans to permanently occupy and use within ten years all of the remaining space not leased long term. If the Borrower is an Eligible Passive Company which leases 100 percent of the new building's space to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph.

(c) If the SBA financing (whether 7(a) or 504) is for 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 permanently occupies and uses no less than 51 percent of the Rentable Property. If the Borrower is an Eligible Passive Company which leases 100 percent of the space of the existing building to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph.

3. Remove the first sentence of § 120.151 and all in its place two new sentences to read as follows:

§ 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 § 121.103 of this chapter, must not exceed a guaranty amount of $1,000,000, except as otherwise authorized by statute for a specific program. SBA is authorized to guarantee portions of loans with a gross loan amount of $2,000,000 or less.

* * * * *

4. Revise the third and fourth sentences of § 120.210 to read as follows:

§ 120.210

What percentage of a loan may SBA guarantee?

* * * * *

Effective December 21, 2000, loans up to $150,000 may receive a maximum guaranty of 85 percent. Loans more than $150,000 may receive a maximum guaranty of 75 percent, except as otherwise authorized by law.

5. Amend § 120.220 by adding an introductory paragraph, redesignating paragraphs (b) and (c) as (e) and (f), removing the chart in paragraph (a), revising paragraph (a), and adding new paragraphs (b), (c), and (d) to read as follows:

§ 120.220

Fees that Lender pays SBA.

A Lender must pay a guaranty fee to SBA for each loan it makes. Payment of the guaranty fee by the Lender when due to SBA is a prerequisite for SBA's guaranty. Nonpayment of a guaranty fee relieves SBA of liability in the event of loan default. Acceptance of the guaranty fee by SBA does not waive any right of SBA arising from a Lender's negligence, misconduct or violation of any provision of this part, the guaranty agreement, or the loan authorization.

(a) Amount of guaranty fee. For a loan with a maturity of twelve (12) months or less, the guaranty fee which the Lender must pay to SBA is one-quarter (1/4) of one percent of the guaranteed portion of the loan. For a loan with a maturity of more than twelve (12) months, the guaranty fee is:

(1) 2 percent of the guaranteed portion of the loan if the total amount of the loan is not more than $150,000,

(2) 3 percent of the guaranteed portion of a loan if the total amount is more than $150,000 but not more than $700,000, and

(3) 3.5 percent of the guaranteed portion of a loan if the total amount is more than $700,000.

(b) When the guaranty fee is payable. For a loan with a maturity of twelve (12) months or less, the Lender must pay the guaranty fee to SBA with its application for a guaranty. The Lender may charge the Borrower for the fee when the loan is approved by SBA. For a loan with a maturity in excess of twelve (12) months, the lender must pay the guaranty fee to SBA within 90 days after SBA gives its loan approval. The Lender may charge the Borrower for the fee after the Lender has made the first disbursement of the loan. The Borrower may use the loan proceeds to pay the guaranty fee. However, the first disbursement must not be made solely or primarily to pay the guaranty fee.

(c) Refund of guaranty fee. For a loan with a maturity of twelve (12) months or less, SBA will refund the guaranty fee if the loan application is withdrawn prior to approval by SBA; if the SBA declines to guarantee the loan; or if SBA changes the Lender's loan terms and then approves the loan, but SBA's modified terms are unacceptable to the Lender. In that case, the Lender must request a refund in writing within 30 calendar days of SBA's approval. For a loan with a maturity of more than twelve (12) months, SBA will refund the guaranty fee if the Lender has not made any disbursement and the lender requests in writing the refund and cancellation of the SBA guaranty.

(d) Lender's retention of portion of guaranty fee. With respect to a loan with a maturity of more than twelve (12) months, where the total loan amount is no more than $150,000, a Lender may retain not more than 25 percent of the guaranty fee (50 basis points).

* * * * *

6. Add a new § 120.223 to subpart B to read as follows:

§ 120.223

Prepayment penalty fee payable to SBA by Borrower.

With respect to an SBA guaranteed loan which has a maturity of not less than 15 years, when, during the first three years after the first disbursement of a loan, borrower makes a voluntary prepayment (or several prepayments in the aggregate) in any calendar year which is more than 25 percent of the outstanding balance of the loan, the following prepayment penalty fees apply:

(a) If the prepayment is made during the first year after first disbursement, the charge is 5% of the total amount of the prepayment;

(b) If the prepayment is made during the second year after first disbursement, the charge is 3 percent of the total amount of the prepayment; and

(c) If the prepayment is made during the third year after first disbursement, the charge is 1 percent of the total amount of the prepayment.

7. Revise § 120.613(b) to read as follows:

§ 120.613

Secondary Participation Guarantee Agreement.

* * * * *

(b) Except for export working capital loans, disburse to the Borrower the full amount of the loan; and

* * * * *

8. Revise the first sentence of the introductory paragraph of § 120.845 and remove paragraph (h) to read as follows:

§ 120.845

Premier Certified Lenders Program (PCLP).

The SBA may designate a CDC a Premier Certified Lender (“Premier CDC”), and authorize it to approve, close, service, foreclose, litigate, and liquidate 504 loans subject to SBA regulations, procedures, and policies. * * *

* * * * *

9. Revise § 120.862(b)(3) to read as follows:

§ 120.862

Other economic development objectives.

* * * * *

(b) * * *

(3) Expansion of small businesses owned and controlled by women, socially and economically disadvantaged persons as defined in §§ 124.103 and 124.104 of this chapter, or veterans (especially service-disabled veterans) as defined in the Small Business Act (15 U.S.C. 632 (q)); * * *

10. Revise § 120.870(c) to read as follows:

§ 120.870

Leasing Project Property

* * * * *

(c) The leasing requirements for business loans in § 120.131 apply to 504 loans.

11. Revise § 120.931 to read as follows:

§ 120.931

What is the statutory limit for total loans to a Borrower?

The outstanding balance of all SBA financial assistance to a single Borrower, including the Borrower's affiliates as defined in § 121.103 of this chapter, must not exceed $1,000,000 ($1,300,000 if one or more of the public policy goals enumerated in § 120.862(b) applies to the project) except as otherwise authorized by statute for a specific program.

Dated: November 5, 2001.

Hector V. Barreto,

Administrator.