[Federal Register Volume 60, Number 241 (Friday, December 15, 1995)]
[Proposed Rules]
[Pages 64356-64401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30327]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 /
Proposed Rules
[[Page 64356]]
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 108, 116, 120, 122, 131
Business Loan Programs
AGENCY: Small Business Administration (SBA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: In response to President Clinton's government-wide regulatory
review directive, SBA has completed a page-by-page and line-by-line
review of all of its existing regulations. SBA determined that it could
eliminate some regulations and consolidate, clarify, and simplify the
remainder. This proposed rule consolidates five current CFR parts into
one Part to be known as Part 120. The surviving Part 120 covers
virtually all policies and regulations, other than size standards,
applicable to SBA's business (non-disaster) loan programs. Almost all
provisions have been reworded, renumbered, and relocated. There are a
few new or revised policies. Several sections have been deleted.
However, most of the revisions merely streamline and clarify the
regulations and do not represent substantive change.
DATES: Comments must be submitted on or before January 16, 1996.
ADDRESSES: Address written comments to David R. Kohler, Associate
General Counsel for General Law, (120) Small Business Administration,
409 3rd Street S.W., Washington, D.C. 20416.
FOR FURTHER INFORMATION CONTACT: Ronald Matzner, Associate Deputy
General Counsel; Office of General Counsel, at (202) 205-6882.
SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton directed
all federal agencies to conduct a page-by-page, line-by-line review of
their existing regulations to determine which could be eliminated or
streamlined. The President's directive complemented SBA's ongoing
reinvention effort, which had already targeted portions of the business
loan programs for streamlining and simplification. From its review of
its business loan programs, SBA is proposing to eliminate many pages of
business loan regulations and consolidate and simplify the remainder.
The proposed rule combines Parts 108, 116, 120, 122 and 131 of 13
CFR into one new Part to be known as Part 120. The new Part 120 will
regulate all of SBA's non-disaster financial assistance to small
businesses under its general business loan program (``7(a) loans''),
its microloan demonstration program (``Microloans''), and its
development company program (``504 loans'').
Many repetitive and overlapping sections from the current
regulations will be eliminated. The remaining provisions will be easy
to find and easy to understand. Formerly, provisions applicable to a
business loan program were often located in different Parts. Sometimes
unintended differences developed between the loan programs in the
interpretation or implementation of similar program policies because of
minor inconsistencies in the language of the provisions in the several
Parts. These inconsistencies have been eliminated.
In the proposed rule, the basic requirements that apply to all of
the business loan programs are located in subpart A. These include
elements currently found in portions of Parts 108, 116, and 120.
Policies specific to a particular program are in the separate subpart
applying to that program. Rules specific to 7(a) loans will be in
subpart B and include elements currently in portions of Parts 116, 120,
and 122. Regulations applying to SBA's special purpose loans currently
in Part 122 and a portion of Part 116 will be in subpart C. Subparts D,
E, and F will contain rules regarding lenders, program administration,
and the secondary market currently found primarily in Part 120. The
loan moratorium provisions presently in Part 131 will also be in
subpart E. Subpart G will contain rules specific to Microloans
currently in Part 122. Finally, regulations applying only to 504 loans
currently located in Part 108 will be in subpart H. The following chart
summarizes the proposed rule:
------------------------------------------------------------------------
Subpart Subject matter covered Section numbers
------------------------------------------------------------------------
Introduction............ Overview of Part 120; 120.1 to 120.99.
definitions.
A....................... Policies applicable to 120.100 to 120.199.
all business loans.
B....................... Loanmaking policy 120.200 to 120.299.
specific to
Guarantees and Direct
7(a) Loans.
C....................... Special Purpose Loans. 120.300 to 120.399.
D....................... Lenders............... 120.400 to 120.499.
E....................... Loan Administration... 120.500 to 120.599.
F....................... Secondary Market...... 120.600 to 120.699.
G....................... Microloan 120.700 to 120.799.
Demonstration Program.
H....................... Development Company 120.800 to 120.899.
Loan Program (504).
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The most noticeable change in the proposed regulation is in the
format. The rule is written in a ``user-friendly'', ``plain-language''
style. Provisions have been grouped in logical sequences. Descriptive
headings make it easier to find sections. Hyphenated section numbers
are no longer used. Questions and answers are sometimes used. Wherever
possible, ordinary language is used instead of ``government-speak''.
SBA's intent was to write regulations that provide easy-to-
comprehend notice of the general content of a policy, rather than
detailed information explaining or expounding upon that policy. Much
explanatory material currently in the regulations and used primarily by
SBA personnel to implement SBA's programs has been eliminated from the
proposed rule, but is available to the public and may be found in SBA
policy guidances, Standard Operating Procedures (``SOPs''), and other
SBA materials.
Most of the revisions do not represent policy changes. In many
cases, the wording of the regulation has been changed to conform to
actual conduct. Although SBA is not aware of any instances, SBA
requests comments regarding any inadvertent substantive changes which
may have been caused by rewording and format changes.
[[Page 64357]]
There are a few substantial policy changes in the proposed rule,
however. For example, the ``alter ego'' rule has been completely
revised making more Passive Companies eligible for financial
assistance, and new provisions are being proposed allowing Certified
Development Companies (``CDCs'') to expand into other areas not being
adequately serviced by the existing CDCs in those areas. These and
other substantive policies are explained in detail below in the section
by section analysis.
Comments to this proposed rule are invited, including suggestions
for further clarification and streamlining. Send them to the person and
address noted above, within the time specified.
Each subpart is addressed separately below. Conversion tables are
provided detailing all deletions, consolidations, relocations, and
policy changes. Immediately below is a chart showing the location of
surviving material by Parts.
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Former part New section
# Subject matter New 120 subpart number(s)
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108........ Development Company H................... 120.800-899
Loans.
116........ Subpart A--Veterans. N/A................. 120.104
116........ Subpart B--Flood N/A................. 120.170
Insurance.
116........ Subpart C--Lead- N/A................. 120.173
based Paint.
116........ Subpart D-- N/A................. 120.172
Floodplain
Management and
Woodlands
Protection.
116........ Subpart E--Coastal N/A................. 120.175
Barrier Resources
Act.
120........ Subpart--General; Dispersed in Intro., 120.1
Subpart A--Loan- Subpart A, Subpart
Making Policy. B..
120........ Subpart B--Loan Subpart E........... 120.500-599
Administration.
120........ Subpart C--Loan Subpart D........... ...............
Participants.
120........ Subpart D........... Subpart D........... ...............
120........ Subpart E........... Subpart D........... ...............
120........ Subpart F........... Subpart F........... ...............
120........ Subpart G........... Subpart F........... ...............
122........ Subpart A--General Dispersed in ...............
Provisions. Introduction,
Subpart A, Subpart
B.
122........ Subpart B--Special Subpart C........... ...............
Purpose Loans.
131........ Loan Moratorium..... Subpart E........... 120.532-536
------------------------------------------------------------------------
Definitions applicable to all business loans are located in
Sec. 120.10, combining separate definitions previously in Parts 108 and
120. Nearly all have been reworded. Some definitions have been added,
and some have been eliminated because they were redundant or were
incorporated into the text. Of particular note is the definition of
``Associate,'' which was broadened. Conversely, the definition of
``close relative'' was limited to the closest family relationship. The
net effect of the changes is to pinpoint more effectively the
individuals subject to the ethical requirements and conflict of
interest prohibitions of the regulations. Terms which are defined in
the proposed rule are capitalized in this preamble for consistency. In
addition, references to SBA Regional offices and officers have been
eliminated and usually, but not always, replaced with a reference to
District Director because of SBA's recent restructuring.
A detailed listing of changes specific to each subpart follows.
120 Subpart A and B--General Loan Policy and Guaranteed and Direct 7(a)
Loans
The following is a conversion table for Subparts A and B:
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Action(s) (Note: all Extent of policy change,
Former section number New part 120 number sections were renumbered if any; comments on
for loan provisions and moved, or deleted) action(s)
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116.1-116.3....................... 120.104.............. Revised; Subpart was Minor policy change;
split; provisions moved explanatory material and
to program Parts. definitions will be in
SOP or other policy
material.
116.10-116.12..................... 120.170.............. Revised; provisions No policy change;
condensed. explanatory material
will be in SOP or other
policy material.
116.20-116.23..................... 120.173.............. Revised; provisions No policy change;
condensed. explanatory material
will be in SOP or other
policy material.
116.30-116.35..................... 120.172.............. Revised; provisions No policy change;
condensed. explanatory material
will be in SOP or other
policy material.
116.40-116.41..................... 120.175.............. Revised; provisions No policy change.
condensed.
116 Appendix A.................... N/A.................. Deleted................... No policy change.
Material no longer
needed.
116 Appendix B.................... N/A.................. Deleted................... No policy change.
Material no longer
needed.
120.1-1........................... 120.1................ Revised; some deletion; No policy change. Some
material moved. explanatory material no
longer valid.
120.1-2........................... 120.4................ Revised................... No policy change.
120.1-3........................... 120.180.............. Revised................... No policy change.
120.1-4........................... N/A.................. Deleted. Unnecessary...... No policy change.
120.2............................. 120.10............... Rewritten................. No policy change. New
definitions are added;
an owner is now
considered an
``Associate.''
120.2-1........................... 120.1................ Rewritten................. No policy change.
120.2-2........................... 120.10............... Revised................... See Policy Note above.
120.2-3........................... N/A.................. Deleted................... No policy change.
Definition will no
longer be used.
[[Page 64358]]
120.2-4........................... 120.10............... Revised................... Minor policy change. This
definition has been
dropped, but sub-
definitions were
modified and included
elsewhere.
120.2-5........................... 120.10............... Revised................... Minor policy change.
Definition of Lending
Institution was dropped.
120.2-6........................... 120.10............... Revised................... Minor policy change. Both
definitions were
dropped.
120.2-7........................... N/A.................. Deleted................... Minor policy change.
Definition was dropped,
as no longer used.
120.2-8........................... 120.470.............. Rewritten................. No policy change.
120.3-1........................... 120.2................ Rewritten................. No policy change.
120.3-2........................... 120.2(a)............. Rewritten................. No policy change.
120.3-3........................... 120.2................ Rewritten................. No policy change.
120.3-4........................... 120.101.............. Consolidated with 120.103- No policy change.
1.
120.100........................... N/A.................. Deleted................... No policy change. Section
not needed.
120.101-1(a)...................... 120.100(d)........... Rewritten................. No policy change.
120.101-1(b)...................... 120.103.............. Rewritten................. No policy change.
120.101-1(c)...................... 120.110(j)........... Revised................... No policy change. Section
now combined with
another.
120.101-2......................... 120.110.............. Revised................... No policy change.
120.101-2(a)...................... 120.110(k)........... Revised................... Clarifies policy
regarding promotion of
religion. See Note 1,
below.
120.101-2(b)...................... 120.110(g)........... Revised................... No policy change.
explanatory material
will be in SOP or other
policy material.
120.101-2(c)...................... 120.110(h)........... Revised................... No policy change.
Needless wording was
deleted.
120.101-2(d)...................... 120.110(b)(c), Revised; new rule included Major policy changes. See
120.111. Note 2, below.
120.101-2(d) (1) through (7)...... 120.111.............. Revised; New Rule......... Major policy changes. See
Note 2, below.
120.101-2(d)...................... 120.110(g)........... Revised................... No policy change.
120.101-2(f)...................... 120.110(f)........... Rewritten................. No policy change.
120.101-2(g)...................... 120.110(m)........... Revised................... No policy change.
120.102........................... 120.120.............. Revised................... No policy change.
120.102-1......................... 120.130(f), 120.201.. Revised................... No policy change.
120.102-2......................... 120.207, 120.130(d).. Revised................... No policy change.
120.102-3......................... 120.130(a)........... Revised................... No policy change.
120.102-4......................... 120.104, 120.130(b).. Revised................... No policy change.
120.102-4(a)...................... 120.104.............. Revised................... No policy change.
120.102-4(b)...................... 120.104.............. Revised................... No policy change.
120.102-5......................... 120.130(c)........... Revised................... No policy change.
120.102-6......................... 120.202.............. Revised................... No policy change. Wording
changed to reflect
agency policy.
120.102-7......................... 120.110(i)........... Revised................... Minor policy change. See
Note 3 below.
120.102-8......................... 120.130, 120.130(e).. Revised................... No policy change.
120.102-9......................... None................. Deleted................... Minor policy change.
Provision was not used.
120.102-10, 120.102-10 (a)-(f).... 120.140, 120.110(o).. Revised; new Rule......... Major policy change. See
Note 4 below.
120.102-11........................ 120.130.............. Revised................... Minor new policy. 180-day
parameter added.
120.102-12 (a)-(d)................ 120.110(q)........... Revised................... Minor policy change. See
Note 5 below.
120.103-1(a), 120.103-1(b)........ 120.101, 120.102..... Rewritten................. Major policy change. See
Note 6 below.
120.103-2......................... 120.150.............. Revised................... No policy change.
120.103-2(a)...................... 120.150.............. Revised................... No policy change.
120.103-2(b)...................... 120.150(f)........... Rewritten................. No policy change.
120.103-2(c)...................... 120.160(a), 120.201.. Revised................... Minor policy change or
clarification. See Note
7 below.
120.103-2(d)...................... 120.160(b)........... Revised................... No policy change.
120.103-2(e)...................... 120.160(c), 120.170.. Revised................... No policy change. Though
not now specifically
mentioned in the
regulation, life
insurance may still be
required as part of
prudent lending.
120.103-2(f)...................... 120.170, 120.172-73, Revised................... No policy change.
120.175-76.
120.103-2(g)...................... 120.160(d)........... Revised................... Minor policy change--
depository plan no
longer required.
120.103-2(h)...................... 120.200.............. Revised................... No policy change.
120.103-3 (a)-(e)................. 120.193.............. Revised................... No policy change.
120.104-1 (a)-(e)................. 120.220.............. Rewritten................. No policy change.
120.104-1(f)...................... N/A.................. Deleted................... Eliminated from statute.
120.104-2(a)(1)................... N/A.................. Deleted................... No policy change; policy
will now be contained in
SOP or other policy
guidance.
[[Page 64359]]
120.104-2(a)(2)................... N/A.................. Deleted................... Major policy change;
deleted from the Act.
120.104-2(a)(3)................... N/A.................. Deleted................... Provision eliminated by
statute (and had never
been implemented by
SBA).
120.104-2(b)...................... 120.221(e)(f)........ Rewritten................. No policy change.
120.104-2(c)...................... 120.221(b)........... Rewritten................. No policy change.
120.104-2(d)...................... 120.222.............. Revised................... No policy change.
120.104-2(e)(1)................... 120.222.............. Revised................... No policy change.
120.104-2(e)(2)................... 120.221(a)........... Revised................... No policy change.
120.104-2(e)(3)................... 120.223(a), Revised................... No policy change.
120.222(e),
120.221(d).
120.104-2(e)(4)................... 120.222(c)........... Rewritten................. No policy change.
120.104-2(f)...................... 120.195.............. Rewritten................. No policy change--
Clarified that does
apply to 504 loans. See
Note 8.
120.105........................... 120.176.............. Rewritten; consolidated... No policy change. Note
that recent regulatory
additions appear in
120.171 and 174. More
guidance can be found in
SOP.
120 Appendix A.................... N/A.................. Deleted................... No policy change. Terms
of the agreement are in
effect. Agreement will
appear in SOP or other
policy material.
122.1............................. 120.1................ Combined.................. No policy change.
122.2............................. N/A.................. Deleted................... No policy change.
122.3-1........................... 120.180.............. Consolidated.............. No policy change.
122.3-2........................... N/A.................. Deleted................... No policy change.
122.4............................. 120.176.............. Consolidated.............. No policy change.
122.5-1........................... 120.101.............. Revised; combined......... No policy change.
122.5-2........................... 120.191.............. Revised................... No policy change.
122.5-3........................... 120.101, 120.190(d).. Consolidated; rewritten... No policy change.
122.5-4........................... 120.192.............. Rewritten................. No policy change.
122.5-5........................... 120.192 (definition.) Revised................... No policy change.
122.6-1(a)(b)..................... 120.212.............. Revised................... No policy change.
122.6-2........................... 120.530.............. Moved; revised............ No policy change.
122.6-3, Part 131................. 120.532-535.......... Moved; combined; revised.. No policy change.
122.7............................. 120.151.............. Rewritten................. No policy change.
122.7-1........................... 120.211(a)(b)........ Revised................... No policy change.
122.7-2........................... 120.211(c)........... Rewritten................. Reference to District
Director's authority to
make exceptions will be
in SOP.
122.7-3........................... 120.151.............. Rewritten................. No policy change.
122.7-3(a)........................ 120.210(a)........... Revised................... Minor policy change;
increase approval will
be by AA/FA.
122.7-3(b)........................ 120.210(b)........... Revised................... No policy change.
122.7-3(c)........................ 120.210(c)........... Revised................... No policy change.
122.8-1........................... 120.213(b)........... Revised................... No policy change.
122.8-2........................... 120.213(b)........... Revised................... No policy change.
122.8-3........................... 120.213(a)........... Revised................... No policy change.
122.8-4........................... 120.214.............. Rewritten................. No policy change.
122.8-4(a)........................ 120.214(a)........... Rewritten................. No policy change.
122.8-4(b)........................ 120.214(a)........... Rewritten................. No policy change.
122.8-4(c)........................ 120.214(b)........... Revised................... Clarifies that movement
in amount of loan must
equal movement in base
rate.
122.8-4(d)....................... 120.214(c)........... Moved..................... No policy change.
122.8-4(e)........................ 120.214(d)........... Moved..................... No policy change.
122.8-4(f)........................ 120.214(e)........... Moved..................... No policy change.
122.8-4(g)........................ 120.214(f)........... Rewritten................. No policy change.
122.8-4(h)........................ 120.214(g)........... Revised................... No policy change.
----------------------------------------------------------------------------------------------------------------
The following chart lists additions to Part 120:
------------------------------------------------------------------------
Section number Subject matter covered
------------------------------------------------------------------------
120.110(r)................................ Prohibition for businesses
engaged in political and
lobbying activities.
120.110(o)................................ Prohibition for businesses
engaged in pornographic or
sexually-oriented (non-
medical) activities. See
Note 1 below.
120.171................................... Compliance with Child
Support Obligations as a
condition of an SBA loan.
120.174................................... Earthquake hazards notice.
120.190................................... Where a business applies for
a loan.
120.193................................... Use of computer generated
forms.
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Note 1. SBA often receives eligibility questions from Borrowers
and Lenders. In the proposed rule, SBA has attempted to delineate
clearly and succinctly the businesses that are ineligible for SBA
financial assistance. In particular, SBA field offices, loan
applicants, Lenders, development corporations and other SBA
intermediaries have requested guidance concerning the eligibility of
businesses which may be engaged in religious activities. After
consulting with the Department of Justice, SBA proposes to provide
such guidance through these new regulations.
The present regulation states that churches and religious
organizations are ineligible for SBA financial assistance. It does
not specify
[[Page 64360]]
whether the prohibition extends to businesses principally engaged in
promoting religion through their activities. Nonetheless, such
businesses in the past have been found to be ineligible.
SBA's primary focus is to provide financial assistance to for-
profit small businesses that can contribute to job growth and
economic development in the United States. Within the limits set by
the Establishment Clause of the Constitution, SBA does not
disqualify otherwise eligible small businesses from receiving
financial assistance merely because they offer religious books,
articles, or other products for sale or because they support or
encourage moral and ethical values based upon religious beliefs. At
the same time, SBA does not make financial assistance available to
religious entities or their affiliates for use in directly promoting
or teaching religion.
The Establishment Clause of the First Amendment, which states
``Congress shall make no law respecting an establishment of
religion,'' serves as a limitation on governmental activities with
regard to religion. The Establishment Clause primarily proscribes
``sponsorship, financial support, and active involvement of the
sovereign in religious activity.'' Walz v. Tax Commission, 397 U.S.
664, 668 (1970). ``Neither a state nor the Federal Government * * *
can pass laws which aid one religion, aid all religions, or prefer
one religion over another * * * No tax in any amount, large or
small, can be levied to support any religious activities or
institutions, whatever they may be called, or whatever form they may
adopt to teach or practice religion.'' Everson v. Bd. of Educ., 330
U.S. 1, 15-16 (1947); see also Grand Rapids School Dist. v. Ball,
473 U.S. 373, 381 (1985) (quoting this language); McCollum v. Bd. of
Educ., 333 U.S. 203, 210 (1948) (same).
Under the proposed rule, SBA would not provide financial
assistance to businesses principally engaged in teaching,
instructing, counseling, or indoctrinating religion or religious
beliefs. While incidental or indirect support of religious
objectives might be permissible, SBA would not provide financial
assistance to a newspaper, broadcasting business, day care center,
or private school principally engaged in such activities.
Some of the more difficult eligibility inquiries received by SBA
field offices have involved businesses which engage in activities in
a secular setting which may be considered to be religious in nature.
The U.S. Supreme Court has held that aid used to fund specifically
religious activities in an otherwise substantially secular setting,
has the primary effect of advancing religion, and therefore violates
the Establishment Clause. Hunt v. McNair, 413 U.S. 734 (1973); Bowen
v. Kendrick, 487 U.S. 589, 613 (1988). The facts of each situation
must be carefully examined. With the above Supreme Court standard in
mind, SBA proposes to include among ineligible businesses those
principally engaged in teaching, instructing, counseling or
indoctrinating religion or religious beliefs, whether the setting is
religious or secular, because, in SBA's view, financial assistance
to such small businesses would violate the Establishment Clause.
SBA field office personnel and others also have sought guidance
on the eligibility of small businesses which sell sexually oriented
products or services, or engage in sexually oriented activities. The
present regulation is silent regarding obscene, pornographic, or
sexually oriented activities. A business engaging in any such
activity that is illegal is ineligible under Sec. 120.110(h) of this
regulation. However, SBA receives inquiries regarding businesses
engaged in activities which, while not illegal, may be considered by
the average person to be obscene or pornographic.
``Obscene'' material is not protected by the First Amendment. It
has been defined by the United States Supreme Court in the context
of a criminal case, Miller v. California, 413 U.S. 15, 24 (1973), as
follows: ``* * * whether a work which depicts or describes sexual
conduct is obscene is [determined by] whether the average person,
applying contemporary community standards, would find that the work,
taken as a whole, appeals to the prurient interest, whether the work
depicts or describes, in a patently offensive way, sexual conduct
specifically defined by the applicable state law, and whether the
work, taken as a whole, lacks serious literary, artistic, political,
or scientific value.''
Under Supreme Court precedent, ``[w]hen the government
appropriates funds to establish a program, it is entitled to define
the limits of that program.'' Rust v. Sullivan, 114 L.Ed.2d 233, 256
(1991). In implementing its programs, SBA must also follow the
Congressional mandate set forth in Section 4(d) of the Small
Business Act (15 U.S.C. 633(d)) (``the Act'') to consider the public
interest in granting or denying an application for SBA financial
assistance.
Having considered the legal precedent and the Congressional
mandate, SBA has determined that it may exclude small businesses
engaging in lawful activities of an obscene, pornographic, or
prurient sexual nature. Under the proposed rule, SBA would not
provide financial assistance to small businesses which present live
performances of a prurient sexual nature or which derive significant
gross revenue from the sale, on a regular basis, of products or
services, or the presentation of depictions or displays, of a
pornographic, obscene, or prurient sexual nature. Thus, an
establishment featuring nude dancing, or a book, magazine or video
store containing merchandise of a prurient sexual nature would not
be eligible for SBA financial assistance if the obscene,
pornographic, or prurient activity contributed to the generation of
a significant portion of the gross revenue of the business.
SBA considers this proposed rule to be consistent with its
obligation to direct its limited resources and financial assistance
to small businesses in ways which will best accomplish SBA's
mission, serve its constituency, and serve the public interest.
Applicants' First Amendment freedoms are in no way abridged. They
may still express their views, exercise their freedoms, operate
their businesses, and obtain any other aid available to them.
SBA is considering the use of a percentage of gross revenue
instead of ``significant'' in the final formulation of this rule and
requests commenters to focus particularly on the relative merits of
the two approaches and what percentage would be appropriate.
Note 2. The proposed regulation establishes a new ``Eligible
Passive Company'' rule replacing the current ``alter ego'' rule. The
new rule will be found at Sec. 120.111. An ``Eligible Passive
Company'' is defined as an entity which does not engage in regular
and continuous business activity, which leases real or personal
property to an Operating Company for use in the Operating Company's
operations. SBA generally makes business loans only to small
businesses engaged in regular business activities, and prohibits
such assistance to entities engaged in passive investment or real
estate development, or which do not engage in regular and continuous
activity as an operating business. SBA calls such entities ``passive
businesses.'' At the same time, SBA recognizes that valid business
reasons may exist for an Operating Company not to own the real
estate and fixed assets used to conduct its business. This proposed
rule would allow certain passive businesses to be eligible for SBA
assistance if that assistance is used only to acquire and/or improve
real or personal property leased to a small business and is used in
that small business' operations. The proposed rule would eliminate
certain requirements and restrictions which presently limit the use
of real estate holding entities in SBA's business-loan and
development company programs.
For purposes of these regulations, an Operating Company is
defined in section 120.100 as a small business actively currently
involved in conducting business operations or about to be located on
real property owned by an Eligible Passive Company, or using or
about to use in its business operations, personal property owned by
an Eligible Passive Company.
Many years ago, SBA agreed to assist eligible Operating
Companies seeking SBA financial assistance through their affiliated
``mirror image'' passive businesses by creating an exception for
such ``alter egos''. Subsequent modifications to the mirror image
requirement permitted variations in ownership percentages between
the operating business and the alter ego for immediate family
members. Such variances led to conflicting interpretations of the
policy, which have frustrated its original intent and confused both
the public and SBA personnel. Such variances limited the
effectiveness of the intended assistance. In addition, the variances
caused inconsistencies between the 7(a) loan program and the
development company loan program.
On February 22, 1994, SBA published (59 FR 8425) a proposed rule
(``1994 proposal'') to eliminate the conflicting interpretations and
inconsistencies and to revise the family member common ownership
threshold to extend the alter ego exception to additional passive
businesses. SBA received more than twenty detailed comments
suggesting changes in the proposal. It also has received many other
suggestions and recommendations from small business owners,
development companies, lending institutions and SBA employees at
regulatory partnership meetings and other outreach activities
conducted by SBA. After considering these comments and suggestions,
SBA has revised its thinking sufficiently to
[[Page 64361]]
warrant publication of this new proposed rule, included here as an
integral part of SBA's overall regulatory streamlining.
In its 1994 proposal, SBA suggested reducing the common
ownership threshold for any passive business and Operating Company
to 20 percent. Most of the comments suggested that, as an exception
to a ``mirror image'' requirement, a 20 percent threshold was
insufficient to support a nexus between a passive business and an
Operating Company. Some suggested that the nexus be increased to 50
percent, others to 80 percent. However, others suggested that SBA
eliminate the ``mirror image'' rule altogether. After carefully
considering all of the options, the goals and the objectives of
SBA's loan programs, SBA proposes to eliminate the present alter ego
rule, and allow such a loan whenever it essentially represents
financial assistance to an Operating Company.
Many small businesses utilize separate entities to hold the real
estate or leasehold improvements used in the operation of their
businesses. SBA now believes that an Eligible Passive Company,
without regard to its ownership interests, should be an eligible
entity for SBA financial assistance if it only uses such assistance
to acquire and/or improve real or personal property which it leases
to an Operating Company for the conduct of its operations.
SBA's new proposed ``Eligible Passive Company'' rule recognizes
that an Eligible Passive Company may be an individual, sole
proprietorship, corporation, limited liability company, an
irrevocable trust or any form of partnership. Under the current
rule, trust ownership of any part of an Eligible Passive Company is
prohibited in the SBA business loan program. The development company
program permits the use of trusts as eligible owners. In this
proposed rule (as in its 1994 proposal), SBA proposes to eliminate
the inconsistency between the 7(a) loan program and the development
company loan program. SBA believes that there is no reason to
prohibit a small business concern using the SBA's business loan
programs from taking advantage of the tax and planning benefits
which may be inherent in the use of an irrevocable trust. Trust
eligibility shall be determined by the eligibility status of the
trustor (grantor/settlor), with all donors to the trust being
presumed conclusively to have trustor status for eligibility
purposes.
SBA welcomes comments on whether use of a revocable trust should
also be permitted. While this would give Borrowers greater planning
flexibility, the trustor's reserved authority to amend the trust
might lead to fronts or other abuses. Under this proposed rule, an
Operating Company must be an eligible small business under SBA's
standards, and the proposed use of proceeds by the Eligible Passive
Company would have to be an eligible use if the Operating Company
were obtaining the financing directly. This ensures that the
Eligible Passive Company will utilize SBA's financial assistance in
the same manner as an eligible small business. As suggested by
several comments on the 1994 proposal, both the Eligible Passive
Company and the Operating Company must meet SBA's size standards (13
CFR Part 121).
In response to other comments on the 1994 proposal, the new rule
clarifies that the lease between the Eligible Passive Company and
the Operating Company must be subordinated to SBA's security
interest, mortgage or trust deed lien and the Eligible Passive
Company (as landlord) must pledge as collateral an assignment of
rents derived from the lease. The requirement for an assignment of
the lease has been eliminated, but an assignment may be required by
SBA when necessary to perfect a lien under applicable law.
Several comments urged SBA not to require the Operating Company
to be a co-Borrower on a loan to an Eligible Passive Company,
suggesting that legitimate tax and business reasons exist in many
cases for the Operating Company to be a guarantor instead of a co-
Borrower. Believing this to be a credit and business decision best
left to the discretion of SBA loan officers, the Borrower, and (in
the development company program) the development company, SBA has
provided that the Operating Company may be either a guarantor or a
co-Borrower in most cases. An exception is created for loans in the
7(a) loan programs in which working capital funding is included, in
which case the Operating Company must be a co-Borrower.
When an Operating Company applies for SBA loan assistance, each
20 percent or more ownership interest holder in the Operating
Company must guarantee the loan. Since the Operating Company will be
a co-Borrower or guarantor when an Eligible Passive Company is the
Borrower, the proposed rule would extend the same requirement to
ownership interests of both the Operating Company and the Eligible
Passive Company.
Several comments noted that it is common for an Operating
Company to need working capital when the Eligible Passive Company
applies for a loan primarily to finance the acquisition of real or
personal property. In the past, SBA has required the Eligible
Passive Company to use the loan proceeds solely to acquire and
improve property for lease to an Operating Company. Thus, two
separate SBA loans would be needed--one to the Eligible Passive
Company for the real property and the other to the Operating Company
for working capital. The commenters suggested that SBA permit
proceeds of a single loan to the Eligible Passive Company to be used
for working capital in the Operating Company. This proposed rule
adopts these suggestions for the 7(a) loan program, provided that
the Operating Company is a co-Borrower. The loan proceeds for
working capital would be allocated to the Operating Company, while
those for acquisition and improvement of property for lease to the
Operating Company would be allocated to the Eligible Passive
Business. Under this approach, small businesses would no longer
incur duplicate costs and would benefit by reduced paperwork and a
streamlined loan process.
Several comments noted that a trust, established to take
advantage of tax and planning benefits inherent in the trust form,
may have a need to engage in other activities. They argued that SBA
should not prohibit a trust which qualifies as an Eligible Passive
Company from engaging in activities other than the leasing of
property to the Operating Company. SBA agrees. Accordingly, under
this proposed rule, a trust qualifying as an Eligible Passive
Company may engage in other activities authorized under its trust
documents. The Trustee will need to certify to SBA (and provide
pertinent language from the trust document) that the Trustee has
authority to act, and that the trust has the authority to borrow
funds, pledge trust assets and lease the property to the Operating
Company. The Trustee also will need to provide SBA with a list of
all trustors and donors.
Note 3. To be eligible for SBA financial assistance, the
products and services of a business must be available to the general
public. Because the current rule refers only to recreational and
amusement enterprises, it is misleading and confusing, and is not
uniformly enforced by SBA field offices. The proposed rule clarifies
that private clubs and businesses that limit the number of members
for reasons other than capacity are ineligible for SBA financial
assistance.
Note 4. The current regulations have separate conflict-of-
interest sections for Lenders and development companies. SBA has re-
written and consolidated the sections. The prohibitions are clear
and consistent for all business loan program participants. The
proposed rule expands the categories of individuals subject to the
requirements and may encompass additional acts not specifically
enumerated.
Note 5. The prohibition against assisting a business which
previously has caused SBA to sustain a loss is currently stated
explicitly only in the 7(a) regulations, although it is applied in
all of SBA's business loan programs. Its inclusion in subpart A
clarifies that the policy applies to all business loans.
Considerable explanatory material currently in the 7(a) regulation
has been removed and will be placed in an SOP or other policy
guidance.
Note 6. SBA may provide financial assistance only if the
applicant shows that the desired credit is needed and not otherwise
available on reasonable terms. In Sec. 120.101, SBA clarifies its
present policy. The current provision, Sec. 120.103-1 uses the
language ``not otherwise available on reasonable terms'' without
indicating any factors which should be considered in determining
what is reasonable. Section 3(h) of the Act defines ``credit
elsewhere'' as the availability of credit from non-Federal sources
on reasonable terms and conditions taking into consideration the
prevailing rates and terms in the community in or near where the
concern transacts business, for similar purposes and periods of
time. SBA believes the language in section 3(h) clarifies the credit
elsewhere test and proposes to include the language in Sec. 120.101.
In addition, the current regulation provides that the certification
made by a Lender in its application for an SBA guarantee is
generally accepted as sufficient documentation that the desired
credit is unavailable to the applicant. In the proposed
Sec. 120.101, SBA clarifies and reaffirms its existing policy that
the Lender or CDC must have examined the availability of credit to
the applicant, have based its
[[Page 64362]]
certification upon that examination, and have documentation in its file
to support the certification.
In the 7(a) program, SBA often required applicant principals and
owners to use personal assets before granting financial assistance,
unless undue hardship would result. In the 504 program, SBA did not
enforce this policy and rarely required applicants to use their own
personal resources.
In this proposed rule, SBA clarifies that there is no difference
between the business loan programs regarding evidence of need. SBA
will consider the personal wealth and resources of the principals
and owners in determining an applicant's need for SBA financial
assistance in all business loan programs, and SBA may require the
principals and owners of the applicant to use their personal
resources before SBA will grant financial assistance.
Note 7. Current regulations require owners of 20 percent or more
of a business to guarantee an SBA loan. Under SBA's current SOP, SBA
may require owners of between 5 and 20 percent of a business to
guarantee a loan. Since the public is not always aware of its SOP,
SBA is including the latter policy in this proposed rule. Rather
than set an arbitrary lower limit of 5 percent (or any other
number), SBA proposes that the rule state that SBA may require
holders of interests of less than 20 percent of an applicant to
guarantee an SBA loan, when appropriate under prudent underwriting
criteria.
Note 8. The use of SBA Form 159 (Compensation Agreement) in the
504 program has been a subject of controversy for some time. The Act
requires 7(a) applicants to certify the names of and fees paid to
all professionals or other representatives engaged by the applicant
in connection with the SBA financial assistance. Current section
120.104-2(f) implements the statutory requirement. Title V of the
Small Business Investment Act, 15 U.S.C. 695 (``Title V'') does not
have a corresponding provision. Despite this, SBA, citing section
7(a)(13) of the Act, has generally extended the requirement to the
development company program. Current section 108.503-6(e) requires
the loan application submitted to SBA by a Certified Development
Company (CDC) to disclose the amount of all fees paid, the names of
the fee recipients, and a description of the services rendered. Most
SBA field offices require in 504 loan authorizations that Form 159
be submitted. Many Lenders in the 7(a) program and CDCs in the 504
Program contend that Form 159 has become a burden upon the
Borrowers, the Lenders and the CDCs. The 504 industry, in
particular, has asked SBA to eliminate the form.
President Clinton has directed Federal agencies to reduce the
paperwork burden upon the public whenever possible. However, this
requirement is contained in the Act. Therefore, SBA may not
eliminate the regulation with respect to the 7(a) program without a
statutory change. Congress has recently held hearings regarding the
disclosure of fees because of concern about the increased number of
investigations of fraud by applicant representatives. As a result,
SBA believes it is prudent to continue to require full disclosure of
all fees. Since SBA sees no reason to differentiate among the
various business loan programs regarding this issue, SBA is
proposing in this Rule to maintain the requirement for all business
loans until such time that Congress revisits the issue.
120 Subpart C--Special Purpose Loans
The proposed new Subpart C reorganizes and consolidates the current
subpart B of Part 122, ``Special Purpose Loans'' with a portion of Part
116.
In Secs. 122.51 through 122.51-6, currently known as ``Handicapped
Assistance Loans,'' the word ``Disabled'' replaces the word
``Handicapped'' wherever it appears. Section 122.60 ``Rural Loans'' is
deleted since this special program expired on September 30, 1995. The
section currently beginning at Sec. 122.61, ``Microloan Demonstration
Project,'' has been reorganized as subpart G of Part 120 to separate it
from 7(a) Special Loan Programs. There are no major substantive changes
in the remaining eleven Special Loan Programs. A new revolving credit
program--CapLines--replaces the GreenLine program and is outlined in
Sec. 120.395.
In the proposed rule, this subpart outlines the significant
policies of each program in a streamlined format while deleting
superfluous and repetitious material.
120 Subpart D--Lenders
Proposed subpart D reorganizes and consolidates current Part 120
subparts C (``Loan Participants''), D (``Preferred Lenders Program''),
and E (``Certified Lenders Program''). Sections have been grouped
together to aid the reader in locating information. There are only a
few substantive changes in subpart D.
Proposed new Sec. 120.430 states specifically that SBA may review a
Lender's records relating to SBA guaranteed loans during normal
business hours. In addition, Sec. 120.420, which is the former
Sec. 120.301-7, contains a new provision (120.420(c)) restricting the
use of SBA loans by Non-Depository Lenders.
(a) Certified Lenders Program (``CLP''). The proposed rule deletes
the definitions found now at Sec. 120.501. Some of the terms are not
used in the subpart. Others apply to the entire Part and will appear in
Sec. 120.10.
The proposed rule streamlines the procedure for obtaining CLP
status. Thus, current Sec. 120.502-1 will be deleted and replaced with
new Sec. 120.441 authorizing SBA District Directors (whose decision is
final) to approve and renew CLP Lenders. Section 120.441(c) clarifies
that CLP status applies only in the SBA office which approved that
status.
The proposed rule will eliminate current Sec. 120.502-2, which
specifies factors which SBA will consider in deciding whether a Lender
should become a CLP lender. Its replacement, Sec. 120.441(a), retains
several of the current seven considerations. SBA may consider other
factors as well.
Proposed Sec. 120.442, ``Suspension or revocation of CLP status''
is new, and follows the mechanism and procedure established for PLP
lenders.
(b) Preferred Lenders Program (``PLP''). The proposed PLP
regulations delete superfluous information and have been reorganized
into a more logical sequence. They also will reflect SBA reorganization
and program changes, including the establishment of the centralized PLP
processing office located in Sacramento, California.
The proposed rule deletes the definitions found now at
Sec. 120.401. Some of the terms are not used in the subpart. Others
apply to the entire Part and will appear in Sec. 120.10.
Current Sec. 120.402-1 describes how a Lender initially may become
a PLP Lender. Proposed Sec. 120.451(a) describes new procedures
following SBA's structural reorganization. The branch or district
office will forward its nomination of a Lender or the Lender's request
for PLP status to the loan processing center rather than to a regional
office. The district office's recommendation and the loan processing
center's recommendation are forwarded to the AA/FA who makes the final
determination. This section also provides for expansion and
recertification of PLP status by the AA/FA after a review of the PLP
Lender by SBA.
The section clarifies that if a PLP Lender is not already a CLP
Lender in a territory into which it seeks to expand its PLP status, it
will automatically obtain CLP status in the territory when it is
granted an extension of its PLP status into that territory without
approval from the District Office.
Proposed Sec. 120.451(b)(current Sec. 120.402-2) describes the
factors SBA will consider in evaluating PLP nominations. SBA has
eliminated the requirement that the Lender be a Certified Lender before
being considered as a PLP Lender.
Proposed Sec. 120.451(c) is a new provision providing that the AA/
FA will designate the ``area'' in which a PLP Lender can make PLP
loans. SBA believes that centralizing this function in the AA/FA will
result in a uniform policy and practice.
[[Page 64363]]
The proposed rule consolidates the current Sec. 120.403-1
(statutory ceiling), Sec. 120.403-5 (interest rates), and Sec. 120.403-
6(b)(fees) into Secs. 120.151, 120.213, 120.214, 120.221 and 120.222
respectively. The proposed rule deletes the current Sec. 120.403-3
(credit allocation) because it is no longer used.
The proposed rule deletes the current Sec. 120.403-6(a), which
limits the fees a PLP lender can charge if it sells the guaranteed
portion of a loan within six months of disbursement, because SBA feels
there is no need to retain a cap on this fee. It consolidates the
current Sec. 120.403-7(c) into Sec. 120.430.
The current Sec. 120.403-7 has been rewritten as the new
Sec. 120.452(a) specifying the requirements of PLP loan processing. The
section specifying the percentage of a PLP loan that SBA will guarantee
has been moved from the current Sec. 120.403-2 to Sec. 120.452(a)(3).
In proposed Sec. 120.452(b), SBA describes the new procedures for
approving a PLP loan by submitting documents to the loan processing
center, which issues an SBA loan number.
The proposed rule consolidates the current Secs. 120.404-1 through
120.405-1 concerning servicing and liquidation into proposed
Sec. 120.453, and deletes current Secs. 120.405-2 through 120.405-4
because they are redundant or adequately described in SBA's SOP.
In proposed Sec. 120.451(f), SBA has added a new provision to allow
a PLP Lender to submit a request to expand its territory to the SBA
loan processing center.
(c) Small Business Lending Companies (``SBLC''). The proposed rule
revises the SBLC regulations for clarity and to eliminate details of
the program better suited to an SOP. The sections have been renumbered,
reorganized in a more logical structure, and presented in a question
and answer format.
Finally, a provision on SBA's authority to suspend or revoke an
SBLC's license is proposed at Sec. 120.475.
120 Subpart E--Loan Administration
New subpart E proposes general loan administration rules.
Basically, these proposed rules reflect existing SBA policies. Any SBA
field office can provide more detailed guidance concerning any aspect
of these proposed rules.
Proposed Secs. 120.510 and 120.511 describe the servicing
responsibilities of the parties making loans. SBA services direct loans
that it makes without the participation of a Lender, while Lenders
service loans they make with the SBA guarantee. After SBA honors its
guarantee, the Lender generally continues to service the loan. Proposed
Sec. 120.512 describes this arrangement.
Proposed Sec. 120.513 lists the servicing actions that require the
concurrence of the Lender and the SBA because of their importance to
the effective and efficient operation of SBA's loan program. The list
includes the provisions contained in the participation agreement which
a Lender executes with SBA to allow it to make 7(a) guaranteed loans,
such as the alteration of terms and conditions of any loan instrument,
the release of collateral with a value over 20 percent of the original
amount of the loan, the acceleration of the maturity of a note, and the
initiation of litigation.
SBA has the authority to purchase the guaranteed portion of a loan
at any time, and proposed Sec. 120.520 provides that a Lender may ask
SBA to purchase the guaranteed portion when the Borrower has been
continuously in default on its installment payments to the Lender for
more than 60 days. If a Borrower cures a default (see Sec. 120.523)
before SBA purchases, the Lender's right to request purchase lapses. If
SBA honors its guarantee, it does not waive any right it may have
against the Lender because of the Lender's negligence, misconduct, or
violation of the regulations, the guarantee agreement between the
lender and SBA, or any of the loan instruments. SBA may sue to recover
the amounts paid and may assert as a basis for recovery any of the
grounds set forth in Sec. 120.524.
A Borrower's obligation to pay principal and interest continues
after SBA honors its guarantee. Proposed Sec. 120.521 prescribes that
the interest rate for which the Borrower is liable after the purchase
continues to be the rate stated in the note if it is a fixed rate note.
If a loan carries a fluctuating interest rate, the Borrower is obliged
for the rate in effect at the time of the earliest uncured default
(where there has been a default), or the rate in effect at the time
when SBA purchases (where there has been no default). This means that
no further fluctuations of interest can occur after SBA honors its
guarantee.
Proposed Sec. 120.522 provides that the interest rate for which SBA
is liable when it purchases the guaranteed portion is the rate in the
note if it is a fixed rate loan, or the rate in effect on the date of
the earliest uncured default (if a default has occurred) or when SBA
purchases (if there has been no default). The section provides that SBA
pays a Lender no more than 120 days interest from the date of a
Borrower's uncured default, plus any deferment period or time it takes
for SBA to process a request to purchase. This cut-off period
encourages a Lender to make timely demand on SBA to purchase. Because
extenuating circumstances may occur, the proposed section authorizes
SBA to extend the 120 day time period for good cause.
Proposed Sec. 120.523 defines ``earliest uncured default'' as the
date on which a Borrower fails to pay a regular installment payment
which remains unpaid for 60 days. If a Borrower makes a payment before
a Lender requests SBA to honor its guarantee, the earliest uncured
default date advances to the next unpaid installment date. This means
that if a Borrower cures early defaults, the earliest uncured default
date continues to move forward.
SBA does not have to honor its guarantee, under proposed
Sec. 120.524, if a Lender, amoungst other things, fails to make, close,
service, or liquidate an SBA guaranteed loan in a prudent fashion. The
regulation contemplates that a Lender will comply with all the
provisions of the regulations, the loan guarantee agreement it executed
with SBA, the loan authorization (which is the document SBA issues to
state that it is providing its guarantee for a specific loan request),
and other loan documents. A Lender's failure to disclose material
facts, a Lender's making material misrepresentations to SBA, or the
Lender's failure to use SBA provided forms or exact computerized
facsimile copies also justifies denial of liability under the
guarantee. Other Lender actions which would support SBA's denial of
liability on its guarantee include Lender's failure to pay the
guarantee fee, Lender's late demand on SBA to purchase, or if the
Borrower has paid the loan in full.
In order to assure the successful establishment and operation of a
Borrower, proposed Sec. 120.530 authorizes SBA to defer a Borrower's
initial payments for a stated period of time. Under proposed
Sec. 120.531, SBA could extend the maturity of a loan for up to ten
years beyond its stated maturity if the extension would aid in the
orderly liquidation of the loan. Proposed Sec. 120.532 defines
``Moratorium'' to be the period of time during which SBA assumes a
Borrower's obligation to make installment payments on a guaranteed
loan.
Under proposed Sec. 120.533, SBA could grant a Moratorium if the
business would become or remain insolvent without it; if the business
would become or remain viable with a Moratorium; if a deferment is not
available; if all the parties agree that SBA could stop making payments
at any time; if the Borrower executes a demand
[[Page 64364]]
note to repay SBA's Moratorium payments; and if SBA obtains security
which it deems necessary. These conditions supporting a Moratorium
ensure that the parties know that their obligations continue and that
SBA expects to be reimbursed for its advances under this procedure.
Proposed Sec. 120.534 allows SBA to continue a Moratorium for six
months. SBA may extend a Moratorium for up to five years if a Borrower
could demonstrate its eventual ability to repay the original note (and
the demand note required for the Moratorium). Proposed Sec. 120.535
lists the repayment terms for a Moratorium. Under this section, the
interest rate on the demand note is the same as for the guaranteed
loan; SBA will apply repayments first to accrued interest and then to
principal; and SBA may demand payment in full under the demand note or
accept a repayment schedule.
Proposed Sec. 120.540 establishes SBA's policy concerning the
liquidation of collateral. Ordinarily, SBA does not liquidate
collateral if there is any reasonable prospect that the Borrower or
guarantor (other than SBA) may repay the loan within a reasonable
period of time. Without the Borrower's consent, SBA has the authority
to sell a direct loan, convert a direct loan to a guaranteed or
immediate participation loan, or convert an immediate participation
loan to a guaranteed loan or a loan owned solely by the Lender.
Importantly, this authority enables SBA to take appropriate steps to
resolve issues and problems concerning a loan. The proposed section
also provides that SBA will generally use competitive bids or a
negotiated sale to dispose of collateral. Under the proposed section,
SBA and the Lender would share all loan payments and recoveries, all
reasonable expenses, and any security or guarantee which the Lender or
SBA may receive in connection with a loan. The proposed section
provides that guarantors of financial assistance have no rights of
contribution against SBA on a direct or guaranteed loan. The proposed
section makes clear that SBA is not a co-guarantor with any other
guarantor, and that SBA's guarantee is unique, distinctive, and of a
totally different character than the guarantees offered by other
parties.
Under applicable federal law, homestead protection for a farmer-
Borrower covers a residence and a reasonable amount of adjoining real
property (``the collateral'') that are still occupied by the farmer-
Borrower after being acquired by SBA as a result of foreclosure, a
voluntary conveyance, or conveyance to the government by a trustee in
bankruptcy. The homestead protection provisions in the proposed rules
cover SBA direct and guaranteed loans, as well as SBA disaster loans.
Proposed Sec. 120.550 specifies that a farmer-Borrower who defaults on
an SBA loan would be allowed to lease the collateral from SBA. Under
proposed Sec. 120.551, SBA must notify the farmer-Borrower of the
homestead protection rights within 30 days after SBA acquires the
property. Under the proposed rule, the farmer-Borrower has to apply to
the local SBA office for homestead protection within 90 days after SBA
acquires the property, provide evidence that the farm produces farm
income reasonable for the area and economic conditions, show that at
least 60 percent of the farmer's gross annual income came from farm or
ranch operations in at least 2 out of the last 6 years, that the
farmer-Borrower has resided on the property during the preceding 6
years, and that the farmer is personally liable for the debt. This last
point means that the SBA loan could have been made to any individual or
entity, so long as the farmer-Borrower was personally liable for the
debt.
Under proposed Sec. 120.552, the farmer, under a lease with SBA,
has to occupy the residence and pay a reasonable rent to SBA. The lease
can be for a period of up to 5 years, and can be renewed for up to
another 5 years. During the lease, or at its end, the lessee-farmer has
the right of first refusal to reacquire the homestead property under
terms and conditions no less favorable than those offered to any other
purchaser. If the sale of the homestead property is an installment
sale, the purchase agreement has to require a down payment of no less
than 20 percent of the purchase price. The option price to the lessee-
farmer must be the appraised fair market value determined by an
independent appraisal. SBA cannot demand a payment for the homestead
property that exceeds the appraised value.
Under proposed Sec. 120.553, a farmer-Borrower can appeal denial of
a homestead protection application to the AA/FA. Until a final decision
is made, the farmer would be allowed to remain on the property. If a
conflict exists between state law and the SBA homestead provisions,
state law prevails.
120 Subpart F--Secondary Market
SBA has consolidated subparts F, G, and H of Part 120 into one new
Subpart F, governing SBA's secondary market for SBA guaranteed portions
of loans. Subpart F covers central registration requirements, the
pooling and sale of SBA guaranteed portions, and the sale of individual
SBA guaranteed portions that do not comprise part of a Pool. Provisions
currently found in separate subparts have been consolidated for ease of
understanding. SBA has renumbered and reordered the resulting
provisions, but there are no substantive or policy changes.
The following is a conversion chart explaining where the current
sections of subparts F, G, and H of 120 will be placed:
------------------------------------------------------------------------
New section Old section
------------------------------------------------------------------------
120.600......................... 120.601, 120.700, 120.800.
120.601......................... 120.602, 120.702, 120. 800, 120.802.
120.610......................... 120.706 and 120.803.
120.611......................... 120.707.
120.612......................... 120.710 and 120.807.
120.613......................... 120.301-2.
120.620......................... 120.711 and 120.701.
120.621......................... 120.801.
120.630......................... 120.703.
120.631......................... 120.704.
120.640......................... 120.709 and 120.806.
120.641......................... 120.713 and 120.809.
120.642......................... 120.708.
120.643......................... 120.805.
120.644......................... 120.804.
120.645......................... 120.605,120.605-1.
120.650......................... 120.603, 120.604, 120.604-1, and
120.604-2.
120.651......................... 120.605-3.
120.652......................... 120.712 and 120.808.
120.660......................... 120.605-2, 120.705, and 120.810.
------------------------------------------------------------------------
Proposed Sec. 120.600 describes the secondary market. Section
120.601 contains definitions used in subpart F. Proposed Sec. 120.610
provides that each Certificate representing either the entire
individual guaranteed portion of an individual 7(a) guaranteed loan or
an undivided interest in a Pool consisting of the SBA guaranteed
portions of a number of 7(a) guaranteed loans (``Certificate'') must be
in registered form only. This means that there are no bearer
Certificates. The section also specifies payment terms for
Certificates.
Proposed Sec. 120.611 describes the Pools which back Pool
Certificates, including Pool characteristics and Pool Certificate
interest rates. In Sec. 120.612, SBA specifies conditions which must be
met for an SBA guaranteed portion of a loan to be eligible to back a
Certificate. Among other things, a loan must be current.
Proposed Sec. 120.613 describes a secondary participation guarantee
agreement (SPGA). Before an SPGA may be executed, the Lender must
disburse the full amount of the loan, pay SBA's guarantee fee, and give
SBA copies of the SPGA and note.
[[Page 64365]]
Proposed Sec. 120.620 describes the extent of SBA's guarantee of a
Pool Certificate. SBA guarantees the timely payment, whether or not
collected, of principal and interest, and any prepayment of principal
on the loans. SBA's guarantee to a Registered Holder in a Pool of SBA
guaranteed portions of loans is backed by the full faith and credit of
the United States.
Proposed Sec. 120.621 describes the extent of SBA's guarantee of an
individual guaranteed portion. SBA guarantees to purchase from the
Registered Holder the guaranteed portion equal to the unpaid principal
and interest, less deductions for the servicing fees of the Lender and
the fiscal and transfer agent (``FTA''). SBA does not guarantee timely
payment on individual guaranteed portions. SBA's guarantee to a
Registered Holder is unconditional and is backed by the full faith and
credit of the United States. SBA's guarantee is triggered when the
Borrower defaults on installments of principal or interest, the Lender
fails to send to the FTA any payments it received from the Borrower, or
the FTA fails to send to the Registered Holder any payments it received
from the Lender.
Proposed Sec. 120.630 specifies the qualifications that an entity
must possess to be a Pool Assembler. Among other things, the entity
must be subject to regulation by an appropriate agency, have the
financial capability to assemble acceptable guaranteed portions, and be
in good standing with SBA. In proposed Sec. 120.631, SBA specifies
reasons for suspending a Pool Assembler from the secondary market.
Proposed Sec. 120.640 describes the administration of the Pools and
individual guaranteed portions. The FTA maintains a registry of
Certificate owners. Each Pool is self-liquidating, which means that
there is no substitution of guaranteed portions of loans that are paid
off by the borrower or SBA. If SBA pays a claim under a guarantee with
respect to a Certificate, it is subrogated to the rights satisfied by
the payment. This means that SBA can take any and all steps to be
reimbursed for payments it makes. Absent an express statutory change,
no federal, state or local law can preclude or limit SBA's exercise of
its ownership rights in the portions of loans constituting the Pool
against which Certificates are issued.
Proposed Sec. 120.641 requires the Pool Assembler, Registered
Holder of a Certificate representing an individual guaranteed portion,
or any subsequent seller to disclose to the purchaser information on
the Certificate's terms, conditions, and yield. Section 120.642
specifies the documents that a Pool Assembler must deliver to the FTA
before the FTA can issue a Certificate, such as a Pool application form
and documents which evidence the guaranteed portions which comprise the
Pool. Section 120.643 specifies the documents that a seller must
provide the FTA before the FTA can issue the initial Certificate for an
individual SBA guaranteed portion, including documentation of ownership
and a copy of the note that represents the guaranteed loan.
Proposed Sec. 120.644 describes certain conditions applying to the
sale of individual guaranteed portions. Each Certificate which
represents the guaranteed portion of a single loan must be for the
entire amount of the guaranteed portion. A Lender (or its Associate)
cannot purchase the guaranteed portion of a loan which it has made.
In Sec. 120.645, SBA describes how to transfer a Certificate and
what information a seller must supply to the FTA. Transfers must comply
with Article 8 of the Uniform Commercial Code of New York State.
Under Sec. 120.650 the FTA registers, issues, transfers title to,
and redeems Certificates. Proposed Sec. 120.651 tells a Registered
Holder what information it must give to the FTA to replace a
Certificate because of loss, theft, destruction, mutilation or
defacement. Section 120.652 authorizes the FTA to collect fees approved
by SBA.
Proposed Sec. 120.660 specifies the reasons for SBA to suspend or
revoke the privilege of a lender, broker, dealer, or Registered Holder
to participate in the secondary market.
Subpart G--Microloan Demonstration Program
This proposed subpart revises, amends, and reorganizes the rules
covering the microloan demonstration program (``microloans'') currently
located in Part 122. Substantive changes include: (1) Sec. 120.708(c)
provides a clearer understanding of how SBA determines the interest
rate charged to an intermediary; (2) Sec. 120.708(e) makes it clear
that SBA loans to intermediaries are non-recourse unless an
intermediary causes a loss to SBA by fraud or negligence; and (3)
Sec. 120.710 requires an intermediary to maintain accurate and current
books and records, and to report periodically to SBA the status of its
microloan portfolio.
The following conversion chart shows where to find the current Part
122 microloan sections:
----------------------------------------------------------------------------------------------------------------
Existing section Action New section
----------------------------------------------------------------------------------------------------------------
Sec. 122.61 (a) and (b)................. Revised.......................... Sec. 120.700 (a)-(c)
Sec. 122.61-2 (a)-(c)................... Retained......................... Sec. 120.701 (a)-(c)
Sec. 122.61-2(d)........................ Revised.......................... Sec. 120.701(d)
Sec. 122.61-2 (e)-(g)................... Retained......................... Sec. 120.701 (e)-(g)
New.............................. Sec. 120.701(h)
Sec. 122.61-3(a)........................ Revised.......................... Sec. 120.700(d)
Sec. 122.61-3(b)........................ Revised.......................... Sec. 120.703
Sec. 122.61-3(c)........................ Revised.......................... Sec. 120.703(c)
Sec. 122.61-4 (a) and (b)............... Revised.......................... Sec. 120.705
Sec. 122.61-4(c)........................ Deleted.......................... ..................................
Sec. 122.61-5........................... Revised.......................... Sec. 120.704
Sec. 122.61-6 (a)-(c)................... Revised.......................... Sec. 120.707
Sec. 122.61-6(d)........................ Revised.......................... Sec. 120.707
Sec. 122.61-6(e)........................ Revised.......................... Sec. 120.707
Sec. 122.61-6(f)........................ Deleted.......................... ..................................
Sec. 122.61-7........................... Revised.......................... Sec. 120.708
Sec. 122.61-8 (a)-(c)................... Revised.......................... Sec. 120.710
Sec. 122.61-8(d)........................ Deleted.......................... Sec. 120.710
Sec. 122.61-9 (a) and (b)............... Revised.......................... Sec. 120.710
Sec. 122.61-10.......................... Retained......................... Sec. 120.712
Sec. 122.61-11(a)....................... Revised.......................... Sec. 120.712
Sec. 122.61-11(b)....................... Revised.......................... Sec. 120.702
[[Page 64366]]
Sec. 122.61-11(c)....................... Retained......................... Sec. 120.712
Sec. 122.61-12.......................... Revised.......................... Sec. 120.711
----------------------------------------------------------------------------------------------------------------
Subpart H--Development Company (504) Loan Program
This proposed rule makes current Part 108 a subpart of Part 120.
The following conversion chart details the restructuring, subsection-
by-subsection. Those sections of Part 108 applicable to all business
loans have been consolidated with the corresponding 7(a) provisions and
placed in subpart A (``Policies Applying to All Business Loans'').
Sections of Part 108 that apply only to the Development Company Loan
Program (``504 loans'') will be in this subpart H. Finally, some
sections of Part 108 have been deleted as delineated in the chart.
Part I--Section-by-Section Analysis of Part 108
----------------------------------------------------------------------------------------------------------------
Former Sec. 108 subpart Proposed action on subpart Comments on action
----------------------------------------------------------------------------------------------------------------
Sec. 108.1(a)........................ Condensed and moved to Sec. 120.800......... No policy change.
Sec. 108.1(b)........................ Condensed and moved to Sec. 120.800......... No policy change.
Sec. 108.1(c)........................ Rewritten and moved to Sec. 120.860-Sec. No policy change.
120.862.
Sec. 108.1(d)........................ Incorporated into Sec. 120.862.............. No policy change.
Sec. 108.1(e)........................ Eliminated as redundant; incorporated into No policy change;
Sec. 120.176. eliminated because
policy covered by other
parts.
Sec. 108.2........................... Definitions applying to all business loans See comments below on
are in Sec. 120.10. Those applying solely specific definitions.
to 504 loans are in Sec. 120.801. Some
terms applying only to a certain subsection
are defined in the subsection.
Sec. 108.3(a)........................ Rewritten and placed into Sec. 120.881(a). No policy change.
Definition of Substantial Increase in
Unemployment is found in Sec. 120.801.
Sec. 108.3(b)........................ Eliminated................................... Deleted because 501 and
502 programs have been
eliminated.
Sec. 108.3(c)........................ Eliminated................................... Deleted because 501 and
502 programs have been
eliminated.
Sec. 108.3(d)........................ Eliminated................................... Deleted because 501 and
502 programs have been
eliminated.
Sec. 108.4(a)........................ Eliminated................................... No change of policy; rule
eliminated because
inherent in standard
business practice.
Sec. 108.4(b)........................ Eliminated, but covered in Sec. 120.826..... No change in policy; will
be covered in SBA's
Standard Operating
Procedure (SOP) or other
policy guidance.
Sec. 108.4(c)........................ Eliminated, but covered in Sec. 120.826..... No change in policy; will
be covered in SBA's SOP
or other policy
guidance.
Sec. 108.4(d)........................ Rewritten, clarified, and broadened. Most Minor policy change: SBA
provisions consolidated with corresponding may waive prohibition on
sections of current Part 120 into proposed member of CDC Board of
Sec. 120.140. See Note 4, subparts A and B. Directors being on
Those applying only to 504 loans are in Sec. another CDC's Board.
120.855.
Sec. 108.4(e)........................ Consolidated with Sec. 108.4(d) and placed No policy change.
in Sec. 120.40. Specific examples of
conflicts of interest will be found in SOP.
Prohibition against debt refinancing is in
Sec. 120.884.
Sec. 108.4(f)........................ Eliminated................................... Consolidated into Sec.
120.176.
Sec. 108.5(a)........................ Covered in Sec. 120.826; specific No policy changes.
explanations and details in SOP.
Sec. 108.5(b)........................ Covered in Sec. 120.826; specific Miniaturized
explanations and details in SOP. reproductions of CDC
records no longer
referenced. Other
technologies now
available. Specific
details will be in SOP.
Sec. 108.5(c)........................ Condensed into Sec. 120.830(c).............. No policy change.
Sec. 108.5(d)........................ Condensed into Sec. 120.830(d) and (e)...... Policy change -means of
delivery will be
detailed in SOP.
Sec. 108.5(e)........................ Eliminated................................... Report considered
unnecessary under
Presidential directive
to reduce paperwork.
Sec. 108.5(f)........................ Eliminated................................... No policy change. Not
required as regulation.
Sec. 108.6........................... Eliminated................................... Reserved sections were
removed.
Sec. 108.7(a)........................ Consolidated in Sec. 120.140................ No policy change.
Sec. 108.7(b)........................ Eliminated. Provision covered in note and No policy change.
other closing documents.
Sec. 108.8(a)........................ Credit elsewhere test consolidated and placed Major change of policy
in Sec. 120.101; evidence of need and use emphasis. See Note 6,
of personal resources by principals placed subparts A and B.
in Sec. 120.102.
Sec. 108.8(b)........................ Consolidated into Sec. 120.150 and Sec. No policy change.
120.160.
Sec. 108.8(c)........................ Sound business purpose is addressed in Sec. No policy change.
120.120 and Sec. 120.150. Size requirements
is addressed in Sec. 120.100(c) and Sec.
120.880(b).
[[Page 64367]]
Sec. 108.8(d)........................ Replaced by Sec. 120.111.................... Major policy change. See
Note 2, subparts A and
B.
Sec. 108.8(e)........................ Condensed and placed in Sec. 120.870........ No policy change.
Sec. 108.8(f)........................ Included in Sec. 120.881. Financial and Clarifies policy.
investment businesses addressed in Sec. Ineligibility of project
120.110. because relocation will
cause unemployment may
be rebutted if the
relocation is crucial to
the continued existence,
economic wellbeing or
competitiveness of the
applicant, and the
benefit to new community
outweighs injury to old.
Sec. 108.8(g)........................ This subject is consolidated into Sec. No policy change.
120.110 and Sec. 120.130.
Sec. 108.9........................... Rewritten and placed in Sec. 120.923(c)..... No policy change.
Sec. 108.10.......................... Eliminated. Not necessary to include in No policy change.
regulation.
Sec. 108.501......................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.501-1....................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.502......................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.502-1....................... Eliminated................................... Deleted because program
eliminated, but SBA
still regulates existing
loans under this
program. See Sec.
120.180.
Sec. 108.503(a)...................... Eliminated................................... No policy change; covered
in Sec. 120.1.
Sec. 108.503(b)...................... Rewritten and incorporated into Sec. 120.2, No policy change.
Sec. 120.860, Sec. 120.861, and Sec.
120.862.
Sec. 108.503(c)...................... Rewritten and placed in Sec. 120.829........ Minor policy change.
$45,000 is substituted
for 25% increase, which
was $43,750. Specific
instructions and details
in SOP and program
guidance.
Sec. 108.503(d)...................... Condensed and placed in Sec. 120.829(b) and No policy change;
(c). specific instructions
and details in SOP and
policy guidance.
Sec. 108.503-1(a).................... Description of the program incorporated into No policy change
Sec. 120.2(c) and Sec. 120.801. Eligible
projects are in Sec. 120.120, and
applications for certification are in Sec.
120.810.
Sec. 108.503-1(b).................... Rewritten and placed in Sec. 120.820 through No policy change;
Sec. 120.826, and Sec. 120.855(a). incidental benefit to
CDC Associate clarified
to allow relationship in
the regular course of
business.
Sec. 108.503-1(c).................... Rewritten and placed in Sec. 120.821. See Important policy changes--
definition of Area of Operations in Sec. see comments below.
120.802. Extending a CDC's Area of
Operations is in Sec. 120.835 and Sec.
120.836. Expiration of existing, temporary
Expansions is in Sec. 120.837. Case-by-case
extensions are in Sec. 120.838.
Sec. 108.503-1(d).................... Consolidated into Sec. 120.822. Member or Policy change. See Note
Board representation in another CDC is in under current Sec.
Sec. 120.855(b). 108.4(d) above. Specific
details and instructions
will be in SOP
Sec. 108.503-1(e).................... Rewritten and placed in Sec. 120.826 and No policy change;
Sec. 120.827. SBIC limitation addressed in Specifics addressed in
Sec. 120.820. SOP.
Sec. 108.503-1(f).................... Incorporated in Sec. 120.827................ No policy change
Sec. 108.503-1(g).................... Rewritten and placed in Sec. 120.855(b)..... Policy change. See Note
under current Sec.
108.4(d) above.
Sec. 108.503-2(a).................... Rewritten and placed in Sec. 120.810........ Small substantive change.
Regional offices removed
from process because of
SBA reorganization. More
information in SOP.
Sec. 108.503-2(b).................... Rewritten and placed in Sec. 120.811........ Minor procedural changes.
10 day period to submit
notice to SBA
eliminated; officer and
director addresses no
longer required in
notice.
Sec. 108.503-2(c).................... Rewritten and placed in Sec. 120.981........ No policy changes.
Sec. 108.503-2(d).................... Rewritten and placed in Sec. 120.812........ No policy change.
Sec. 108.503-2(e).................... Rewritten and placed in Sec. 120.980........ No policy change.
[[Page 64368]]
Sec. 108.503-3(a).................... Rewritten and placed in Sec. 120.827........ No policy change.
Sec. 108.503-3(b).................... Covered by Sec. 120.827(a).................. No policy change. Will be
expounded upon in SOP.
Sec. 108.503-3(c).................... Rewritten and placed in Sec. 120.828........ Policy change. The number
of loan approvals
required to satisfy the
minimum level of
activity will now be
specified in annual
program announcement.
See major policy change
note (a) below.
Sec. 108.503-3(d).................... Covered by Sec. 120.826..................... No policy change.
Specifics in SOP.
Sec. 108.503-3(e).................... Eliminated................................... Deleted reserved section.
Sec. 108.503-3(f).................... Rewritten and placed in Sec. 120.830(a) and No policy change. SBA
(b). streamlining paperwork
requirements under
Presidential directive.
Specifics in SOP.
Sec. 108.503-3(g).................... Rewritten and placed in Sec. 120.140(c)..... No policy change.
Sec. 108.503-3(h).................... Rewritten and placed in Sec. 120.983........ No policy change.
Sec. 108.503-4(a).................... Rewritten and placed in Sec. 120.120, Sec. No policy changes.
120.110, Sec. 120.150 and Sec. 120.193.
See Sec. 120.871 and Sec. 120.872 for
portions of new construction or existing
building that may be leased.
Sec. 108.503-4(b).................... Rewritten and placed in Sec. 120.130 and Policy change. Airplanes
Sec. 120.881. in Alaska and Hawaii no
longer eligible.
Reference to assets
limited in potential use
or marketability
deleted. This is part of
the credit decision. The
rule clarifies the
eligibility status of
heavy construction
equipment. See comment
(d) below.
Sec. 108.503-4(c).................... Rewritten and placed in Sec. 120.882(a)(2) Policy change. Any
and Sec. 120.884(a) and (c). Statutory expenditure made toward
ceiling discussed in Sec. 120.931; SBIC a project in
participation in Sec. 120.103 and Sec. anticipation of SBA
120.913; and administrative ceiling in Sec. assistance within 6
120.932.. months of receipt by SBA
of an application is
eligible. No notice is
required. See comment
(b) below.
Sec. 108.503-5(a).................... Rewritten and placed in Sec. 120.120 and No policy change.
Sec. 120.882.
Sec. 108.503-5(b).................... Rewritten and placed in Sec. 120.883........ No policy change.
Sec. 108.503-5(c).................... Rewritten and placed in Sec. 120.130 and No policy change.
Sec. 120.884.
Sec. 108.503-5(d).................... Discussed in Sec. 120.882(a)(2). Land See comment under current
contributions in Sec. 120.911. Sec. 108.503-4(c) above
and policy comment
discussion (b) below.
Specific instructions
and explanations will be
in SOP.
Sec. 108.503-6(a).................... Rewritten and placed in Sec. 120.883(c), No policy change. Omits
Sec. 120.961(a), and Sec. 120.971(a)(1). reference to $2,500 in
discussion of legal
fees. See note (c).
Specifics in SOP.
Sec. 108.503-6(b).................... Rewritten and placed in Sec. 120.936........ No policy change.
Sec. 108.503-6(c).................... Rewritten and placed in Sec. 120.961(b)..... No policy change.
Sec. 108.503-6(d).................... Rewritten and placed in Sec. 120.971(a)(3).. No policy change.
Sec. 108.503-6(e).................... Eliminated................................... Policy change. See Note
8, subparts A and B.
Sec. 108.503-7(a).................... Rewritten. Certification of project No policy change.
completion placed in Sec. 120.891. Specifics in SOP.
Certifications of no adverse change are in
Sec. 120.892..
Sec. 108.503-7(b).................... Rewritten and placed in Sec. 120.890........ No policy change.
Sec. 108.503-7(c).................... Rewritten and placed in Sec. 120.962........ No policy change.
Sec. 108.503-8(a).................... Rewritten and placed in Sec. 120.900........ No policy change, but (3)
is now called ``Borrower
contribution'' instead
of ``the 503 Company
injection''.
Sec. 108.503-8(b).................... Rewritten and placed in Sec. 120.920 through No policy change, but
Sec. 120.925. Newly published (1/20/95) Sec. 120.923(b)
``other real estate owned'' provision placed clarifies that some
in Sec. 120.923(a). payments made by
lienholder are allowed
to maintain and protect
the lien position.
Sec. 108.503-9....................... Loan conditions are detailed in Sec. 120.930 No policy change.
through Sec. 120.941. Description of
program is in Sec. 120.3 and Sec. 120.801.
Sec. 108.503-10...................... Rewritten and placed in Sec. 120.910 through No policy change. Some
Sec. 120.913. specifics left for SOP.
Sec. 108.503-11...................... Eliminated. Consolidated with current Sec. No policy change.
108.504(e) into Sec. 120.954.
Sec. 108.503-12...................... Rewritten and placed in Sec. 120.960........ No policy change.
Specifics in SOP.
Sec. 108.503-13(a) and (b)........... Rewritten and placed in Sec. 120.970. No policy change.
Quarterly reports discussed in Sec. Specifics moved to SOP.
120.830(f).
Sec. 108.503-13(c)................... Placed in 120.970. Incorporates Sec. 120.513 No policy changes.
Specifics in SOP.
Sec. 108.503-13(d)................... Rewritten and placed in Sec. 120.971(a)(1).. No policy change.
Sec. 108.503-13(e)................... Rewritten and placed in Sec. 120.982........ No policy change.
Sec. 108.503-13(f)................... Rewritten and placed in Sec. 120.983........ No policy change.
[[Page 64369]]
Sec. 108.503-13(g)................... Rewritten and placed in Sec. 120.938........ No policy change.
Sec. 108.503-13(h)................... Consolidated into Sec. 120.530.............. No policy change.
Specific information and
explanatory material
will be in SOP.
Sec. 108.503-14...................... Rewritten and placed in Sec. 120.970........ No policy change.
Specific information and
explanatory material
will be in SOP.
Sec. 108.503-15(a) and (b)........... Rewritten and placed in Sec. 120.972........ No policy change--
specifics in SOP.
Sec. 108.503-15(c) and (d)........... Eliminated................................... Deleted all reserve
sections.
Sec. 108.503-15(e)................... Rewritten and placed in Sec. 120.984........ No policy change.
Sec. 108.504 (a), (b) and (c)........ Consolidated into Sec. 120.801.............. No policy change.
Sec. 108.504(d)...................... Placed in Sec. 120.934...................... No policy change.
Sec. 108.504(e)...................... Rewritten and placed in Sec. 120.954........ No policy change.
Sec. 108.504(f)...................... Rewritten and placed in Sec. 120.941........ No policy change.
Sec. 108.504(g)...................... Eliminated. More suitable for inclusion in No policy change.
SOP.
Sec. 108.504(h)...................... Rewritten and placed in Sec. 120.941........ .........................
Sec. 108.504(i)...................... Consolidated into Sec. 120.962.............. No policy change.
Sec. 108.504(j)...................... Rewritten and placed in Sec. 120.939........ No policy change.
Sec. 108.504(k)...................... Placed into Sec. 120.941.................... No policy change.
Sec. 108.504(l)...................... Eliminated................................... No policy change.
Debentures are sold
through Pools.
Sec. 108.504-1....................... Condensed and placed in Sec. 120.194........ Computer generated forms
now may be used for all
business loans, not just
504 loans.
Sec. 108.505(a)...................... Consolidated into Sec. 120.1................ No policy change.
Sec. 108.505(b)...................... Consolidated into Sec. 120.2 and Sec. No policy change.
129.801.
Sec. 108.505(c)...................... SBA guarantee discussed in Sec. 120.801; No policy change.
timely payment on Certificate is in Sec.
120.942; effect of other laws is in Sec.
120.991.
Sec. 108.505(d)...................... Condensed and placed in 120.941.............. No policy change.
Sec. 108.505(e)...................... Condensed and placed in Sec. 120.942........ No policy change.
Sec. 108.505(f)...................... Placed in Sec. 120.950, Sec. 120.951 No policy change, but
(selling agent), Sec. 120.952 (fiscal reference to ``Transfer
agent), Sec. 120.953 (trustee), and Sec. Agent'' has been
120.954 (central servicing agent). Bond/ deleted. ``Trustee'' has
Insurance requirement moved to Sec. been used since 1986.
120.956(a).
Sec. 108.505(g)...................... Eliminated. Regulations not necessary........ No policy change, but
``Pooler'' is now
referred to as
``Underwriter'' and
specific conditions and
duties will be in SOP.
Sec. 108.505(h)...................... Consolidated and placed in Sec. 120.955..... No policy change.
Sec. 108.505(i)...................... Consolidated and placed in Sec. 120.971(c).. No policy change.
Sec. 108.505(j)...................... Included in Sec. 120.942(b)................. No policy change.
Sec. 108.505(k)...................... Condensed into Sec. 120.940................. No policy change.
Sec. 108.505(l)...................... Condensed into Sec. 120.956................. No policy change.
Sec. 108.506......................... Condensed and consolidated into Sec. No policy change.
120.140(i).
Sec. 108.507......................... Rewritten and placed in Sec. 120.850........ No policy change.
Sec. 108.507-1....................... Merged into Sec. 120.850.................... No policy change.
Sec. 108.507-2....................... Consolidated into Sec. 120.851.............. Minor policy change. ADCs
may be for-profit, as
well as non-profit
status. SBA's purpose is
to encourage more
organizations to aid
small businesses.
Sec. 108.507-3....................... Condensed into Sec. 120.851................. No policy change.
Specifics will be in
SOP.
Sec. 108.507-4....................... Consolidated into Sec. 120.850(a)........... No policy change.
Sec. 108.507-5....................... Reviews and audits consolidated into Sec. No policy change.
120.972. Suspension and revocation discussed
in Sec. 120.852.
Sec. 108.508-1....................... This new program, published 4/26/95, was No policy change.
condensed and placed at Sec. 120.840.
Sec. 108.509......................... This new program, published 4/26/95, was No policy change.
condensed and placed at Sec. 120.845.
New................................... 120.831...................................... Minor policy change. CDCs
would disclose to SBA &
Borrower any
compensation or
remuneration received
from a Lender or other
party involved in a 504
loan to monitor any
inducements.
----------------------------------------------------------------------------------------------------------------
Part II--Major Policy Changes
(a) Area of Operations. During the policy review accompanying the
regulatory rewriting, SBA focused much of its attention on the question
of what constitutes adequate service in an Area of Operation.
Throughout the history of the 504 program there has been a great
divergence among CDCs in the number of loan approvals each year. While
some CDCs have exhibited continued growth measured by their loan
approvals and
[[Page 64370]]
ability to package, process and service loans, other CDCs have lagged
behind. There are many complicated reasons for this, but the net result
has been a patchwork of 504 service (measured by loan approvals) across
the country, with many small businesses in some areas receiving 504
assistance while in other areas few, if any, small businesses have
received such assistance.
SBA attempted to address this issue by permitting CDCs to expand
temporarily into adjacent areas, and then, in l993, by designating a
minimum number of loan approvals per year which a CDC must average over
the previous two fiscal year periods to retain certification as a CDC.
The current number of required loan approvals is two. SBA also
established the status of an Associate Development Company (``ADC'').
Those CDCs unable or unwilling to meet the minimum number of loan
approvals may become ADCs, thereby continuing to participate in the
program goals of economic and community development without having to
make loans. A number of CDCs have been decertified as a result of this
policy and have opted for ADC status.
However, a focus on removal from CDC status does not address the
real question of adequacy of service within an Area of Operations. What
constitutes adequate service within a community? The statutory
objectives of the 504 program are to provide a portion of long term
fixed-asset financing for small business projects that provide jobs and
result in economic development. Clearly, these goals cannot be met in
an Area of Operations unless loans are being packaged, processed,
approved, closed and serviced by one or more CDCs. Unfortunately, SBA
is aware of too many locations across the country in which present CDCs
are unable or unwilling to meet the small business demand for 504
loans. Transferring an existing CDC to ADC status does not address this
inadequacy. SBA has concluded that the answer lies not in
decertification, but in competition and customer service.
Therefore, in Sec. 120.835, SBA is proposing that existing CDCs be
permitted to expand into Areas of Operations that are not being
adequately serviced. The expanding CDC would have to show that the
proposed Area of Operations is not being adequately served by the
existing CDCs and that the expanding CDC is well-qualified to serve it.
SBA is not proposing any geographic or size limitation on CDCs applying
to service a location, but such factors will be considered in
evaluating the application. A CDC must apply in writing to the SBA
district office serving the geographic area in which the CDC proposes
to expand.
In this context, SBA has concluded that there is no minimum loan
approval number appropriate to every CDC in every location across the
country. A small CDC with a rural Area of Operations and slow economic
activity may be providing adequate service at a low level of approvals
while a larger CDC in a metropolitan region with much economic activity
may be providing inadequate service, despite having a greater number of
loan approvals.
SBA has also concluded that adequate service includes adequate
servicing of loans, as well as the number of loan approvals. Thus, any
CDC seeking to expand will have to show that it has a history of
adequate experience and expertise in both loan packaging and servicing,
and that the existing CDCs in the proposed area of expansion have not
been adequately packaging or servicing loans. Even if the number of
loan approvals does not accurately represent the competence of a CDC,
it does accurately reflect the adequacy of the market penetration of
504 financing in the proposed area of expansion.
In general, SBA will consider an Area of Operations inadequately
served if the existing CDCs in the Area of Operations have not
averaged, over the last two fiscal years, sufficient loan approvals for
the population, as published by SBA in an annual program announcement.
SBA will establish the initial formula in a program announcement upon
publication of the final rule, but would like the benefit of comments
on this subject before committing any specific numbers to print. SBA is
considering a two or three tier formula based on the current national
averages for CDC loan approvals per number of population. Suggestions
have been received that the formula should be based not on population,
but on the number of small businesses in the Area of Operations or some
other factor. SBA is interested in comments and would like
recommendations on how, if at all, to incorporate a servicing component
into its approach.
SBA is proposing (Sec. 120.837) that all existing, temporary
expansions of Areas of Operations will expire automatically 6 months
after the effective date of these regulations, unless a CDC applies for
permanent expansion into that Area before the expiration date. SBA
believes that CDCs will best serve the small business community by
making a permanent commitment to an Area of Operations. Upon showing
good cause, a CDC will still be able to apply to SBA to make an
individual loan for a Project outside its Area of Operations in an area
not being adequately served by other CDCs (Sec. 120.838). Note also
that the Borrower may write to the AA/FA (but not the District
Director) to request the servicing of a CDC not currently serving the
area. SBA has added this provision to give Borrowers more flexibility
if they have a concern about the services of a particular CDC.
(b) Expenditures in Anticipation of Project. In the current
regulations, costs incurred by a Borrower in anticipation of receiving
a 504 loan are not eligible to be included in Project costs unless the
applicant has filed a written notice with the CDC and SBA within 60
days of incurring the expense and SBA gives written approval. As a
result, CDCs and SBA receive notices from many potential borrowers
considering 504 financing who desire to maximize potential financing.
Many of these businesses never actually apply or their applications are
denied. In those cases, the written notices are a useless paperwork
burden on SBA, the CDC and the applicant.
Therefore, SBA is proposing (Sec. 120.882(a)(2)) to eliminate the
requirement for written notice. Any expense incurred toward a Project
within six months of receipt by SBA of a complete loan application will
be an eligible Project cost.
(c) Legal Fees. The Borrower's closing costs, including legal fees,
are eligible for inclusion in the 504 loan. Typically, legal services
are provided by the CDC's counsel, who is usually experienced in
closing 504 loans and thus, is able to do so cost effectively.
Sometimes, a Borrower will also retain an attorney. Under the current
regulations, the CDC may charge the Borrower up to $2,500 for the legal
services performed by the CDC counsel, unless SBA approves a higher fee
in a complex case. If the fee is more than $2,500, the CDC must pay the
difference. The CDC collects the fee at closing and forwards it to the
closing attorney.
The $2,500 figure in the regulation has engendered much debate
within the industry. Many CDCs feel the figure establishes a minimum
base for attorney services and is, therefore, anti-competitive. On the
other hand, during the past five months, SBA has conducted several
expedited closing training sessions for CDC counsel. Many attorneys
feel that the figure establishes a ceiling for attorney services and
is, therefore, anti-competitive. There appears to be a wide range of
prices charged by CDC counsel for closing services. Most CDCs try to
minimize
[[Page 64371]]
counsel fees to reduce costs to the Borrower.
SBA has determined that there is no reason for SBA to refer to any
legal fee amount. Whether it is viewed as a ceiling or a base, the
$2,500 reference has apparently caused misunderstanding and may have
had an effect on legal fees charged. SBA believes legal fees should be
determined by the competitive market. Therefore, proposed
Secs. 120.883(d) and 120.961(a), omit any reference to amount.
(d) Eligible Use of Proceeds. In the current regulations, airplanes
are not eligible for 504 loans, except that Alaskan and Hawaiian
Projects may include airplanes not exceeding 20 percent of the Project
cost, if they are indispensable to the Project. SBA proposes to
eliminate this exception (Sec. 120.884(d)(2)), previously justified
because of the great distances people must travel in those states. But
distances are great in many mainland states, as well, and airplanes
simply are not directly attributable and necessary for a Project.
Also, in the current regulations there is no direct reference to
the eligibility of construction equipment as a distinct sub-category of
equipment and machinery. CDCs and SBA often receive questions from
potential Borrowers as to whether construction equipment is eligible
for 504 financing. The proposed rule in Sec. 120.884(d)(3) clarifies
that construction equipment is ineligible for 504 financing unless it
is heavy duty equipment integral to the operation of a business and
meeting the IRS definition of capital equipment. Note also that
Sec. 120.884(d)(1) clarifies SBA policy that short term equipment is a
permitted use of loan proceeds if the equipment is essential to the
Project and reflects a minor percentage of the loan. This is not a
change in policy.
(e) Definitions. SBA has created several new definitions to help
make the regulation easier to understand. Comments and suggestions will
be appreciated.
Several definitions clarify terms long associated with the 504
program which were included in the regulations, but were not defined.
These include ``Area of Operations,'' ``Certificate,'' ``Debenture,''
``Job Opportunity,'' and ``Substantial Increase in Unemployment.''
Finally, some key words have been replaced with more useful and apt
words. A ``Small Business Concern'' is now a ``Small Business.'' The
term ``Underwriter'' has replaced ``Pooler.'' The term ``Project'' has
replaced ``Plant.'' ``Project Property'' is a new definition previously
undefined in the regulation.
(f) Minor Policy Changes. In proposed Sec. 120.828, the minimum
level of CDC lending activity is no longer set at a specific number;
SBA will retain the ability to change this number through its program
announcements based on program performance and the economy. In proposed
Sec. 120.939(b), CDCs will be liable for SBA losses incurred by
``wrongful CDC conduct'' as well as in cases of fraud and negligence.
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 proposed rule involves internal
administrative procedures and would not be considered a significant
rule within the meaning of Executive Order 12866 and would 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 is not likely to have an annual economic effect of $100 million
or more, result in a major increase in costs or prices, or have a
significant adverse effect on competition or the United States economy.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this proposed rule, if adopted in final form, would
contain no new reporting or record keeping requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
would not have any 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
13 CFR Part 108
Equal employment opportunity, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 116
Coastal Zone, Flood insurance, Flood plains, Lead poisoning, Small
businesses, Veterans.
13 CFR Part 120
Loan programs-business, Reporting and recordkeeping requirements,
Small businesses.
13 CFR Part 122
Community development, Employee benefit plans, Energy conservation,
Environmental protection, Exports, Individuals with disabilities, Loan
programs-business, Loan programs-energy, Loan programs-veterans,
Microloans, Reporting and recordkeeping requirements, Small businesses,
Solar energy, Trusts and trustees, Veterans.
13 CFR Part 131
Loan programs-business, Small businesses.
Accordingly, pursuant to the authority set forth in sections 5
(b)(1) and (b)(6) of the Small Business Act, 15 U.S.C. 634(b)(6) and
636 (a) and (h), SBA hereby proposes to amend Chapter I of Title 13,
Code of Federal Regulations (CFR), as follows:
1. Part 120 would be revised to read as follows:
PART 120--BUSINESS LOANS
General Descriptions of SBA's Business Loan Programs
Sec.
120.1 Which loan programs does this part cover?
120.2 Descriptions of the business loan programs.
120.3 Pilot programs.
Definitions
120.10 Definitions.
Subpart A--Policies Applying to All Business Loans
Eligibility Requirements
120.100 What are the basic requirements for all Borrowers?
120.101 Credit not available elsewhere.
120.102 Funds not available from alternative sources, including
personal resources of principals.
120.103 Are farm enterprises eligible?
120.104 Are businesses financed by SBICs eligible?
120.105 Special consideration for veterans.
Ineligible Businesses and Eligible Passive Companies
120.110 What businesses are ineligible for SBA business loans?
120.111 What conditions must an Eligible Passive Company satisfy?
Uses of Proceeds
120.120 What are eligible uses of proceeds?
120.130 Restrictions on uses of proceeds.
Ethical Requirements
120.140 What ethical requirements apply to participants?
Credit Criteria for SBA Loans
120.150 What are SBA's lending criteria?
120.151 What is the statutory limit for total loans to a Borrower?
120.160 Loan conditions.
[[Page 64372]]
120.161 Lending limits.
Requirements Imposed Under Other Laws and Orders
120.170 Flood insurance.
120.171 Compliance with child support obligations.
120.172 Flood-plain and wetlands management.
120.173 Lead-based paint.
120.174 Earthquake hazards.
120.175 Coastal barrier islands.
120.176 Compliance with other laws.
Enforceability Despite Rule Changes
120.180 Are rules enforceable if they are changed later?
Loan Applications
120.190 Where does an applicant apply for a loan?
120.191 The contents of a business loan application.
120.192 Approval or denial.
120.193 Reconsideration after denial.
Computerized SBA Forms
120.194 Use of computer forms.
120.195 Duty of Lender, CDC, Intermediary Lender, and Borrower to
report fees.
Subpart B--Policies Specific to 7(a) Loans
Bonding Requirements
120.200 What bonding requirements exist during construction?
Limitations on Use of Proceeds
120.201 Refinancing unsecured or undersecured loans.
120.202 Restrictions on loans for changes in ownership.
120.203 Revolving credit.
Maturities; Interest Rates; Loan and Guarantee Amounts
122.210 What percentage of a loan may SBA guarantee?
120.211 What limits are there on the amounts of direct loans?
120.212 What limits are there on loan maturities?
120.213 What fixed interest rates may a Lender charge?
120.214 What conditions apply for variable interest rates?
Fees for Guaranteed Loans
120.220 Guarantee fees that Lender pays SBA.
120.221 Fees which the Lender may collect from a loan applicant.
120.222 Fees which the Lender or Associate may not collect from the
Borrower or share with third parties.
Subpart C--Special Purpose Loans
120.300 Statutory Authority.
Disabled Assistance Loan Program (DAL)
120.310 What assistance is available for the disabled?
120.311 Definitions.
120.312 DAL-1 use of proceeds and other program conditions.
120.313 DAL-2 use of proceeds and other program conditions.
120.314 Resolving doubts about creditworthiness.
120.315 Interest rate and loan limit.
Businesses Owned by Low Income Individuals
120.320 Policy.
Energy Conservation
120.330 Who is eligible for an energy conservation loan?
120.331 What devices or techniques are eligible for a loan?
120.332 What are the eligible uses of proceeds?
120.333 Are there any special credit criteria?
Export Working Capital Program (EWCP)
120.340 What is the Export Working Capital Program?
120.341 Who is eligible?
120.342 What are eligible uses of proceeds?
120.343 Collateral.
120.344 Cash flow projections.
International Trade Loans
120.345 Policy.
120.346 Eligibility.
120.347 Use of proceeds.
120.348 Amount and percentage of guarantee.
Qualified Employee Trusts (ESOP)
120.350 Policy.
120.351 Definitions.
120.352 Use of proceeds.
120.353 Eligibility.
120.354 Creditworthiness.
Veterans Loan Program
120.360 Which veterans are eligible?
120.361 Other conditions of eligibility.
Pollution Control Program
120.370 Policy.
Loans to Participants in the 8(a) Program
120.375 Policy.
120.376 Special requirements.
120.377 Use of proceeds.
Defense Economic Transition Assistance
120.380 Program.
120.381 Eligibility.
120.382 Repayment ability.
120.383 Restrictions on loan processing.
Caplines Program
120.390 Revolving credit.
Small General Contractors
120.391 What is the Small General Contractor Program?
120.392 Who may apply?
120.393 Are there special application requirements?
120.394 What are the eligible uses of proceeds?
120.395 What is SBA's collateral position?
120.396 What is the term of the loan?
120.397 Are there any special restrictions?
Subpart D--Lenders
120.400 Participation agreements.
Participation Criteria
120.410 Requirements for all participating Lenders.
120.411 Preferences.
120.412 Other services Lenders may provide Borrowers.
120.413 Advertisement of relationship with SBA.
Pledging Notes or Transferring Unguaranteed Portion
120.420 Financings by Nondepository Lenders.
Miscellaneous Provisions
120.430 SBA access to Lender files.
120.431 Suspension or revocation of eligibility to participate.
Certified Lenders Program (CLP)
120.440 What is the Certified Lenders Program?
120.441 How does a Lender become a CLP Lender?
120.442 Suspension or revocation of CLP status.
Preferred Lenders Program (PLP)
120.450 What is the Preferred Lenders Program?
120.451 How does a Lender become a PLP Lender?
120.452 What are the requirements of PLP loan processing?
120.453 What are the requirements of PLP loan servicing and
liquidation?
120.454 PLP performance review.
120.455 Suspension or revocation of PLP status.
Small Business Lending Companies (SBLC)
120.470 What is an SBLC?
120.471 Records.
120.472 Reports to SBA.
120.473 Change of ownership or control.
120.474 Prohibited financing.
120.475 Suspension or revocation.
Subpart E--Loan Administration
120.500 General.
Servicing
120.510 Servicing direct and immediate participation loans.
120.511 Servicing guaranteed loans.
120.512 Who services the loan after SBA honors its guarantee?
120.513 What servicing actions require the prior written consent of
the SBA?
SBA'S Purchase of a Guaranteed Portion
120.520 When does SBA honor its guarantee?
120.521 What interest rate applies after SBA purchases its
guaranteed portion?
120.522 How much accrued interest does SBA pay to the Lender or
Registered Holder when SBA purchases the guaranteed portion?
120.523 What is the ``earliest uncured default''?
120.524 When is SBA released from liability on its guarantee?
[[Page 64373]]
Deferment, Extension of Maturity and Loan Moratorium
120.530 Deferment of payment.
120.531 Extension of maturity.
120.532 What is a loan Moratorium?
120.533 When will SBA grant a Moratorium?
120.534 How long can a Moratorium continue?
120.535 What are the repayment terms of a Moratorium?
Liquidation of Collateral
120.540 What are SBA's policies concerning liquidation of
collateral?
Homestead Protection for Farmers
120.550 What is homestead protection for farmers?
120.551 Who is eligible for homestead protection?
120.552 Lease.
120.553 Appeal.
Subpart F--Secondary Market
120.600 What is the SBA Secondary Market?
120.601 Definitions.
Certificates
120.610 Description of Certificates.
120.611 Description of Pools backing Pool Certificates.
120.612 What loans are eligible to back Certificates?
120.613 What is a Secondary Participation Guarantee Agreement?
The SBA Guarantee of a Certificate
120.620 The SBA guarantee of a Pool Certificate.
120.621 The SBA guarantee of a Certificate representing a
individual guaranteed portion.
Pool Assemblers
120.630 Qualifications to be a Pool Assembler.
120.631 Suspension or termination of eligibility of Pool Assembler.
Sale of Certificates
120.640 Administration of the Pool and individual guaranteed
portions.
120.641 Disclosure to purchasers.
120.642 Requirements before the FTA issues Pool Certificates.
120.643 Requirements before the FTA issues the Certificate for an
individual guaranteed portion.
120.644 Sale of individual SBA guaranteed portion.
120.645 Transfers of Certificates.
Fiscal and Transfer Agent (FTA)
120.650 Registration duties of FTA in Secondary Market.
120.651 Claim to FTA by Registered Holder to replace Certificate.
120.652 FTA fees.
Suspension or Revocation of Participant in Secondary Market
120.660 Suspension or revocation.
Subpart G--Microloan Demonstration Program
120.700 What is the Microloan Program?
120.701 Definitions.
120.702 Are there limits on Intermediaries or loans?
120.703 How do I apply to become an Intermediary?
120.704 What is my financial contribution?
120.705 Microloan Revolving Fund.
120.706 Loan Loss Reserve Fund.
120.707 What are the terms and conditions of my Intermediary SBA
loan?
120.708 What conditions apply to my loans to Microloan Borrowers?
120.709 What records and reports does SBA require?
120.710 How does an Intermediary get a grant to assist Microloan
Borrowers?
120.711 Does SBA provide technical assistance to Intermediaries?
120.712 How does a non-Intermediary get a grant?
120.713 Does SBA guarantee any loans an Intermediary obtains from
another source?
Subpart H--Development Company Loan Program (504)
120.800 What is the purpose of the 504 program?
120.801 How is a 504 Project financed?
120.802 Definitions.
Certification Procedures to Become a CDC
120.810 Applications for certification as a CDC.
120.811 Public notice of CDC certification application.
120.812 Probationary period for newly certified CDCs.
Requirements for CDC Certification and Operation
120.820 CDC non-profit status.
120.821 CDC Area of Operations.
120.822 CDC membership.
120.823 CDC board of directors.
120.824 Professional management and staff.
120.825 Financial ability to operate.
120.826 Basic requirements for operating a CDC.
120.827 Services a CDC provides to small businesses.
120.828 The minimum level of CDC lending activity.
120.829 The Job Opportunity average a CDC must maintain.
120.830 Reports a CDC must submit.
120.831 Disclosure of referral fees or other payments by or to a
CDC
Extending a CDC's Area of Operations
120.835 Application to extend an Area of Operations.
120.836 Public notice of application for extension.
120.837 Expiration of existing, temporary expansions.
120.838 Case-by-case extensions.
Accredited Lenders Program
120.840 Accredited Lenders Program.
Premier Certified Lenders Program
120.845 Premier Certified Lenders Program.
Associate Development Companies (ADCs)
120.850 ADC functions.
120.851 ADC eligibility and operating requirements.
120.852 Suspension and revocation of ADCs.
Ethical Requirements
120.855 CDC and ADC ethical requirements.
Project Economic Development Goals
120.860 Required objectives.
120.861 Job creation or retention.
120.862 Other economic development objectives.
Leasing Policies Specific to 504 Loans
120.870 Leasing Project Property.
120.871 Leasing part of a new construction Project to another
business.
120.872 Leasing part of an existing building to another business.
Loan-Making Policies Specific to 504 Loans
120.880 Basic eligibility requirements.
120.881 Ineligible Projects for 504 loans.
120.882 Eligible Project costs for 504 loans.
120.883 Eligible administrative costs for 504 loans.
120.884 Ineligible costs for 504 loans.
Interim Financing
120.890 Source of interim financing.
120.891 Certifications of disbursement and completion.
120.892 Certifications of no adverse change.
Permanent Financing
120.900 What are the sources of permanent financing?
The Borrower's Contribution
120.910 How much must the Borrower contribute?
120.911 Land contributions.
120.912 Borrowed contributions.
120.913 May an SBIC provide the contribution?
Third Party Loans
120.920 The first lien position.
120.921 Terms of Third Party loans.
120.922 Pre-existing debt on the Project Property.
120.923 What are the policies on subordination?
120.924 Prepayment of subordinate financing.
120.925 Preferences.
504 Loans and Debentures
120.930 Amount.
120.931 504 lending limits.
120.932 Interest rate.
120.933 Maturity.
120.934 Collateral.
120.935 Deposit.
120.936 Subordination to CDC.
120.937 Assumption.
120.938 Default.
120.939 Borrower prohibition.
120.940 Prepayment of the 504 loan or Debenture.
120.941 Certificates.
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Debenture Sales and Service Agents
120.950 SBA and CDC must appoint agents.
120.951 Selling agent.
120.952 Fiscal agent.
120.953 Trustee.
120.954 Central Servicing Agent.
120.955 Agent bonds and records.
120.956 Suspension or revocation of brokers and dealers.
Closings
120.960 Responsibility for closing.
120.961 CDC closing fees.
120.962 Construction escrow accounts.
Servicing and Post-Closing Fees
120.970 Servicing of 504 loans and Debentures.
120.971 Post-closing fees paid by Borrower.
120.972 Oversight and evaluation of CDCs and ADCs.
CDC Transfer, Suspension and Revocation
120.980 Transfer of CDC to ADC status.
120.981 Voluntary transfer and surrender of CDC certification.
120.982 Correcting CDC servicing deficiencies.
120.983 Transfer of CDC servicing to SBA or another CDC.
120.984 Suspension or revocation of CDC certification.
Enforceability of 501, 502 and 503 Loans and Other Laws
120.990 501, 502 and 503 loans.
120.991 Effect of other laws.
Authority: 15 U.S.C 634(b)(6) and 636 (a) and (h).
General Descriptions of SBA's Business Loan Programs
Sec. 120.1 Which loan programs does this part cover?
This Part regulates SBA's financial assistance to small businesses
under its general business loan programs (``7(a) loans'') authorized by
section 7(a), 15 U.S.C. 636(a) of the Small Business Act (``the Act''),
its microloan demonstration loan program (``Microloans'') authorized by
section 7(m), 15 U.S.C. 636(m) of the Act, and its development company
program (``504 loans'') authorized by Title V of the Small Business
Investment Act, 15 U.S.C. 695 to 697f (``Title V''). These three
programs constitute the business loan programs of the SBA.
Sec. 120.2 Descriptions of the business loan programs.
(a) 7(a) loans. (1) 7(a) loans provide financing for general
business purposes and may be:
(i) A direct loan by SBA;
(ii) An immediate participation loan by a Lender and SBA; or
(iii) A guaranteed loan (deferred participation) by which SBA
guarantees a portion of a loan made by a Lender.
(2) A guaranteed loan is initiated by a Lender agreeing to make an
SBA guaranteed loan to a small business and applying to SBA for SBA's
guarantee under a blanket guarantee agreement (participation agreement)
between SBA and the Lender. If SBA agrees to guarantee (authorizes) a
portion of the loan, the Lender funds and services the loan. If the
small business defaults on the loan, SBA's guarantee requires SBA to
purchase its portion of the outstanding balance, upon demand by the
Lender and subject to specific conditions. Regulations specific to 7(a)
loans are found in subpart B of this part.
(b) Microloans. SBA makes loans and loan guarantees to non-profit
Intermediaries that make short-term loans up to $25,000 to eligible
small businesses for general business purposes, except payment of
debts. SBA also gives grants to Intermediaries for use in providing
management assistance and counseling to small businesses. Regulations
specific to these loans are found in subpart G of this part.
(c) 504 loans. Projects involving 504 loans require long-term
fixed-asset financing for small businesses. A Certified Development
Company (CDC) provides the final portion of this financing with a 504
loan made from the proceeds of a Debenture issued by the CDC,
guaranteed 100 percent by SBA (with the full faith and credit of the
United States), and sold to investors. The regulations specific to
these loans are found in subpart H of this part.
Sec. 120.3 Pilot programs.
The Administrator of SBA may from time to time suspend, modify, or
waive rules for a limited period of time to test new programs or ideas.
The Administrator shall publish a document in the Federal Register
explaining the reasons for these actions.
Definitions
Sec. 120.10 Definitions.
The following terms have the same meaning wherever they are used in
this part. Defined terms are capitalized wherever they appear.
Associate. (1) An Associate of a Lender or CDC is:
(i) An officer, director, member, or key employee, or an agent
involved in the loan-making process;
(ii) A Close Relative of any individual in paragraph (1)(i) of this
definition; and
(iii) Any entity in which one or more individuals referred to in
paragraphs (1) (i) and (ii) of this definition own or control at least
10 percent.
(2) An Associate of a small business is:
(i) An officer, director, member, owner, principal, key employee,
or agent authorized to act on behalf of the small business;
(ii) A Close Relative of any individual in paragraph (2)(i) of this
definition;
(iii) Any entity in which one or more individuals referred to in
paragraphs (2) (i) and (ii) of this definition owns or controls at
least 10 percent; and
(iv) Any individual or entity in control of or controlled by the
small business (except a Small Business Investment Company (``SBIC'')
licensed by SBA).
(3) For purposes of this definition, the time during which an
Associate relationship exists commences six months before the following
dates and continues as long as the certification, participation
agreement, or loan is outstanding:
(i) For a CDC, the date of certification by SBA;
(ii) For a Lender, the date of application for a loan guarantee on
behalf of an applicant; or
(iii) For a small business, the date of the loan application to
SBA, the CDC, the Intermediary, or the Lender.
Authorization is SBA's written agreement providing the terms and
conditions under which SBA will make or guarantee business loans. It is
not a contract to make a loan.
Borrower is the obligor of an SBA business loan.
Certified Development Company (``CDC'') is an entity authorized by
SBA to deliver 504 financing to small businesses.
Close Relative is a spouse; a parent; or a child or sibling, or the
spouse of any such person.
Eligible Passive Company is a small entity which does not engage in
regular and continuous business activity, which leases real or personal
property to an Operating Company for use in the Operating Company's
business, and which complies with the conditions set forth in
Sec. 120.111.
Intermediary is the entity in the Microloan program that receives
SBA financial assistance and makes loans to small businesses in amounts
up to $25,000.
Lender is an institution that has executed a participation
agreement with SBA under the guaranteed loan program.
Loan Instruments are the Authorization, note, instruments of
hypothecation, and all other agreements and documents related to a
loan.
Operating Company is an eligible small business actively involved
in conducting business operations now or about to be located on real
property owned by a Passive Company, or using or about to use in its
business
[[Page 64375]]
operations personal property owned by a Passive Company.
Preference is any arrangement giving a Lender or a CDC a preferred
position compared to SBA relating to the making of a business loan with
respect to such things as repayment, collateral, guarantees, control,
maintainance of a compensating balance, purchase of a Certificate of
deposit or acceptance of a separate or companion loan, without SBA's
consent.
Rural Area is a political subdivision or unincorporated area in a
non-metropolitan county (as defined by the Department of Agriculture),
or, if in a metropolitan county, any such subdivision or area with a
resident population under 20,000 which is designated by SBA as rural.
Service Provider is an entity that contracts with a Lender or CDC
to perform management, marketing, legal or other services.
Subpart A--Policies Applying to All Business Loans
Eligibility Requirements
Sec. 120.100 What are the basic requirements for all Borrowers?
To be an eligible Borrower for an SBA loan, a small business must:
(a) Be an operating business (except for loans to Passive
Companies);
(b) Be organized for profit;
(c) Be located in the United States;
(d) Be small under the size requirements of Part 121 of this
chapter (including affiliates). See subpart H of this part for the size
standards of Part 121 of this chapter which apply only to 504 loans;
and
(e) Must demonstrate a need for the desired credit.
Sec. 120.101 Credit not available elsewhere.
SBA provides business loan assistance only to applicants for whom
the desired credit is not otherwise available on reasonable terms from
non-Federal sources. SBA requires the Lender or CDC to certify or
otherwise show that the desired credit is unavailable to the applicant
on reasonable terms and conditions from non-Federal sources without SBA
assistance, taking into consideration the prevailing rates and terms in
the community in or near where the applicant conducts business, for
similar purposes and periods of time. Submission of an application to
SBA by a Lender or CDC constitutes certification by the Lender or CDC
that it has examined the availability of credit to the applicant, has
based its certification upon that examination, and has documentation in
its file to support the certification.
Sec. 120.102 Funds not available from alternative sources, including
personal resources of principals.
An applicant for a business loan must show that the desired funds
are not available from the personal resources of the applicant's
principals or other sources such as the sale of the applicant's assets
or securities. SBA may require the use of personal resources before a
loan will be granted, unless SBA determines that undue hardship would
result or if the loan is to an employee trust.
Sec. 120.103 Are farm enterprises eligible?
Federal financial assistance to agricultural enterprises is
generally made by the United States Department of Agriculture (USDA),
but may be made by SBA under the Memorandum of Understanding signed by
SBA and USDA. Farm-related businesses are eligible businesses under
SBA's business loan programs.
Sec. 120.104 Are businesses financed by SBICs eligible?
SBA may make or guarantee loans to a business financed by an SBIC
if SBA's collateral position will be superior to that of the SBIC. SBA
may also make or guarantee a loan to an otherwise eligible small
business which temporarily is owned or controlled by an SBIC under the
regulations in part 107 of this chapter. SBA neither guarantees SBIC
loans nor makes loans jointly with SBICs.
Sec. 120.105 Special consideration for veterans.
SBA will give special consideration to a small business owned by a
veteran or, if the veteran chooses not to apply, to a business owned or
controlled by one of the veteran's dependents. If the veteran is
deceased or permanently disabled, SBA will give special consideration
to one survivor or dependent. SBA will process the application of a
business owned or controlled by a veteran or dependent promptly,
resolve close questions in the applicant's favor, and pay particular
attention to maximum loan maturity. For SBA loans, a veteran is a
person honorably discharged from active military service.
Ineligible Businesses and Eligible Passive Companies
Sec. 120.110 What businesses are ineligible for SBA business loans?
The following types of businesses are ineligible:
(a) Non-profit businesses (for-profit subsidiaries are eligible);
(b) Financial businesses primarily engaged in the business of
lending, such as banks, finance companies, and factors (pawn shops,
although engaged in lending, may qualify in some circumstances);
(c) Passive businesses owned by developers and landlords that do
not actively use or occupy the assets acquired or improved with the
loan proceeds (except Eligible Passive Companies under Sec. 120.111);
(d) Life insurance companies;
(e) Businesses located in a foreign country (businesses in the U.S.
owned by aliens may qualify);
(f) Pyramid sale distribution plans;
(g) Businesses deriving more than one-third of gross annual income
from legal gambling activities);
(h) Businesses engaged in any illegal activity;
(i) Private clubs and businesses which limit the number of
memberships for reasons other than capacity;
(j) Government-owned entities (except for businesses owned or
controlled by a Native American tribe);
(k) Businesses principally engaged in teaching, instructing,
counseling or indoctrinating religion or religious beliefs, whether in
a religious or secular setting;
(l) Consumer and marketing cooperatives (producer cooperatives are
eligible);
(m) Loan packagers earning 30 percent or more of their gross annual
revenue from packaging SBA loans;
(n) Businesses with an Associate considered to have control under
Part 121 who is incarcerated, on probation, on parole, or subject to
pending felony charges;
(o) Businesses in which the Lender or CDC, or any of its Associates
owns an equity interest (unless waived by SBA for good cause in the
case of minor ownership interests);
(p) Businesses which:
(1) Present live performances of a prurient sexual nature; or
(2) Derive significant gross revenue through the sale of products
or services, or the presentation of depictions or displays, of a
prurient sexual nature;
(q) Unless waived by SBA for good cause, businesses that have
previously defaulted on a Federal loan or Federally assisted financing,
resulting in the Federal government or any of its agencies or
Departments sustaining a loss in any of its programs, and businesses
owned or controlled by an applicant or any of its Associates which
previously owned, operated, or controlled a business which defaulted
[[Page 64376]]
on a Federal loan and caused the Federal government or any of its
agencies or Departments to sustain a loss in any of its programs. For
purposes of this section, a compromise agreement shall also be
considered a loss; and
(r) Businesses primarily engaged in political or lobbying
activities.
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 an Operating Company for the
conduct of the Operating Company's business. Any ownership structure or
legal form may qualify as a Eligible Passive Company, except revocable
trusts and other grantor trusts.
(a) Conditions that apply to all legal forms:
(1) The Operating Company is an eligible small business, and the
proposed use of the proceeds would have been an eligible use if the
Operating Company were obtaining the financing directly;
(2) Both the Eligible Passive Company and the Operating Company
must be small under the appropriate size standards in part 121 of this
chapter;
(3) The lease between the Eligible Passive Company and the
Operating Company must be in writing and must be subordinated to SBA's
mortgage, trust deed lien, or security interest on the property. Also,
the Eligible Passive Company (as landlord) must furnish as collateral
for the loan an assignment of all rents paid under the lease;
(4) The lease, including options to renew exercisable solely by the
Operating Company, must have a remaining term at least equal to the
term of the loan;
(5) The Operating Company must be a guarantor or a co-borrower
(with the Eligible Passive Company) of the loan; and
(6) Each holder of an ownership interest constituting at least 20
percent of the Eligible Passive Company or the Operating Company must
guarantee the loan (the trustee shall execute the guarantee on behalf
of any trust).
(b) Additional conditions that apply to irrevocable trusts. A trust
qualifying as a Eligible Passive Company may engage in other activities
as authorized by its trust agreement. For purposes of this section, the
trustee shall certify to SBA that:
(1) The trustee has authority to act;
(2) The trust is irrevocable, and is not regarded as a grantor
trust for tax purposes;
(3) The trust has the authority to borrow funds, pledge trust
assets, and lease the property to the Operating Company;
(4) The trustee has provided accurate, pertinent language from the
trust agreement confirming the above; and
(5) The trustee has provided and will continue to provide SBA with
a true and complete list of all trustors and donors.
Uses of Proceeds
Sec. 120.120 What are eligible uses of proceeds?
A small business must use an SBA loan for sound business purposes.
The uses of proceeds are prescribed in each loan's Authorization.
(a) A Borrower may use loan proceeds from any SBA loan to:
(1) Acquire land (by purchase or lease);
(2) Improve a site (grading, streets, parking lots, landscaping);
(3) Purchase an existing building;
(4) Convert, expand or renovate an existing building;
(5) Construct a new building; and/or
(6) Acquire (by purchase or lease) and install machinery and
equipment (in the 504 program, with a useful life of at least 10 years
and at a fixed location, unless essential to the Project).
(b) A Borrower may also use 7(a) and microloan proceeds for:
(1) Inventory;
(2) Supplies;
(3) Raw materials;
(4) Working capital; and
(5) Refinancing certain outstanding debts.
Sec. 120.130 Restrictions on uses of proceeds.
SBA will not authorize nor may a Borrower use loan proceeds for the
following purposes (including the replacement of funds used for any
such purpose):
(a) Payments, distributions or loans to Associates of the applicant
(except for ordinary compensation for services rendered);
(b) Refinancing a debt owed to a Small Business Investment Company
(``SBIC'');
(c) Speculation in any kind of real or personal property;
(d) Floor plan financing or other revolving line credit, except
under Sec. 120.390;
(e) Investments in real or personal property acquired and held
primarily for sale, lease, or investment and not used within 3 years in
an otherwise eligible business (except for a loan to an Eligible
Passive Company or to a small contractor under Sec. 120.310);
(f) A purpose which does not benefit the small business; or
(g) Any use restricted by Secs. 120.201-120.203 and 120.884
(specific to 7(a) loans and 504 loans respectively).
Ethical Requirements
Sec. 120.140 What ethical requirements apply to participants?
Lenders, Intermediaries, CDCs, Associate Development Companies
(``ADCs'') and their Associates (in this section ``Participants'') must
act ethically and exhibit good character. Ethical indiscretion of an
Associate shall be attributed to the Participant. A Participant must
promptly notify SBA if it obtains information concerning the unethical
behavior of an Associate. The following are examples of such unethical
behavior. A Participant may not:
(a) Self-deal;
(b) Have a real or apparent conflict of interest with a small
business with which it is dealing (including any of its Associates) or
SBA;
(c) Own an equity interest in a business that has received or is
applying to receive SBA financing (during the term of the loan or
within 6 months prior to the loan application);
(d) Be incarcerated, on parole, or on probation;
(e) Knowingly misrepresent or make a false statement to SBA;
(f) Engage in conduct reflecting a lack of business integrity or
honesty;
(g) Be a convicted felon, or have an adverse final civil judgment
(in a case involving fraud, breach of trust, or other conduct) that
would cause the public to question the Participant's business
integrity, taking into consideration such factors as the magnitude,
repetition, harm caused, and remoteness in time of the activity or
activities in question;
(h) Accept funding from any source that restricts, prioritizes, or
conditions the types of small businesses that the CDC, ADC, or
Intermediary may assist under an SBA program or that imposes any
conditions or requirements upon recipients of SBA assistance
inconsistent with SBA's loan programs or regulations;
(i) Fail to disclose to SBA all relationships between the small
business and its Associates, the Participant, and/or the lenders
financing the Project;
(j) Fail to disclose to SBA whether the loan will:
(1) Reduce the exposure of a Lender in a position to sustain a
loss;
(2) Directly or indirectly finance the purchase of real estate,
personal property or services (including insurance) from the
Participant;
(3) Repay or refinance a debt due a Participant;
[[Page 64377]]
(4) Require the small business, or an Associate, to invest in the
Participant (except for institutions which require an investment from
all members as a condition of membership, such as a Production Credit
Association); or
(5) Involve a Lender, CDC or Associate that has issued a commitment
to make or consider the loan prior to receipt of the loan application,
including a forward commitment to a builder or developer; or
(k) Engage in any activity which taints its objective judgment in
evaluating the loan.
Credit Criteria for SBA Loans
Sec. 120.150 What are SBA's lending criteria?
The Borrower (and the Operating Company) must be creditworthy.
Loans must be so sound as to assure repayment. SBA will consider:
(a) Character, reputation, and credit history of the Borrower (and
the Operating Company, if applicable), its Associates, and guarantors;
(b) Experience and depth of management;
(c) Strength of the business;
(d) Past earnings, projected cash flow, and future prospects;
(e) Ability to repay the loan with earnings from the business;
(f) Sufficient invested equity to operate on a sound financial
basis;
(g) Potential for long-term success; and
(h) Nature and value of collateral. (Inadequate colateral will not
be the sole reason for denial of a loan request.)
Sec. 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 part 121 of
this chapter, shall not exceed $750,000, except as otherwise authorized
by statute for a specific loan program.
Sec. 120.160 Loan conditions.
The following requirements are normally required by SBA for all
business loans:
(a) Personal guarantees. Associates and holders of at least a 20
percent ownership interest generally must guarantee the loan. SBA, in
its discretion, may require holders of interests of less than 20
percent to guarantee the loan.
(b) Appraisals. SBA may require professional appraisals of the
applicant's and principals' assets, a survey, or a feasibility study.
(c) Hazard Insurance. SBA requires hazard insurance on all
collateral.
(d) Taxes. If any portion of the loan proceeds will be used for
working capital, the applicant may not use any of the proceeds to pay
past-due Federal and state payroll taxes.
Sec. 120.161 Lending limits.
The outstanding balance of all SBA financial assistance to a
Borrower and its affiliates under the business loan programs covered by
this Part must not exceed $750,000 (except as otherwise authorized for
a specific loan program).
Requirements Imposed Under Other Laws and Orders
Sec. 120.170 Flood insurance.
Under the Flood Disaster Protection Act of 1973 (Sec. 205(b) of
Public Law 93-234; 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a loan
recipient must obtain flood insurance if any building (including mobile
homes), machinery, or equipment acquired, installed, improved,
constructed, or renovated with the proceeds of SBA financial assistance
is located in a special flood hazard area. The requirement applies also
to any inventory (business loan program), fixtures or furnishings
contained or to be contained in the building. Mobile homes on a
foundation are buildings. SBA, Lenders, CDCs, and Intermediaries must
notify Borrowers that flood insurance must be maintained.
Sec. 120.171 Compliance with child support obligations.
Any holder of 50% or more of the ownership interest in the
recipient of an SBA loan must certify that he or she is not more than
60 days delinquent on any obligation to pay child support arising
under:
(a) An administrative order;
(b) A court order;
(c) A repayment agreement between the recipient and the custodial
parent; or
(d) A repayment agreement between the recipient and a State agency
providing child support enforcement services.
Sec. 120.172 Flood-plain and wetlands management.
(a) All loans must conform to requirements of Executive Orders
11988, ``Flood Plain Management'' (3 CFR, 1977 Comp., p. 117) and
11990, ``Protection of Wetlands'' (3 CFR, 1977 Comp., p. 121). Lenders,
Intermediaries, CDCs, and SBA must comply with requirements applicable
to them. Applicants must show:
(1) Whether the location for which financial assistance is proposed
is in a floodplain or wetland;
(2) If it is in a floodplain, that the assistance is in compliance
with local land use plans; and
(3) That any necessary construction or use permits will be issued.
(b) Generally, there is an 8-step decision making process with
respect to:
(1) Construction or acquisition of anything, other than a building;
(2) Repair and restoration equal to more than 50% of the market
value of a building; or
(3) Replacement of destroyed structures.
(c) SBA may determine for the following types of actions, on a
case-by-case basis, that the full 8-step process is not warranted and
that only the first step (determining if a proposed action is in the
base floodplain) need be completed:
(1) Actions located outside the base floodplain;
(2) Repairs, other than to buildings, that are less than 50% of the
market value;
(3) Replacement of building contents, materials, and equipment;
(4) Hazard mitigation measures;
(5) Working capital loans; and
(6) SBA loan assistance of $1,500,000 or less.
Sec. 120.173 Lead-based paint.
If loan proceeds are for the construction or rehabilitation of a
residential structure, lead-based paint may not be used on any interior
surface, or on any exterior surface that is readily accessible to
children under the age of 7.
Sec. 120.174 Earthquake hazards.
When loan proceeds are used to construct a new building or an
addition to an existing building, the construction must conform with
the ``National Earthquake Hazards Reduction Program (NEHRP) Recommended
Provisions for the Development of Seismic Regulations for New
Buildings,'' obtainable from the Interagency Committee on Seismic
Safety in Construction.
Sec. 120.175 Coastal barrier islands.
SBA and Intermediaries may not make or guarantee any loan within
the Coastal Barrier Resource System.
Sec. 120.176 Compliance with other laws.
All SBA loans are subject to all applicable laws, including
(without limitation) the civil rights laws (see Parts 112, 113, 117 and
136 of this chapter), prohibiting discrimination on the grounds of
race, color, national origin, religion, sex, marital status, disability
or age. SBA requests agreements or evidence to support or document
compliance with these laws, including reports required by applicable
statutes or the regulations in this chapter.
[[Page 64378]]
Enforceability Despite Rule Changes
Sec. 120.180 Are rules enforceable if they are changed later?
Regulations and contractual provisions in effect at the time of a
transaction govern an SBA loan financing transaction, notwithstanding
subsequent rule or contract changes. SBA may conduct an enforcement
action regarding any violation of provisions of regulations or
contracts applicable at the time, but no longer in effect or in use.
Loan Applications
120.190 Where does an applicant apply for a loan?
An applicant for a loan should apply to:
(a) A Lender for a guaranteed or immediate participation loan;
(b) A CDC for a 504 loan;
(c) An Intermediary for a Microloan; or
(d) SBA for a direct loan.
Sec. 120.191 The contents of a business loan application.
SBA requires that an application for a business loan contain, among
other things, a description of the history and nature of the business,
the amount and purpose of the loan, the collateral offered for the
loan, current financial statements, historical financial statements (or
tax returns if appropriate) for the past three years, and a business
plan, when applicable. Personal histories and financial statements will
be required from principals of the applicant (and the Operating
Company, if applicable).
Sec. 120.192 Approval or denial.
Applicants receive notice of approval or denial by the Lender, CDC,
Intermediary, or SBA, as appropriate. Notice of denial will include the
reasons. If a loan is approved, an Authorization will be issued.
Sec. 120.193 Reconsideration after denial.
An applicant or recipient of a business loan may request
reconsideration of a denied loan or loan modification request within 6
months of denial. Applicants denied due to a size determination can
appeal that determination under part 121 of this chapter. All others,
including those requesting modification of an existing loan condition,
can only appeal to the office that denied the initial loan application
or request. To prevail, the applicant must demonstrate that it has
overcome all legitimate reasons for denial. Six months after denial, a
new application is required. If the reconsideration is denied, an
applicant may request a final reconsideration by the AA/FA, whose
decision is final.
Computerized SBA Forms
Sec. 120.194 Use of computer forms.
Any applicant or other party involved in SBA Business Loan Programs
may use computer generated SBA application forms, closing forms, and
other forms designated by SBA if the forms are exact reproductions of
SBA forms.
Sec. 120.195 Duty of Lender, CDC, Intermediary Lender, and Borrower to
report fees.
(a) A Lender, CDC, or Intermediary Lender must report to SBA all
fees of which it has knowledge or which it charges the applicant,
including insurance fees. It must refund to the applicant any fees that
SBA considers excessive. Failure to do so may result in an action by
SBA to suspend or revoke the Lender's participation status.
(b) An applicant for a business loan must certify to SBA the name
of each individual or entity (attorney, loan packager, broker,
accountant, Service Provider, Lender) that helped the applicant obtain
the loan, describing the services performed, and disclosing the amount
of each fee.
Subpart B--Policies Specific to 7(a) Loans
Bonding Requirements
Sec. 120.200 What bonding requirements exist during construction?
On 7(a) loans where the SBA guarantee covers a period of
construction, the Borrower must supply a 100 percent payment and
performance bond and builder's risk insurance, unless waived by SBA.
Limitations on Use of Proceeds
Sec. 120.201 Refinancing unsecured or undersecured loans.
A Borrower may not use 7(a) loan proceeds to pay off an
inadequately secured creditor, including a Lender, causing a shift to
SBA of all or part of a potential loss from an existing debt.
Sec. 120.202 Restrictions on loans for changes in ownership.
A Borrower may not use loan proceeds to purchase a portion of a
business or a portion of another owner's interest. One or more current
owners may use loan proceeds to purchase the entire interest of another
current owner, or a Borrower can purchase ownership of an entire
business.
Sec. 120.203 Revolving credit.
SBA may not use its regular 7(a) program for a revolving line of
credit, such as ``floor plan'' financing. (See Sec. 120.390 for special
Caplines program.)
Maturities; Interest Rates; Loan and Guarantee Amounts
Sec. 120.210 What percentage of a loan may SBA guarantee?
SBA's guarantee percentage must not exceed the applicable
percentage established in section 7(a) of the Act. The maximum
allowable guarantee percentage on a loan will be determined by the loan
amount. As of October 31, 1995, the percentages are: Loans of $100,000
or less may receive a maximum guarantee of 80 percent. All other loans
may receive a maximum guarantee of 75 percent, not to exceed $750,000.
Sec. 120.211 What limits are there on the amounts of direct loans?
(a) The statutory limit for direct loans made under the authority
of section 7(a)(1)-(19) of the Small Business Act is $350,000. SBA has
established an administrative limit of $150,000 for direct loans. The
Associate Administrator for Financial Assistance (AA/FA) may authorize
acceptance of an application up to the statutory limit.
(b) The statutory limit for direct loans made under the authority
of section 7(a)(20) is $750,000. SBA has established an administrative
limit of $150,000. The Associate Administrator for Minority Enterprise
Development may authorize the acceptance of an application that exceeds
the administrative limit.
(c) The statutory limit on SBA's portion of an immediate
participation loan is the lesser of 90 percent of the loan or $350,000.
The administrative limit is the lesser of 75 percent of the loan or
$150,000. The AA/FA may authorize exceptions to the administrative
limit up to $350,000.
Sec. 120.212 What limits are there on loan maturities?
The term of a loan shall be:
(a) The shortest appropriate term, depending upon the Borrower's
ability to repay;
(b) Ten years or less, unless it finances or refinances real estate
or equipment with a useful life exceeding ten years; and
(c) A maximum of 25 years, including extensions. (A portion of a
loan used to acquire or improve real property may have a term of 25
years plus an additional period needed to complete the construction or
improvements.)
[[Page 64379]]
Sec. 120.213 What fixed interest rates may a Lender charge?
(a) Fixed Rates for Guaranteed Loans. A loan may have a reasonable
fixed interest rate. SBA periodically publishes the maximum allowable
rate in the Federal Register.
(b) Direct loans. A statutory formula based on the cost of money to
the Federal government determines the interest rate on direct loans.
SBA publishes the rate periodically in the Federal Register.
Sec. 120.214 What conditions apply for variable interest rates?
A Lender may use a variable rate of interest, upon SBA's approval.
SBA's maximum allowable rates apply only to the initial rate on the
date SBA received the loan application. SBA shall approve the use of a
variable interest rate under the following conditions:
(a) Frequency. The first change may occur on the first calendar day
of the month following initial disbursement, using the base rate (see
paragraph (c) of this section) in effect on the first business day of
the month. After that, changes may occur no more often than monthly.
(b) Range of fluctuation. The amount of fluctuation shall be equal
to the movement in the base rate. The difference between the initial
rate and the ceiling rate may be no greater than the difference between
the initial rate and the floor rate.
(c) Base rate. The base rate shall be the prime rate in effect on
the first business day of the month, printed in a national financial
newspaper published each business day, or the SBA Optional Peg Rate
which SBA publishes quarterly in the Federal Register.
(d) Maturities under 7 years. For loans with maturities under seven
years, the maximum interest rate shall not exceed two and one-quarter
(2\1/4\) percentage points over the base rate.
(e) Maturities of 7 years or more. For loans with maturities of
seven or more years, the maximum interest rate shall not exceed two and
three-quarters (2\3/4\) percentage points over the base rate.
(f) Higher interest rates for smaller loans. For a variable rate
loan over $25,000 but not exceeding $50,000, the interest rate may be
one percent more than the maximum interest rate described above. For a
variable rate loan of $25,000 or less, the maximum interest rate
described above may be increased by two percentage points.
(g) Amortization. Initial amortization of principal and interest
may be recomputed as interest rates fluctuate, as directed by SBA. With
prior approval of SBA, the Lender may use certain other amortization
methods.
Fees for Guaranteed Loans
Sec. 120.220 Guarantee fees that Lender pays SBA.
(a) The Lender pays a guarantee fee to SBA for each loan as
follows:
----------------------------------------------------------------------------------------------------------------
Fee measured as
Guaranteed portion of loan percentage of When payable Lender may get fee When SBA refunds
guaranteed portion from borrower fee from borrower
----------------------------------------------------------------------------------------------------------------
Under 12 months.................. .25%.............. With guarantee When SBA approves If application
application. loan. withdrawn or
denied \1\
More than 12 months and total 2.0% of guaranteed Within 90 days of After First If loan cancelled
guaranteed portion is $80,000 or portion. SBA approval. disbursement. and never
less. disbursed
More than 12 months and amount of 3%................ Within 90 days of After first If loan cancelled
guaranteed portion of loan that SBA approval. disbursement. and never
is $250,000 or less. disbursed
More than 12 months and amount of 3.0% of 1st Within 90 days of After first If loan cancelled
guaranteed portion of loan $250,000 plus SBA approval. disbursement. and never
between $250,000 and $500,000. 3.5% of balance. disbursed
More than 12 months and amount of 3.0% of 1st Within 90 days of After first If loan cancelled
guaranteed portion of loan $250,000 plus SBA approval. disbursement. and never
exceeding $500,000. 3.5% of next disbursed.
$250,000 plus
3.875% of the
amount exceeding
$500,000.
----------------------------------------------------------------------------------------------------------------
\1\ Also, if SBA substantially changes the Lender's loan terms and approves the loan, but the modified terms are
unacceptable to the Borrower or Lender. (The Lender must request refund in writing within 30 calendar days of
the approval).
(b) The Lender shall also pay SBA an annual fee equal to 0.5
percent of the outstanding balance of the guaranteed portion of each
loan.
(c) If the guarantee fee is not paid, SBA may terminate the
guarantee. The Borrower may use loan proceeds to reimburse the Lender
for the guarantee fee. Acceptance of the guarantee fee by SBA shall not
waive any right of SBA arising from the Lender's misconduct or
violation of any provision of this part, the guarantee agreement, the
Authorization, or other loan documents.
Sec. 120.221 Fees which the Lender may collect from a loan applicant.
(a) Service and packaging fees. The Lender may charge an applicant
reasonable fees (customary for similar Lenders in the geographic area
where the loan is being made) for packaging and other services. The
Lender must advise the applicant in writing that the applicant is not
required to obtain or pay for unwanted services. The applicant is
responsible for deciding whether fees are reasonable. SBA may review
these fees at any time. Lender must refund any such fee considered
unreasonable by SBA.
(b) Commitment fee for Export Working Capital loan. After SBA
approves a loan under the Export Working Capital Program, the Lender
may charge the borrower a commitment fee of \1/4\ of 1 percent (or $200
minimum) of the loan.
(c) Extraordinary servicing. Subject to prior written SBA approval,
if all or part of a loan will have extraordinary servicing needs, the
Lender may charge the applicant a service fee not to exceed 2 percent
per year on the outstanding balance of the part requiring special
servicing.
(d) Out-of-pocket expenses. The Lender may collect from the
applicant
[[Page 64380]]
necessary out-of-pocket expenses such as filing or recording fees.
(e) Late payment fee. The Lender may charge the Borrower a late
payment fee not to exceed 5 percent of the regular loan payment.
(f) No prepayment fee. The Lender may not charge a fee for full or
partial prepayment of a loan.
Sec. 120.222 Fees which the Lender or Associate may not collect from
the Borrower or share with third parties.
The Lender or its Associate may not:
(a) Require the applicant or Borrower to pay the Lender, an
Associate, or any party designated by either, any fees or charges for
goods or services, including insurance, as a condition for obtaining an
SBA guaranteed loan (unless permitted by this part);
(b) Charge an applicant any commitment, bonus, broker, commission,
or similar fee;
(c) Charge points or add-on interest;
(d) Share any premium received from the sale of an SBA guaranteed
loan in the secondary market with either a packager or other loan-
referral source; or
(e) Charge the Borrower for legal services, unless they are hourly
charges for requested services actually rendered.
Subpart C--Special Purpose Loans
Sec. 120.300 Statutory authority.
In addition to the general 7(a) business loan program, Congress has
authorized several special purpose programs in various subsections of
the Act. Generally, the regular 7(a) loan policies, eligibility
requirements and credit criteria apply. The sections of this subpart
prescribe the special conditions applying to each special purpose
program. As with other business loans, special purpose loans are
available only to the extent funded by annual appropriations.
Disabled Assistance Loan Program (DAL)
Sec. 120.310 What assistance is available for the disabled?
Section 7(a)(10) of the Act authorizes SBA to guarantee or make
direct loans to the disabled. SBA distinguishes two kinds of
assistance:
(a) DAL-1. DAL-1 Financial Assistance is available to non-profit
public or private organizations for the disabled that employ the
disabled; or
(b) DAL-2. DAL-2 Financial Assistance is available to:
(1) Small businesses wholly owned by the disabled; and
(2) Disabled individuals to establish, acquire, or operate a small
business.
Sec. 120.311 Definitions.
(a) Organization for the disabled means one which:
(1) Is organized under federal or state law to operate in the
interest of the disabled;
(2) Is non-profit;
(3) Employs disabled individuals for seventy-five percent of the
time needed to produce commodities or services for sale; and
(4) Complies with occupational and safety standards prescribed by
the Department of Labor.
(b) Disabled individual means a person who has a permanent
physical, mental or emotional impairment, defect, ailment, disease or
disability which limits the type of employment for which the person
would otherwise be qualified.
Sec. 120.312 DAL-1 use of proceeds and other program conditions.
(a) DAL-1 applicants must submit appropriate documents to establish
program eligibility.
(b) Generally, applicants may use loan proceeds for any 7(a) loan
purposes. Loan proceeds may not be used:
(1) To purchase or construct facilities if construction grants and
mortgage assistance are available from another Federal source; or
(2) For supportive services (expenses incurred by a DAL-1
organization to subsidize wages of low producers health and
rehabilitation services, management, training, education, and housing
of disabled workers).
(c) SBA does not consider a DAL-1 organization to have a conflict
of interest if one or more of its Associates is an Associate of the
Lender.
Sec. 120.313 DAL-2 use of proceeds and other program conditions.
(a) The DAL-2 loan proceeds may be used for normal 7(a) loan
purposes.
(b) An applicant may use DAL-2 loan proceeds to acquire an eligible
small business without complying with the change of ownership
conditions in Sec. 120.206.
(c) A DAL-2 applicant must submit evidence from a physician,
psychiatrist, or other qualified professional as to the permanent
nature of the disability and the limitation it places on the applicant.
Sec. 120.314 Resolving doubts about creditworthiness.
For the purpose of the DAL Program, SBA shall resolve doubts
concerning the creditworthiness of an applicant in favor of the
applicant. However, the applicant must present satisfactory evidence of
repayment ability. Personal guarantees of Associates are not required.
Sec. 120.315 Interest rate and loan limit.
The interest rate on direct DAL loans is three percent. There is an
administrative limit of $150,000 on a direct DAL loan.
Businesses Owned by Low Income Individuals
Sec. 120.320 Policy.
Section 7(a)(11) of the Act authorizes SBA to make or guarantee
loans to establish, preserve or strengthen small business concerns:
(a) Located in an area having high unemployment according to the
Department of Labor;
(b) Located in an area in which a high percentage of individuals
have a low income inadequate to satisfy basic family needs; and
(c) More than 50 percent owned by low income individuals.
Energy Conservation
Sec. 120.330 Who is eligible for an energy conservation loan?
SBA may make or guarantee loans to assist a small business to
design, engineer, manufacture, distribute, market, install, or service
energy devices or techniques designed to conserve the Nation's energy
resources.
Sec. 120.331 What devices or techniques are eligible for a loan?
Eligible energy conservation devices or techniques include:
(a) Solar thermal equipment;
(b) Photovoltaic cells and related equipment;
(c) A product or service which increases the energy efficiency of
existing equipment, methods of operation or systems which use fossil
fuels, and which is on the Energy Conservation Measures list of the
Secretary of Energy;
(d) Equipment producing energy from wood, biological waste, grain
or other biomass energy sources;
(e) Equipment for cogeneration of energy, district heating or
production of energy from industrial waste;
(f) Hydroelectric power equipment;
(g) Wind energy conversion equipment; and
(h) Engineering, architectural, consulting, or other professional
services necessary or appropriate for any of the devices or techniques
in paragraphs (a) through (g) of this section.
Sec. 120.332 What are the eligible uses of proceeds?
(a) Acquire property. The Borrower may use the loan proceeds to
acquire land necessary for imminent plant construction, buildings,
machinery,
[[Page 64381]]
equipment, furniture, fixtures, facilities, supplies, and material
needed to accomplish any of the eligible program purposes in
Sec. 120.330.
(b) Research and development. Up to 30% of loan proceeds may be
used for research and development:
(1) Of an existing product or service; or
(2) A new product or service.
(c) Working capital. The Borrower may use proceeds for working
capital for entering or expanding in the energy conservation market.
Sec. 120.333 Are there any special credit criteria?
In addition to regular credit evaluation criteria, SBA shall weigh
the greater risk associated with energy projects. SBA shall consider
such factors as quality of the product or service, technical
qualifications of the applicant's management, sales projections, and
financial status.
Export Working Capital Program (EWCP)
Sec. 120.340 What is the Export Working Capital Program?
Under the EWCP, SBA guarantees a revolving line of credit for
export purposes (section 7(a)(14) of the Act). Loan maturities may be
for up to three years with annual renewals. Proceeds can be used only
to finance export transactions. Loans can be for single or multiple
export sales.
Sec. 120.341 Who is eligible?
In addition to the criteria applicable to all 7(a) loans, an
applicant must be in business for one full year at the time of
application, but not necessarily in the exporting business. SBA may
waive this requirement if the applicant has sufficient export trade
experience or other managerial experience.
Sec. 120.342 What are eligible uses of proceeds?
Loan proceeds may be used:
(a) To acquire inventory;
(b) To pay the manufacturing costs of goods for export;
(c) To purchase goods or services for export;
(d) To support standby letters of credit;
(e) To develop or penetrate foreign markets;
(f) For pre-shipment working capital; and
(g) For post-shipment exposure coverage.
Sec. 120.343 Collateral.
A Borrower must give SBA a first security interest sufficient to
cover 100 percent of the EWCP loan amount (such as insured accounts
receivable or letters of credit). Collateral must be located in the
United States, its territories or possessions.
Sec. 120.344 Cash flow projections.
An applicant must submit cash flow projections to support the need
for the loan and the ability to repay. After the loan is made, the loan
recipient must submit monthly progress reports.
International Trade Loans
Sec. 120.345 Policy.
Section 7(a)(16) of the Act authorizes SBA to guarantee loans to
small businesses that are:
(a) Engaged or preparing to engage in international trade; or
(b) Adversely affected by import competition.
Sec. 120.346 Eligibility.
(a) An applicant must establish that:
(1) The loan proceeds will significantly expand an existing export
market or develop new export markets; or
(2) The applicant business is adversely affected by import
competition; and
(3) Upgrading facilities or equipment will improve the applicant's
competitive position.
(b) The applicant must have a business plan reasonably supporting
its projected export sales.
Sec. 120.347 Use of proceeds.
The Borrower may use loan proceeds to acquire, construct, renovate,
modernize, improve, or expand facilities and equipment to be used in
the United States to produce goods or services involved in
international trade.
Sec. 120.348 Amount and percentage of guarantee.
SBA can guarantee up to $1,250,000 for a combination of fixed-asset
financing and working capital, supplies and EWCP assistance. The non-
fixed-asset portion cannot exceed $750,000.
Qualified Employee Trusts (ESOP)
Sec. 120.350 Policy.
Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to a
qualified employee trust (``ESOP'') to:
(a) Help finance the growth of its employer's small business; or
(b) Purchase ownership or voting control of the employer.
Sec. 120.351 Definitions.
All terms specific to ESOPs have the same definition for purposes
of this section as in the Internal Revenue Service (IRS) Code (title 26
of the United States Code) or regulations (26 CFR chapter I).
Sec. 120.352 Use of proceeds.
Loan proceeds may be used for two purposes.
(a) Qualified employer securities. A qualified employee trust may
relend loan proceeds to the employer by purchasing qualified employer
securities. The small business concern may use these funds for any
general 7(a) purpose.
(b) Control of employer. A qualified employee trust may use loan
proceeds to purchase a controlling interest (51 percent) in the
employer. Ownership and control must vest in the trust by the time the
loan is repaid.
Sec. 120.353 Eligibility.
SBA may assist a qualified employee trust (or equivalent trust)
that meets the requirements and conditions for an ESOP prescribed in
all applicable IRS, Treasury and DOL regulations. In addition, the
following conditions apply:
(a) The small business must provide the funds needed by the trust
to repay the loan; and
(b) The small business must provide adequate collateral.
Sec. 120.354 Creditworthiness.
In determining repayment ability, SBA shall not consider the
personal assets of the employee-owners of the trust. SBA shall consider
the earnings history and projected future earnings of the employer
small business. SBA may consider the business and management experience
of the employee-owners. SBA must have evidence that financial
assistance is not otherwise available by utilizing:
(a) The personal resources and credit of the principals of the
small business;
(b) The resources and credit of the small business; or
(c) The sale of the assets of the small business.
Veterans Loan Program
Sec. 120.360 Which veterans are eligible?
SBA may make a direct loan to a small business 51 percent owned by
one or more of the following eligible veterans:
(a) Vietnam-era veterans who served for a period of more than 180
days between August 5, 1964, and May 7, 1975, and were discharged other
than dishonorably;
(b) Disabled veterans of any era with a minimum compensable
disability of 30 percent; or
(c) A veteran of any era who was discharged for disability.
[[Page 64382]]
Sec. 120.361 Other conditions of eligibility.
(a) Management and daily operations of the business must be
directed by one or more of the veteran owners whose veteran status was
used to qualify for the loan.
(b) This direct loan program is available only if private sector
financing and guaranteed loans are not available.
(c) A veteran may qualify only once for this direct loan program.
Pollution Control Program
Sec. 120.370 Policy.
Section 7(a)(12) of the Act authorizes SBA to guarantee loans up to
$1,000,000 to an eligible small business to plan, design or install a
pollution control facility. An applicant must meet the eligibility
requirements for 7(a) loans.
Loans to Participants in the 8(a) Program
Sec. 120.375 Policy.
Section 7(a)(20) of the Act authorizes SBA to provide direct
(unilaterally or together with Lenders) or guaranteed loans to firms
participating in the 8(a) Program.
Sec. 120.376 Special requirements.
The following special conditions apply (otherwise, the general 7(a)
eligibility criteria apply):
(a) The Associate Administrator of Minority Enterprise Development
(``MED'') may waive the direct loan administrative ceiling of $150,000,
and raise it to $750,000.
(b) The SBA portion on a guaranteed loan must not exceed $750,000.
(c) The interest rate on a guaranteed loan shall be the same as on
regular 7(a) guarantee loans. The interest rate on a direct loan shall
be one percent less than on a regular direct loan.
(d) For a direct loan or SBA's portion of an immediate
participation loan, SBA shall subordinate its security interest on all
collateral to other debt of the applicant.
Sec. 120.377 Use of proceeds.
The loan proceeds shall not be used for debt refinancing. A
manufacturing concern may use loan proceeds for working capital.
Defense Economic Transition Assistance
Sec. 120.380 Program.
Section 7(a)(21) of the Act authorizes SBA to guarantee loans to
help eligible small businesses transition from defense to civilian
markets, or eligible individuals adversely impacted by base closures or
defense cutbacks to acquire or open and operate a small business.
Sec. 120.381 Eligibility.
(a) Eligible small businesses. A small business is eligible if it
has been detrimentally impacted by the closure (or substantial
reduction) of a Department of Defense installation, or the termination
(or substantial reduction) of a Department of Defense Program on which
the small business was a prime contractor, subcontractor, or supplier
at any tier.
(b) Eligible individual. An eligible individual, for purposes of
this program, includes the following persons involuntarily separated
from their position or voluntarily terminated under a program offering
inducements to encourage early retirement:
(1) A member of the Armed Forces of the United States (honorably
discharged);
(2) A civilian employee of the Department of Defense; or
(3) An employee of a prime contractor, sub-contractor, or supplier
at any tier of a Department of Defense program.
Sec. 120.382 Repayment ability.
SBA shall resolve reasonable doubts concerning the small business'
proposed business plan for transition to non-defense-related markets in
favor of the loan applicant in determining the sound value of the
proposed loan.
Sec. 120.383 Restrictions on loan processing.
Since greater risk may be associated with a loan to an applicant
under this program, a Certified Lender or Preferred Lender shall not
make a defense economic assistance loan.
CapLines Program
Sec. 120.390 Revolving credit.
CapLines finances small businesses' short-term, revolving working-
capital needs. Generally, SBA regulations governing the 7(a) program
also govern this program. Under CapLines, SBA generally can guarantee
up to $750,000.
Small General Contractors
Sec. 120.391 What is the Small General Contractor Program?
SBA may make or guarantee loans to finance small general
contractors to construct or rehabilitate residential or commercial
property for resale (section 7(a)(9) of the Act). This program provides
an exception under specified conditions to the general rule against
financing investment property. ``Construct'' and ``rehabilitate'' mean
only work done on-site to the structure, utility connections and
landscaping.
Sec. 120.392 Who may apply?
A construction contractor or home-builder with a past history of
profitable construction or rehabilitation projects of comparable type
and size may apply. An applicant may subcontract a portion of the work.
Subcontracts in excess of $25,000 may require 100 percent payment and
performance bonds.
Sec. 120.393 Are there special application requirements?
(a) An applicant must submit letters from:
(1) A mortgage lender indicating that permanent mortgage money is
available to qualified purchasers to buy such properties;
(2) A real estate broker indicating that a market exists for the
proposed building and that it will be compatible with its neighborhood;
and
(3) An architect, appraiser or engineer agreeing to make
inspections and certifications to support interim disbursements.
(b) The Borrower may substitute a letter from a Lender for one or
more of the letters.
Sec. 120.394 What are the eligible uses of proceeds?
A Borrower must use the loan proceeds solely to acquire, construct
or substantially rehabilitate an individual residential or commercial
building for sale. ``Substantial'' means rehabilitation expenses of
more than one-third of the purchase price or fair market value at the
time of the application. A Borrower may use up to 20 percent of the
proceeds to acquire land, and up to 5 percent for community
improvements such as curbs and sidewalks.
Sec. 120.395 What is SBA's collateral position?
SBA will require a lien on the building which must be in no less
than a second position.
Sec. 120.396 What is the term of the loan?
The loan must not exceed thirty-six months plus the estimated time
to complete construction or rehabilitation.
Sec. 120.397 Are there any special restrictions?
The borrower must not use loan proceeds to purchase vacant land for
possible future construction or to operate or hold rental property for
future rehabilitation. SBA may allow rental of the property only if the
rental will improve the ability to sell the property. The sale must be
a legitimate change of ownership.
[[Page 64383]]
Subpart D--Lenders
Sec. 120.400 Participation agreements.
SBA may enter into participation agreements with Lenders to make
deferred participation (guaranteed) loans. Participation agreements do
not obligate SBA to participate in any specific proposed loan that a
Lender may submit. The existence of a participation agreement does not
limit SBA's rights to deny a specific loan or establish general
policies.
Participation Criteria
Sec. 120.410 Requirements for all participating Lenders.
A Lender must:
(a) Have a continuing ability to evaluate, process, close,
disburse, and service small business loans;
(b) Be open to the public for the making of such loans (not be a
financing subsidiary, engaged primarily in financing the operations of
an affiliate);
(c) Have continuing good character and reputation, and otherwise
meet and maintain the ethical requirements of Sec. 120.140; and
(d) Be supervised and examined by a State or Federal regulatory
authority, satisfactory to SBA.
Sec. 120.411 Preferences.
No agreement to participate under the Act shall establish any
Preferences in favor of the Lender.
Sec. 120.412 Other services Lenders may provide Borrowers.
Subject to the conflict of interest provision in subpart A of this
part, Lenders, their Associates or the designees of either may provide
services to and contract for goods with a Borrower only after full
disbursement of the loan to the small business or to an account not
controlled by the Lender, its Associate, or the designee. A Lender, an
Associate, or a designee providing such services must do so under a
written contract with the small business, based on time and hourly
charges, and must maintain time and billing records for examination by
SBA. Charges made cannot exceed those charged by established
professional consultants providing similar services.
Sec. 120.413 Advertisement of relationship with SBA.
A Lender may refer in its advertising to its participation with
SBA. The advertising may not:
(a) State or imply that the Lender, or any of its Borrowers, has or
will receive preferential treatment from SBA;
(b) Be false or misleading; or
(c) Make use of SBA's seal.
Pledging Notes or Transferring Unguaranteed Portion
Sec. 120.420 Financings by Nondepository Lenders.
(a) A Small Business Lending Company regulated by SBA or a Business
and Industrial Development Company (``Nondepository Lender'') may
pledge the notes evidencing SBA guaranteed loans or sell the
unguaranteed portions of such loans if SBA, 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 Nondepository 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
blanket Guarantee Agreement. In any such agreement, the parties must
agree to the following conditions:
(1) The Nondepository Lender, SBA, or a third party custodian
agreeable to SBA, will hold all pertinent Loan Instruments, and the
Nondepository Lender will continue to service the loans after the
pledge or transfer is made;
(2) The Nondepository Lender must continue to retain an economic
risk in and bear the ultimate risk of loss on the unguaranteed
portions. The Nondepository Lender must demonstrate to SBA's
satisfaction and in SBA's sole discretion the retention of economic
risk by:
(i) In the case of the sale of unguaranteed portions:
(A) Establishing a sufficient reserve fund at time of sale;
(B) Retaining a sufficient level of insurance; and/or
(C) Agreeing to reacquire the unguaranteed portion of a guaranteed
loan or the note evidencing a guaranteed loan if the loan goes into
default; or
(ii) In the case of the pledge of notes, retaining all of the
economic interest in the unguaranteed portion of any loans which the
notes evidence.
(c) The Nondepository Lender may not use SBA guaranteed loans or
the collateral supporting such loans as collateral for the borrowing of
any related enterprise or for any other purpose inconsistent with this
part.
Miscellaneous Provisions
Sec. 120.430 SBA access to Lender files.
A Lender must allow SBA's authorized representatives, during normal
business hours, access to its files to review, inspect and copy all
records and documents relating to SBA guaranteed loans.
Sec. 120.431 Suspension and revocation of eligibility to participate.
SBA may suspend or revoke the eligibility of a Lender to
participate in the 7(a) program because of a violation of SBA
regulations, a breach of any agreement with SBA, a change of
circumstance resulting in the Lender's inability to meet operational
requirements, or a failure to engage in prudent lending practices.
Proceedings for such purposes will be conducted in accordance with the
provisions of part 134 of this chapter. A suspension or revocation will
not invalidate a guarantee previously provided by SBA.
Certified Lenders Program (CLP)
Sec. 120.440 What is the Certified Lenders Program?
Under the Certified Lenders Program (CLP), designated Lenders
process, close, and service, and may liquidate, SBA guaranteed loans.
SBA gives priority to applications and servicing actions submitted by
Lenders under this program. All other rules in this part 120 relating
to the operations of Lenders apply to CLP Lenders.
Sec. 120.441 How does a Lender become a CLP Lender?
(a) An SBA field office may nominate a Lender or a Lender may
request a field office to consider it for CLP status. SBA district
directors may approve and renew a Lender's CLP status. The district
director will consider whether the Lender:
(1) Has the ability to process, close, service and liquidate loans;
and
(2) Has a satisfactory performance history with SBA, including the
submission of complete and accurate loan guarantee application
packages;
(3) Has an acceptable SBA purchase rate; and
(4) Has shown the ability to work well with the local SBA office.
(b) If the district director does not approve a request for CLP
status, the Lender may appeal to the AA/FA, whose decision will be
final. If SBA grants CLP status, it applies only in the field office
that approved the CLP designation. A CLP Lender must execute a
Supplemental Guarantee Agreement that will specify a term not to exceed
two years.
[[Page 64384]]
Sec. 120.442 Suspension or revocation of CLP status.
The AA/FA may suspend or revoke CLP status upon written notice
providing the reasons at least 10 business days prior to the effective
date of the suspension or revocation. Reasons for suspension or
revocation may include a loan performance record unacceptable to SBA,
failure to make the required number of loans under the expedited
procedures,or violations of applicable statutes, regulations or
published SBA policies and procedures. A CLP Lender may appeal the
suspension or revocation made under this section under procedures found
in part 134 of this chapter. The action of the AA/FA shall remain in
effect pending resolution of the appeal.
Preferred Lenders Program (PLP)
Sec. 120.450 What is the Preferred Lenders Program?
Under the Preferred Lenders Program (PLP), designated Lenders
process, close, service, and liquidate SBA guaranteed loans with
reduced requirements for documentation to and prior approval by SBA.
Sec. 120.451 How does a Lender become a PLP Lender?
(a) An SBA field office serving the area where a CLP Lender's
office is located can nominate a CLP Lender or a CLP Lender can request
a field office to consider it for PLP status. The SBA field office will
forward its recommendation to an SBA centralized loan processing center
which will submit its recommendation and supporting documentation to
the AA/FA for final decision.
(b) In making its decision, SBA will consider whether the CLP
Lender:
(1) Has the required ability to process, close, service and
liquidate loans; and
(2) Has the ability to develop and analyze complete loan packages;
and
(3) Has a satisfactory performance history with SBA.
(c) If the Lender is approved, the AA/FA will designate the area in
which it can make PLP loans.
(d) Before it can operate as a PLP Lender, the approved CLP Lender
must execute a Supplemental Loan Guarantee Agreement, which will
specify a term not to exceed two years.
(e) When a PLP's Supplemental Loan Guarantee Agreement expires, SBA
may recertify it as a PLP Lender for an additional term not to exceed
two years. Prior to recertification, SBA will review a PLP Lender's
loans, policies and procedures. The recertification decision of the AA/
FA is final.
(f) A PLP Lender may request an expansion of the territory in which
it can process PLP loans by submitting its request to a loan processing
center. The center shall obtain the recommendation of each SBA office
in the area into which the PLP Lender would like to expand its PLP
operations. The center shall forward the recommendations to the AA/FA
for final decision. If a PLP Lender is not already a CLP Lender in a
territory into which it seeks to expand its PLP status, it will
automatically obtain CLP status in the territory without approval from
the District Office when it is granted its extension of PLP status into
that territory .
Sec. 120.452 What are the requirements of PLP loan processing?
(a) Subparts A and B of this part govern the making of PLP loans,
except for the following:
(1) Certain types of businesses, loans, and loan programs are not
eligible for PLP, as detailed in published SBA policy and procedures.
(2) A Lender may not use the PLP procedure to reduce its existing
credit exposure for any Borrower.
(3) SBA will guarantee no more than the specified statutory
percentage of any PLP loan. (b) A PLP Lender notifies SBA of its
approval of a PLP loan by submitting to SBA's loan processing center
appropriate documentation signed by two of the PLP's authorized
representatives. SBA will attach the SBA guarantee and notify the PLP
Lender of the SBA Loan Number (if it does not identify a problem with
eligibility, and funds are available).
(c) The PLP Lender is responsible for the correctness of all PLP
loan decisions regarding eligibility (including size),
creditworthiness, loan closing, and compliance with all requirements of
law or SBA regulations.
Sec. 120.453 What are the requirements of PLP loan servicing and
liquidation?
The PLP Lender must service and liquidate its SBA guaranteed loan
portfolio (including its non-PLP loans) using generally accepted
commercial banking standards employed by prudent lenders. The PLP
Lender must liquidate any defaulted SBA guaranteed loan in its
portfolio unless SBA advises in writing that SBA will liquidate the
loan. The PLP Lender must submit a liquidation plan to SBA prior to
commencing liquidation action, if possible. The PLP Lender may take any
necessary servicing action, or liquidation action consistent with a
plan, for any SBA guaranteed loan in its portfolio, except it may not:
(a) Take any action that confers a Preference on the Lender;
(b) Accept a compromise settlement without prior written SBA
consent; and
(c) Sell or pledge more than 90 percent of a PLP loan.
Sec. 120.454 PLP performance review.
SBA may review the performance of a PLP Lender. SBA may charge the
PLP Lender a fee for this review.
Sec. 120.455 Suspension or revocation of PLP status.
The AA/FA may suspend or revoke PLP status upon written notice
providing the reasons 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
make the required number of loans under the expedited procedures, or
violations of applicable statutes, regulations or published SBA
policies and procedures. A PLP Lender may appeal the suspension or
revocation made under this section under procedures found in Part 134
of this chapter. The action of the AA/FA shall remain in effect pending
resolution of the appeal.
Small Business Lending Companies (SBLC)
Sec. 120.470 What is an SBLC?
A Small Business Lending Company (SBLC) is a nondepository lending
institution engaged solely in the making of loans under section 7(a)
(except section 7(a)(13)) of the Act in participation with SBA. SBA
supervises, examines, and regulates SBLCs. An SBLC is subject to all
applicable SBA regulations, including those governing Lenders. This
program has been closed to new licenses since January, l982. In
addition to complying with Sec. 120.400-120.413, an SBLC must meet the
following requirements:
(a) Business structure. It must be a corporation (profit or non-
profit).
(b) Written agreement. It must sign a written agreement with SBA
with terms satisfactory to SBA.
(c) Capital structure. It must have unencumbered paid-in capital
and paid-in surplus of at least $1,000,000, or ten percent of the
aggregate of its share of all outstanding loans, whichever shall be
more.
(d) Capital impairment. It must avoid capital impairment at all
times. Impairment exists if the retained earnings deficit of an SBLC
exceeds 50 percent of combined paid-in capital and paid-in-surplus,
excluding treasury stock. An SBLC must give SBA prompt written notice
of any capital impairment
[[Page 64385]]
within 30 calendar days of the month-end financial report that first
reflects the impairment. Until the impairment is cured, an SBLC may not
present any loans to SBA for guarantee.
(e) Issuance of securities. Without prior written SBA approval, it
must not issue any securities (including stock options and debt
securities) except stock dividends and common stock issued for cash or
direct obligations of, or obligations fully guaranteed as to principal
and interest by, the United States.
(f) Voluntary capital reduction. Without prior written SBA
approval, it must not voluntarily reduce its capital, or purchase and
hold more than 2 percent of any class or combination of classes of its
stock.
(g) Reserves for losses. It must maintain a reserve in the amount
of anticipated losses on loans and receivables.
(h) Internal control. It must adopt a plan designed to safeguard
its funds and other assets, to assure the reliability of its personnel,
and to maintain the accuracy of its financial data.
(i) Dual control. It must maintain dual control over disbursement
of funds and withdrawal of securities. An SBLC may disburse funds only
by checks or wire transfers authorized by signatures of two or more
officers covered by the SBLC's fidelity bond, except that checks in an
amount of $1,000 or less may be signed by one bonded officer. There
must be two or more bonded officers, or one bonded officer and a bonded
employee to open safe deposit boxes or withdraw securities from
safekeeping. The SBLC shall furnish to each depository bank, custodian,
or entity providing safe deposit boxes a certified copy of the
resolution implementing these control procedures.
(j) Fidelity insurance. It must maintain a Brokers Blanket Bond,
Standard Form 14, or Finance Companies Blanket Bond, Standard Form 15,
or such other form of coverage as SBA may approve, in a minimum amount
of $25,000 executed by a surety holding a Certificate of authority from
the Secretary of the Treasury pursuant to 6 U.S.C. 6-13.
(k) Common control. It must not control, be controlled by, or under
common control with, another SBLC. Without prior written SBA approval,
an Associate of one SBLC shall not be an Associate of another SBLC or
of any entity which directly or indirectly controls or is under common
control with another SBLC.
(l) Management services. An SBLC must employ full time professional
management.
(m) Borrowed funds. Without SBA's prior written approval, it must
not be capitalized with borrowed funds. Shareholders owning 10 percent
or more of any class of its stock shall not use borrowed funds to
purchase the stock unless the net worth of the shareholders is at least
twice the amount borrowed or unless the shareholders receive SBA's
prior written approval for a lower ratio.
Sec. 120.471 Records.
Each SBLC must comply with the following requirements concerning
records:
(a) Maintenance of Records. It must maintain accurate and current
financial records, including books of account, minutes of stockholder,
directors, or executive committee meetings, and all documents and
supporting materials relating to the SBLC's transactions at its
principal business office. Securities held by a custodian pursuant to a
written agreement shall be exempt from this requirement.
(b) Preservation of records.
(1) It must preserve in a manner permitting immediate retrieval the
following documentation for the financial statements required by
Sec. 120.472 (and of the accompanying independent public accountant's
opinion), for the following specified periods:
(i) Preserve permanently:
(A) All general and subsidiary ledgers (or other records)
reflecting asset, liability, capital stock and surplus, income, and
expense accounts;
(B) All general and special journals (or other records forming the
basis for entries in such ledgers); and
(C) The corporate charter, bylaws, application for determination of
eligibility to participate with SBA, and all minutes books, capital
stock Certificates or stubs, stock ledgers, and stock transfer
registers;
(ii) Preserve for at least 6 years following final disposition of
the related loan:
(A) All applications for financing;
(B) Lending, participation, and escrow agreements;
(C) Financing instruments; and
(D) All other documents and supporting material relating to such
loans, including correspondence.
(2) Records and other documents referred to in this section may be
preserved electronically or by reproduction if the SBLC makes and
stores duplicate originals separately from the original for the time
required.
Sec. 120.472 Reports to SBA.
An SBLC must submit the following to the AA/FA:
(a) An audited financial statement prepared by an independent
public accountant within three months after the close of each fiscal
year, and interim financial reports when requested by SBA;
(b) A report of any legal or administrative proceeding, by or
against the SBLC, or against an officer, director, or employee of the
SBLC for an alleged breach of official duty, within 10 days after
initiating or learning of the proceeding, as well as notification of
the terms of any settlement or final judgment (in addition to any
reporting under applicable SBA Forms);
(c) Copies of any report furnished to its stockholders (including
any prospectus, letter, or other publication concerning the financial
operations of the SBLC);
(d) A summary of any changes in the SBLC's organization or
financing, such as:
(1) Any change in its name, address or telephone number;
(2) Any change in its charter, bylaws, or its officers or directors
(to be accompanied by a statement of personal history on an approved
SBA form);
(3) Any changes in capitalization not otherwise required by
Sec. 120.470 to be reported to SBA;
(4) Any changes affecting the eligibility of the SBLC to continue
to participate as an SBLC; and
(5) Notice of a pledge of stock within 30 calendar days of the
transaction if 10 percent or more of the stock is pledged by any person
(or group of persons acting in concert) as collateral for indebtedness,
and such pledge does not involve a transfer for which prior written
approval of SBA is required under Sec. 120.473; and
(e) Such other reports as SBA may require from time to time by
written directive.
Sec. 120.473 Change of ownership or control.
(a) Any change of ownership or control without prior written
approval of SBA is prohibited. An SBLC must request approval of any
such change from the AA/FA. Pending the approval, the SBLC may not
register the proposed new owners on its transfer books nor permit them
to participate in any manner in the conduct of the SBLC's affairs.
Change of ownership or control shall include:
(1) Any transfer of 10 percent or more of any class of the SBLC's
stock, and any agreement providing for such transfer;
(2) Any transfer that could result in the beneficial ownership by
any person or group of persons acting in concert of 10 percent or more
of any class of its
[[Page 64386]]
stock, and any agreement providing for such transfer;
(3) Any merger, consolidation, or reorganization; or
(4) Any other transaction or agreement that transfers control of
the SBLC.
(b) If transfer of ownership or control is subject to the approval
of any State or Federal chartering, licensing, or other regulatory
authority, copies of any documents filed with such authority shall, at
the same time, be transmitted to the SBA District Office serving the
area in which the SBLC's principal office is located.
Sec. 120.474 Prohibited financing.
An SBLC may not make a loan to a small business that has received
financing (or a commitment for financing) from an SBIC that is an
Associate of the SBLC.
Sec. 120.475 Suspension or revocation.
SBA may revoke or suspend an SBLC for a violation of law, these
regulations, or any agreement with SBA. An appeal can be made following
the procedures set forth in part 134 of this chapter.
Subpart E--Loan Administration
Sec. 120.500 General.
This subpart outlines the general loan administration policies
applicable to SBA financial assistance.
Servicing
Sec. 120.510 Servicing direct and immediate participation loans.
SBA services the direct loans that it makes. Generally, the Lender
services immediate participation loans that it makes and in which SBA
participates.
Sec. 120.511 Servicing guaranteed loans.
The Lender services guaranteed loans, holds the Loan Instruments
and receives the Borrower's payments of principal and interest.
Sec. 120.512 Who services the loan after SBA honors its guarantee?
Generally, after SBA honors its guarantee, the Lender must continue
to hold the Loan Instruments and service the loan, and the Lender must
execute a Certificate of interest showing SBA's percentage of the loan.
If SBA elects to service the loan, the Lender must assign the Loan
Instruments to SBA.
Sec. 120.513 What servicing actions require the prior written consent
of the SBA?
SBA must give its prior written consent before the Lender takes any
of the following actions:
(a) Alter substantially the terms or conditions of any Loan
Instrument (for example, any increase in the principal amount or change
in the interest rate, or conferring a Preference on the Lender);
(b) Release collateral having a cumulative value in excess of 20
percent of the original loan amount;
(c) Accelerate the maturity of the note;
(d) Sue upon any Loan Instrument;
(e) Compromise or waive any claim against any Borrower, guarantor,
obligor or standby creditor arising out of any Loan Instrument; or
(f) Increase the amount of any prior lien held by the Lender on the
collateral securing the loan.
SBA'S Purchase of a Guaranteed Portion
Sec. 120.520 When does SBA honor its guarantee?
(a) SBA, in its sole discretion, may purchase a guaranteed portion
of a loan at any time. A Lender may demand in writing that SBA honor
its guarantee if the Borrower is in default on any installment for more
than 60 calendar days (or less if SBA agrees) and the default has not
been cured. If a Borrower cures a default before a Lender requests
purchase by SBA, the Lender's right to request purchase on that default
lapses.
(b) When SBA purchases the guaranteed portion, it does not waive
any of its rights to recover money paid on the guaranty, based upon the
Lender's negligence, misconduct, or violation of this part, including
the those actions listed in Sec. 120.524(a), the guarantee agreement or
the Loan Instruments.
Sec. 120.521 What interest rate applies after SBA purchases its
guaranteed portion?
When SBA honors its guarantee for a fixed interest rate loan, the
rate of interest remains as stated in the note. On loans with a
fluctuating interest rate, the interest rate that the Borrower owes
will be at the rate in effect at the time of the earliest uncured
default (where a default has occurred), or the rate in effect at the
time of purchase (where no default has occurred).
Sec. 120.522 How much accrued interest does SBA pay to the Lender or
Registered Holder when SBA purchases the guaranteed portion?
(a) Rate of interest. If SBA purchases the guaranteed portion from
a Lender or from a Registered Holder (if sold in the Secondary market),
it will pay accrued interest at:
(1) The rate in the note if it is a fixed rate loan; or
(2) The rate in effect on the date of the earliest uncured default
(if a default has occurred) or of SBA's purchase (if there has been no
default).
(b) Payment to Lender. SBA calculates the accrued interest due a
Lender from the date of the Borrower's earliest uncured default, but
interest may not accrue for more than 120 days (plus any deferment
period which SBA had approved). In addition, if a Lender requests SBA
to purchase within 120 days of the earliest uncured default, SBA will
pay accrued interest to the Lender for any SBA time spent in making
payment in excess of 120 days, plus interest from the last paid-to date
to the earliest uncured default date.
(c) Payment to Registered Holder. SBA will pay a Registered Holder
all accrued interest up to the date of payment.
(d) Extension of the 120 day period. Before the 120 days expire,
the SBA field office may extend the period if the Lender and SBA agree
that the Borrower can cure the default within a reasonable and definite
period of time or that the benefits from doing so otherwise will exceed
the costs of SBA paying additional interest. If the 120 days have
passed, only SBA's AA/FA or his designee can extend the period.
Sec. 120.523 What is the ``earliest uncured default''?
Default occurs when a Borrower violates any provision in the Loan
Instruments. The default date is the date the violation occurred. The
``earliest uncured default'' is the earliest violation not yet cured.
If the violation is the failure by a Borrower to pay a regular
installment of principal and interest when due, payments made by the
Borrower before a Lender makes its request to SBA to purchase are
applied to the earliest uncured default. If the installment is paid in
full, the earliest uncured default date will advance to the next unpaid
installment date. If a Borrower makes any payment after a Lender makes
its request to SBA to purchase, the earliest uncured default date does
not change because the Lender has already exercised its right to
request purchase.
Sec. 120.524 When is SBA released from liability on its guarantee?
(a) SBA is released from liability on a loan guarantee (in whole or
in part, within SBA's exclusive discretion), if any of the events below
occur:
(1) The Lender has failed to comply with any of the provisions of
these regulations, the Loan Guarantee Agreement, or the Authorization;
(2) The Lender has failed to make, close, service, or liquidate a
loan in a prudent manner;
(3) The Lender's improper action or inaction has placed SBA at
risk;
[[Page 64387]]
(4) The Lender has failed to disclose a material fact to SBA
regarding a guaranteed loan in a timely manner;
(5) The Lender has misrepresented a material fact to SBA regarding
a guaranteed loan;
(6) SBA has received a written request from the Lender to terminate
the guarantee;
(7) The Lender has not paid the guarantee fee within the period
required under SBA rules and regulations;
(8) The Lender has failed to request that SBA purchase a guarantee
within 120 days after maturity of the loan;
(9) The Lender has failed to use required SBA forms or exact
electronic copies; or
(10) The Borrower has paid the loan in full.
(b) If SBA determines, after purchasing its guaranteed portion of a
loan, that any of the events set forth in paragraph (a) of this section
occurred in connection with that loan, SBA is entitled to recover any
money paid on the guaranty plus interest from the Lender responsible
for those events.
(c) If the Lender's loan documentation indicates that one or more
of the events in paragraph (a) of this section may have occurred, SBA
may undertake such investigation as it deems necessary to determine
whether to honor or deny the guarantee, and may withhold a decision on
whether to honor the guarantee until the completion of such
investigation.
(d) Any information provided to SBA prior to Lender's request for
SBA to honor its guarantee shall not prejudice SBA's right to deny
liability for a guarantee if one or more of the events listed in
paragraph (a) of this section occur.
(e) Unless SBA provides written notice to the contrary, the Lender
remains responsible for all loan servicing and liquidation actions
until SBA honors its guarantee in full.
Deferment, Extension of Maturity and Loan Moratorium
Sec. 120.530 Deferment of payment.
SBA may agree to defer payments for a stated period of time, and
use such other methods as it considers necessary and appropriate to
help in the successful establishment and operation of the Borrower.
This policy applies to all business loan programs, including 504 loans.
Sec. 120.531 Extension of maturity.
SBA may agree to extend the maturity of a loan for up to 10 years
beyond its original maturity if the extension will aid in the orderly
repayment of the loan.
Sec. 120.532 What is a loan Moratorium?
SBA may assume a Borrower's obligation to repay principal and
interest on a loan by agreeing to make the payments to the
Participating Lender on behalf of the Borrower. This relief is called a
``Moratorium.''
Sec. 120.533 When will SBA grant a Moratorium?
SBA normally will grant a Moratorium if:
(a) Without it, the small business will become or remain insolvent;
(b) With it, the small business will become or remain viable;
(c) Alternative remedies, such as a deferment, are not available;
(d) The Lender has already granted deferments equal to at least six
(6) monthly installments, and the Lender and SBA agree that the
deferments have been beneficial;
(e) The Borrower, Lender, obligors, and guarantors execute a
``Moratorium Agreement'' giving SBA absolute discretion to discontinue
making the payments at any time;
(f) The Borrower (and co-Borrowers) execute a demand note to repay
SBA's Moratorium advances;
(g) All guarantors or other obligors of the guaranteed loan execute
guarantee agreements and any other instruments required by SBA to
protect its interests under the demand note;
(h) The Borrower and other obligors provide such security as SBA
considers necessary or appropriate; and
(i) The collateral securing the demand note includes at least the
collateral securing the guaranteed loan, and the collateral position
for the demand note is subject only to the lien position on the
guaranteed loan.
Sec. 120.534 How long can a Moratorium continue?
Generally, SBA will continue a Moratorium for six months, although
SBA may authorize an initial Moratorium for up to one year. SBA may
continue a Moratorium for additional periods (to a maximum total of
five (5) years) only if the Borrower can demonstrate the eventual
ability to repay from earnings the original note and the demand note.
Sec. 120.535 What are the repayment terms of a Moratorium?
(a) The interest rate for the demand note is the same as for the
guaranteed loan. SBA advances to a Participating Lender during the
Moratorium period accrue interest from the date of each disbursement.
(b) SBA has the right to demand payment at any time. If not
previously demanded, payment in full will be due immediately after the
Borrower has fully paid the guaranteed loan.
(c) SBA may demand payment in full under the demand note or SBA may
accept a repayment schedule. If the loan has been paid, the frequency
and amount of the repayments must be at least equal to the amount and
frequency that were due under the loan.
(d) SBA will apply repayments first to accrued interest and then to
principal.
(e) A loan may be extended beyond the statutory limit for a period
of time corresponding to the time of the Moratorium.
Liquidation of Collateral
Sec. 120.540 What are SBA's policies concerning liquidation of
collateral?
(a) Liquidation policy. SBA or the Lender may liquidate collateral
securing a loan if there is no reasonable prospect that the Borrower or
a guarantor (other than SBA) can repay the loan within a reasonable
period.
(b) Sale and conversion of loans. Without the consent of the
Borrower, SBA may:
(1) Sell a direct loan;
(2) Convert a guaranteed or immediate participation loan to a
direct loan; or
(3) Convert an immediate participation loan to a guaranteed loan or
a loan owned solely by the Lender.
(c) Dispose of collateral and assets acquired through foreclosure
or conveyance. SBA or the Lender may sell real and personal property
(including contracts and claims) pledged to secure a loan that is in
default in accordance with the provisions of the related security
instrument (see Sec. 120.550 for Homestead Protection for Farmers).
(1) Competitive bids or negotiated sale. Generally, SBA or the
Lender will offer loan collateral and acquired assets for public sale
through competitive bids at an auction or a sealed bid sale, although a
negotiated sale may be utilized under appropriate circumstances.
(2) Lease of acquired property. Normally, neither SBA nor a Lender
will rent or lease acquired property or grant options to purchase. SBA
will consider proposals for a lease if it appears a property cannot be
sold advantageously and it is in the government's interest, but SBA may
terminate the lease upon receipt of a favorable purchase offer.
(d) Recoveries and security interests shared. SBA and the
Participating Lender will share pro rata (in accordance with their
respective interests in a loan) all loan payments or recoveries, all
reasonable expenses
[[Page 64388]]
(including advances for the care, preservation, and maintenance of
collateral securing the loan), and any security interest or guarantee
(excluding SBA's guarantee) which the Lender or SBA may hold or receive
in connection with a loan.
(e) Guarantors. Guarantors of financial assistance have no rights
of contribution against SBA on an SBA guaranteed or direct loan. SBA is
not deemed to be a co-guarantor with any other guarantors.
Homestead Protection for Farmers
Sec. 120.550 What is homestead protection for farmers?
SBA may lease to a farmer-Borrower the farm residence occupied by
the Borrower and a reasonable amount of adjoining property (no more
than 10 acres and seven farm buildings), if they were acquired by SBA
as a result of a defaulted farm loan made or guaranteed by SBA (see the
Consolidated Farm and Rural Development Act, 7 U.S.C. 1921, for
qualifying loan purposes).
Sec. 120.551 Who is eligible for homestead protection?
SBA must notify the Borrower in possession of the availability of
these homestead protection rights within 30 days after SBA acquires the
property. A farmer-Borrower must:
(a) Apply for the homestead occupancy to the SBA field office which
serviced the loan within 90 days after SBA acquires the property;
(b) Provide evidence that the farm produces farm income reasonable
for the area and economic conditions;
(c) Show that at least 60 percent of Borrower's gross annual income
came from farm or ranch operations in at least any two out of the last
six calendar years;
(d) Have resided on the property during the previous six years; and
(e) Be personally liable for the debt.
Sec. 120.552 Lease.
If approved, the applicant must personally occupy the residence
during the term of the lease and pay a reasonable rent to SBA. The
lease shall be for a period not to exceed 5 years, renewable for up to
another 5 years. During or at the end of the lease period, the lessee
has a right of first refusal to reacquire the homestead property under
terms and conditions no less favorable than those offered to any other
purchaser.
Sec. 120.553 Appeal.
If the application is denied, the Borrower may appeal the decision
to the Regional Administrator in the region in which the field office
which denied the application is located. Until the conclusion of any
appeal, the Borrower may retain possession of the homestead property.
If there is a conflict between state law and this section, state law
prevails.
Subpart F--Secondary Market
Sec. 120.600 What is the SBA Secondary Market?
The SBA secondary market (``Secondary Market'') consists of the
sale of Certificates, representing either the entire guaranteed portion
of an individual 7(a) guaranteed loan or an undivided interest in a
Pool consisting of the SBA guaranteed portions of a number of 7(a)
guaranteed loans. By the terms of the Certificate, SBA guarantees a
Registered Holder timely payment of principal and interest to which the
Registered Holder is entitled from the loan or loans underlying the
Certificate. Transactions involving interests in Pools or the sale of
individual guaranteed portions are governed by the contracts entered
into by the parties, SBA's Secondary Market Program Guide, and this
subpart. See sections 5 (f), (g) and (h) of the Small Business Act (15
U.S.C. 634 (f), (g) and (h)).
Sec. 120.601 Definitions.
The definitions in this section apply throughout this subpart.
(a) Certificate is the document the FTA issues representing a
beneficial fractional interest in a Pool (Pool Certificate), or an
undivided interest in the entire guaranteed portion of an individual
7(a) guaranteed loan that is sold separately.
(b) Current means that no repayment from a Borrower to a Lender is
over 29 days late measured from the due date of the payment on the
records of the FTA's central registry (Pools) or the entity servicing
the loan (individual guaranteed portion).
(c) FTA is the SBA's fiscal and transfer agent.
(d) Note Rate is the interest rate on the Borrower's note.
(e) Net Rate means the interest rate on an individual guaranteed
portion in a Pool.
(f) Payment date is the date that the FTA deposits checks in the
U.S. mail. SBA may change the date or method of payment by publishing a
document in the Federal Register.
(g) Pool is an aggregation of SBA guaranteed portions of loans made
by Lenders.
(h) Pool Assembler is a financial institution that:
(1) Organizes and packages a Pool by acquiring the SBA guaranteed
portions of loans from Lenders;
(2) Resells fractional interests in the Pool to Registered Holders;
and
(3) Directs the FTA to issue Certificates.
(i) Pool Rate means the interest rate on a Certificate.
(j) Registered Holder is the Certificate owner listed in FTA's
records.
Certificates
Sec. 120.610 Description of Certificates.
(a) General form and content. Each Certificate must be registered
with the FTA (no bearer Certificates). SBA must approve the terms of
the Certificate.
(b) Face amount of Pool Certificate. The face amount of a Pool
Certificate cannot be less than a specified minimum amount and must be
in increments which SBA may specify (except for one Certificate in each
Pool). SBA may change these requirements by issuing a document in the
Federal Register after analyzing market conditions and program
experience.
(c) Payment Terms for Pool Certificates. Principal installments and
interest payments are based on the unpaid principal balance of the
portion of the Pool represented by a Pool Certificate. All prepayments
on loans in the Pool must be passed through to the Registered Holders
on the payment date.
(d) Payment Terms for Certificates which represent individual
guaranteed portions. Principal installments and interest payments are
based on the unpaid principal balance of the entire SBA guaranteed
portion of the loan. The Certificate must provide for a pro rata pass
through to the Registered Holder of payments which the FTA receives
from a Lender or any entity servicing the loan.
Sec. 120.611 Description of Pools backing Pool Certificates.
(a) Pool characteristics. (1) When the FTA issues a Pool
Certificate, each Pool must have:
(i) A minimum number of guaranteed portions of loans;
(ii) A minimum aggregate principal balance of the guaranteed
portions;
(iii) A maximum percentage of the Pool which an individual
guaranteed portion may constitute;
(iv) A maximum allowable difference between the highest and lowest
note interest rates;
(v) A maximum allowable difference between the remaining terms to
maturity of the loans in the Pool; and
(vi) A minimum weighted average maturity at Pool formation.
(2) SBA may adjust the Pool characteristics periodically based upon
[[Page 64389]]
program experience and market conditions.
(b) Interest rate on Pool Certificate. The interest rate on a pool
Certificate must be equal to the lowest net rate on any individual
guaranteed portion in the pool.
(c) Redemption of Certificate. The FTA and SBA may redeem a pool
Certificate because of prepayment or default of all loans constituting
the pool.
Sec. 120.612 What loans are eligible to back Certificates?
(a) Pool Certificates are backed by the SBA guaranteed portions of
loans comprising the Pool. An individual Certificate is backed by the
entire SBA guaranteed portion of a single loan. Each such loan must:
(1) Be current as of the date the Pool is formed or the individual
loan is initially sold in the Secondary Market;
(2) Be guaranteed under the Act; and
(3) Meet such other standards as SBA may determine to be necessary
for the successful operation of the pooling program.
(b) With respect to any Pool, the loans must meet the SBA standards
in effect at the time the Pool is formed.
Sec. 120.613 What is a Secondary Participation Guarantee Agreement?
When a Lender wants to sell the guaranteed portion of a loan, it
enters into a Secondary Participation Guarantee Agreement (``SPGA'')
with SBA and the purchaser of the guaranteed portion. The terms of sale
between the Lender and the purchaser cannot require the Lender or SBA
to repurchase except in accordance with the terms of the SPGA. Before
execution of the agreement, the Lender must:
(a) Documents. Submit to SBA a copy of the SPGA, the note, and such
other documents as SBA may require;
(b) Full Disbursement. Disburse to the Borrower the full amount of
the loan; and
(c) Guarantee Fees Paid. Pay SBA all guarantee fees in full.
The SBA Guarantee of a Certificate
Sec. 120.620 The SBA guarantee of a Pool Certificate.
(a) Extent of Guarantee. SBA guarantees to a Registered Holder the
timely payment of principal and interest installments and any
prepayment or other recovery of principal on the underlying loans to
which the Registered Holder is entitled. If the Borrower of a loan in a
Pool backing the Certificates does not make a required installment
payment, SBA through the FTA must make advances to maintain the
schedule of interest and principal payments to the Registered Holders
until SBA purchases the guaranteed portion.
(b) SBA guarantee backed by full faith and credit. SBA's guarantee
of the Pool Certificate is backed by the full faith and credit of the
United States.
Sec. 120.621 The SBA guarantee of a Certificate representing an
individual guaranteed portion.
(a) Extent of SBA guarantee. With respect to individual SBA
guaranteed portions sold in the Secondary Market, SBA guarantees to
purchase from the Registered Holder the guaranteed portion for an
amount equal to the unpaid principal and accrued interest due on the
guaranteed portion of the note as of the date of SBA's purchase, less
deductions for applicable fees. As opposed to the SBA guarantee with
respect to pooled loans, SBA does not guarantee timely payment on
individual guaranteed portions.
(b) What triggers the SBA guarantee. SBA's guarantee to the
Registered Holder may be called upon when:
(1) The Borrower remains in uncured default for 60 days on payments
of principal or interest due on the note;
(2) The Lender fails to send to the FTA payments it received from
the Borrower; or
(3) The FTA fails to send to the Registered Holder any payments it
has received from the Lender.
(c) Full faith and credit. SBA's guarantee to the Registered Holder
is unconditional and is backed by the full faith and credit of the
United States.
Pool Assemblers
Sec. 120.630 Qualifications to be a Pool Assembler.
(a) Application to become Pool Assembler. The application to become
a Pool Assembler is available from the AA/FA. In order to qualify as a
Pool Assembler, an entity must send the application to the AA/FA, with
an application fee, and certify that it:
(1) Is regulated by the appropriate agency as defined in section
3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(34)(G));
(2) Meets all financial and other applicable requirements of its
regulatory authority and the Government Securities Act of l986, as
amended (Pub. L. 99-571, 100 Stat. 3208);
(3) Has the financial capability to assemble acceptable and
eligible guaranteed loan portions in sufficient quantity to support the
issuance of Pool Certificates; and
(4) Is in good standing with SBA (as the AA/FA determines), the
Office of the Comptroller of the Currency (``OCC'') if it is a national
bank, the Federal Deposit Insurance Corporation if it is not a national
bank, or the National Association of Securities Dealers.
(b) Approval by SBA. After SBA approves the application to become a
Pool Assembler, the entity may submit Pool applications to the FTA.
(c) Conduct of business by Pool Assembler. An entity continues to
qualify as a Pool Assembler so long as it:
(1) Meets the eligibility standards in paragraph (a) of this
section;
(2) Conducts its business in accordance with SBA regulations and
accepted securities or banking industry practices, ethics, and
standards; and
(3) Maintains its books and records in accordance with generally
accepted accounting principles or in accordance with the guidelines of
the regulatory body governing its activities.
Sec. 120.631 Suspension or termination of eligibility of Pool
Assembler.
(a) Suspension or termination. The AA/FA may suspend a Pool
Assembler from operating in the Secondary Market for up to 18 months or
terminate its eligibility, if the Pool Assembler (and/or its
Associates):
(1) Does not comply with any of the requirements in Sec. 120.630(a)
and (c);
(2) Has been indicted or otherwise formally charged with, or
convicted of, a misdemeanor or felony;
(3) Has received an adverse final civil judgment that it has
committed a breach of trust or a violation of a law or regulation
protecting the integrity of business transactions or relationships;
(4) Has not formed a Pool for at least 3 years; or
(5) Is under investigation by its regulating authority for
activities which may affect its ability to participate in the Secondary
Market.
(b) Suspension procedures. The AA/FA shall notify a Pool Assembler
by certified mail, return receipt requested, of the decision to suspend
and the reasons therefore at least 10 business days prior to the
effective date of the suspension. The Pool Assembler may appeal the
suspension 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.
(c) Notice of termination. In order to terminate a Pool Assembler's
eligibility, the AA/FA must issue an order to show cause why the SBA
should not terminate the Pool Assembler's participation in the
Secondary Market. The Pool Assembler may appeal the termination made
under this section
[[Page 64390]]
pursuant to procedures set forth in part 134 of this chapter. The
action of the AA/FA shall remain in effect pending resolution of the
appeal.
Sale of Certificates
Sec. 120.640 Administration of the Pool and individual guaranteed
portions.
(a) FTA responsibility. The FTA has the responsibility to
administer each Pool or individual guaranteed portion. It shall
maintain a registry of Registered Holders and other information as SBA
requires.
(b) Self-liquidating. Each Pool or individual guaranteed portion in
the Secondary Market is self-liquidating because of Borrower payments
or prepayments, redemption by SBA, and/or payments by SBA or the Lender
after default by the Borrower. There is no substitution of the
guaranteed portions of existing loans for defaulted loans.
(c) SBA's right to subrogation. If SBA pays a claim under a
guarantee with respect to a Certificate issued under this subpart, it
must be subrogated fully to the rights satisfied by such payment.
(d) SBA ownership rights not limited. No Federal, State or local
law can preclude or limit the exercise by SBA of its ownership rights
in the portions of loans constituting the Pool against which the
Certificates are issued.
Sec. 120.641 Disclosure to purchasers.
(a) Information to purchaser. Prior to any sale, the Pool
Assembler, Registered Holder of a Certificate representing an
individual guaranteed portion, or any subsequent seller must disclose
to the purchaser, either orally or in writing, information on the
terms, conditions, and yield as described in the SBA Secondary Market
Program Guide.
(b) Information on transfer document. The seller must provide the
same information described in paragraph (a) of this section in writing
on the transfer document when the seller submits it to the FTA. After
the sale of an individual Certificate, the FTA will provide the
disclosure information in writing to the purchaser.
(c) Information in prospectus. If the Registered Holder is a trust,
investment Pool, mutual fund or other security, it must disclose the
information in (a) above to investors through a prospectus and other
promotional material if a Certificate or Pool Certificate is placed
into or used as the backing for the investment vehicle.
Sec. 120.642 Requirements before the FTA issues Pool Certificates.
Before the FTA issues any Pool Certificate, the Pool Assembler must
deliver to it the following documents:
(a) A properly completed Pool application form;
(b) Either:
(1) Certificates evidencing the guaranteed portions comprising the
Pool; or
(2) An executed SPGA and related documentation for the loans whose
guaranteed portions are to be part of the Pool; and
(c) Any other documentation which SBA may require.
Sec. 120.643 Requirements before the FTA issues the Certificate for an
individual guaranteed portion.
(a) FTA issuance of initial Certificate. Before the FTA can issue
the initial Certificate for a particular guaranteed portion, the
original seller must provide the following documents to the FTA:
(1) An executed SPGA;
(2) A copy of the note representing the guaranteed loan; and
(3) Any other documentation which SBA may require.
(b) Review of documentation. SBA may review or require the FTA to
review any documentation before the FTA issues a Certificate.
Sec. 120.644 Sale of individual SBA guaranteed portion.
(a) Amount of Certificate. Each Certificate which represents the
guaranteed portion of a single loan must be for the entire amount of
the guaranteed portion.
(b) General rule on transferability of Certificate. Each such
Certificate is transferable only on the books and records of the FTA or
SBA.
(c) Lender cannot purchase guaranteed portion of loan it made. The
Lender (or its Associate) that made the loan cannot purchase the
guaranteed portion in the Secondary Market. If a Lender does purchase
the guaranteed portion of one of its own loans, it shall not have the
unconditional guarantee of SBA.
(d) Prepayment or default. The prepayment of the underlying loan or
a default on such loan will trigger the redemption of the Certificate
by FTA/SBA in accordance with the procedures prescribed in the SPGA.
Sec. 120.645 Transfers of Certificates.
(a) General rule. Certificates are transferable. Transfers in the
Secondary Market must comply with Article 8 of the Uniform Commercial
Code of the State of New York. The seller must use the detached form of
assignment (SBA Form 1088), unless the seller and purchaser choose to
use another form which the SBA approves. The FTA may refuse to issue a
Certificate until it is satisfied that the documents of transfer are
complete.
(b) Transfer on FTA records. In order for the transfer of a
Certificate to be effective the FTA or SBA must reflect it on their
records.
(c) Contents of letter of transmittal accompanying the transfer of
Certificates. (1) A letter of transmittal must accompany each
Certificate which a Registered Holder submits to the FTA for transfer.
The Registered Holder must supply the following information:
(i) Pool number, if applicable;
(ii) Certificate number;
(iii) Name of purchaser of Certificate;
(iv) Address and tax identification number of the purchaser;
(v) Name and telephone number of the person handling or
facilitating the transfer;
(vi) Instructions for the delivery of the new Certificate.
(2) With this information, the seller of the Certificate must send
the fee which the FTA charges for this service. The FTA will supply fee
information to the seller.
Fiscal and Transfer Agent (FTA)
Sec. 120.650 Registration duties of FTA in Secondary Market.
The FTA registers all Certificates. This means it issues, transfers
title to, and redeems them. All financial transactions relating to a
guaranteed portion of a loan flow through the FTA. The FTA must keep
the central registry current, using the following information required
for each registration:
(a) The Lender that made and sold the loan;
(b) The interest rate paid by the Borrower to the Lender (including
whether the rate is fixed or variable);
(c) The Lender's servicing fee;
(d) The purchaser;
(e) The price paid by the purchaser;
(f) The interest rate paid on the Certificate or Pool Certificate;
(g) The fees which the FTA charges to register and issue
Certificates; and
(h) Any other information which SBA requires.
Sec. 120.651 Claim to FTA by Registered Holder to replace Certificate.
(a) To replace a Certificate because of loss, theft, destruction,
mutilation, or defacement, the Registered Holder must:
(1) Give the FTA information about the Certificate and the facts
relating to the claim;
(2) File an indemnity bond acceptable to SBA and the FTA with a
surety to protect the interests of SBA and the FTA;
(3) Pay the FTA its fee to replace a Certificate; and
[[Page 64391]]
(4) Use an affidavit of loss (form available from the FTA) to
report:
(i) The name and address of the Registered Holder (and the name and
capacity of any representative actually filing the claim);
(ii) The Certificate by Pool number, if applicable;
(iii) The Certificate number;
(iv) The original principal amount;
(v) The name in which the Certificate was registered;
(vi) Any assignment, endorsement or other writing on the
Certificate; and
(vii) A statement of the circumstances of the theft or loss.
(b) When the FTA receives notice of the theft or loss, it will stop
any transfer of the Certificate. The Registered Holder must send to the
FTA all available portions of a mutilated or defaced Certificate. When
the Registered Holder completes these steps, the FTA will replace the
Certificate.
Sec. 120.652 FTA fees.
The FTA may charge reasonable servicing fees, transfer fees, and
other fees as the SBA and FTA may negotiate under contract.
Suspension or Revocation of Participant in Secondary Market
Sec. 120.660 Suspension or revocation.
(a) Suspension or revocation of Lender, broker, dealer, or
Registered Holder for violation of Secondary Market rules and
regulations. The AA/FA may suspend or revoke the privilege of a Lender,
broker, dealer, or Registered Holder to sell, purchase, broker, or deal
in loans or Certificates for:
(1) Committing a serious violation, in SBA's discretion, of:
(i) The rules and regulations of the Secondary Market; or
(ii) Any provisions in the contracts entered into by the parties,
including SBA Forms 1085, 1086, 1088 and 1454; or
(2) Knowingly submitting false or fraudulent information to the SBA
or FTA.
(b) Additional rules for suspension or revocation of broker or
dealer. In addition to acting under paragraph (a) of this section, the
AA/FA may suspend or revoke any broker or dealer from selling or
otherwise dealing in Certificates in the Secondary Market if:
(1) Its supervisory agency has revoked or suspended the broker or
dealer from engaging in the securities business, or is investigating
the firm or broker for a practice which SBA considers, in its sole
discretion, to be relevant to the broker's or dealer's fitness to
participate in the Secondary Market;
(2) The broker or dealer has been indicted or otherwise formally
charged with a misdemeanor or felony which bears on its fitness to
participate in the Secondary Market; or
(3) A final civil judgment is entered holding that the broker or
dealer has committed a breach of trust or a violation of any law or
regulation protecting the integrity of business transactions or
relationships.
(c) Notice to suspend or revoke. The AA/FA shall notify the
affected party in writing, providing the reasons therefore, at least 10
business days prior to the effective date of the suspension or
revocation. The affected party 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. Revocation shall last a minimum of 5
years.
Subpart G--Microloan Demonstration Program
Sec. 120.700 What is the Microloan Program?
(a) The Microloan Demonstration Program assists women, low income
individuals, minority entrepreneurs, and other small businesses
(``Microloan Borrowers'') who need smaller amounts of financial
assistance, but still have limited access to credit. The program has
been authorized through September 30, 1997.
(b) Under this program, SBA makes direct and guaranteed loans to
Intermediaries (as defined below) who use the proceeds to make loans to
Microloan Borrowers. SBA also may make grants to these Intermediaries
to be used for marketing, management, and technical assistance to the
Microloan Borrowers.
(c) SBA also may make grants to qualified non-profit entities, who
are not Intermediaries, to provide marketing, management and technical
assistance to Microloan Borrowers seeking to start or enlarge small
businesses.
(d) An Intermediary cannot operate in more than one state unless
the AA/FA determines that it would be in the best interests of the
small business community to operate across state lines.
Sec. 120.701 Definitions.
(a) Deposit account is a demand, time, savings, passbook, or
similar account maintained with an insured depository institution (not
including an account evidenced by a Certificate of Deposit).
(b) Economically Distressed Area is a county or equivalent division
of local government of a state in which, according to the most recent
available data from the United States Bureau of the Census, 40 percent
or more of the residents have an annual income that is at or below the
poverty level.
(c) Grant is a Federal award of money, or property in lieu of money
(including cooperative agreements) to an eligible grantee that must
account for its use. The term does not include the provision of
technical assistance, revenue sharing, loans, loan guarantees, interest
subsidies, insurance, direct appropriations, or any fellowship or other
lump sum award.
(d) Insured depository institution has the same meaning as in
section 3(c) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
(e) Intermediary is an entity participating in the Microloan
Demonstration Program which has made and serviced microloans to small
businesses for at least one year, and which provides marketing,
management, and technical assistance to its Microloan Borrowers. It may
be:
(1) A private, nonprofit community development corporation or other
entity;
(2) A consortium of private, nonprofit community development
corporations or other entities;
(3) A quasi-governmental economic development entity, other than a
State, county, municipal government or any agency thereof; or
(4) An agency of or a non-profit entity established by a Native
American Tribal Government.
(f) Microloan is a short-term, fixed interest rate loan of not more
than $25,000 made by an Intermediary to an eligible small business.
(g) Non-Federal sources are funds acquired from sources other than
the Federal Government and may include indirect costs or in-kind
contributions paid for under non-Federal programs.
(h) Specialized Intermediary means an Intermediary which maintains
a portfolio of microloans averaging $7,500 or less.
Sec. 120.702 Are there limits on Intermediaries or loans?
(a) SBA will not allow a quasi-governmental Intermediary to
participate in the program unless:
(1) No otherwise eligible organization applies; or
(2) SBA determines that participation by a quasi-governmental
Intermediary is in the public interest.
(b) In selecting Intermediaries, SBA will give priority to
Specialized Intermediaries.
(c) SBA will not loan more than $2.5 million collectively per year
to the
[[Page 64392]]
Intermediaries operating in any one State.
Sec. 120.703 How do I apply to become an Intermediary?
(a) Application Process. SBA periodically will solicit applications
from prospective Intermediaries in a Program Announcement or Request
For Proposal informing you:
(1) Where to obtain an application package;
(2) The deadline for submitting your application;
(3) Where to deliver your completed application.
(b) Documentation in support of your application. Your application
must include a detailed narrative statement describing:
(1) The types of businesses which you have assisted in the past and
those you intend to assist with Microloans;
(2) The average size of the loans which you have made in the past
and the average size of your intended Microloans;
(3) The extent to which you will make loans to small businesses in
rural areas;
(4) The geographic area in which you intend to operate, including a
description of the economic and demographic conditions existing in your
intended area of operations;
(5) The availability and cost of obtaining credit for small
businesses in your area;
(6) Your experience and qualifications in providing marketing,
management, and technical assistance to small businesses;
(7) Any plan you may have to use other technical assistance (such
as counselors from the Service Corps of Retired Executives) to help
your microloan borrowers.
(c) Evaluation. In evaluating applications to become
Intermediaries, SBA shall select applicants that ensure the appropriate
availability of Microloans for small businesses in all industry and
business sectors located in both rural and urban areas.
Sec. 120.704 What is my financial contribution?
You must contribute from non-Federal sources an amount equal to 15%
of any loan that you receive from SBA. The contribution may not be
borrowed.
Sec. 120.705 Microloan Revolving Fund.
You must establish a Microloan Revolving Fund (``MRF'') in an
interest-bearing Deposit Account into which you must deposit your
contributions from non-Federal sources, the proceeds from SBA loans,
and payments from your Microloan Borrowers. You may only withdraw from
this account the money needed to establish the Loan Loss Reserve Fund
(Sec. 120.706), proceeds for each Microloan you make, and any payments
which you owe to SBA.
Sec. 120.706 Loan Loss Reserve Fund.
(a) General. You must establish a Loan Loss Reserve Fund (``LLRF'')
in an interest-bearing Deposit Account. The purpose of the LLRF is to
account for any shortage in the MRF caused by delinquencies or losses
on your microloans. You must maintain the LLRF until you have repaid
all obligations which you owe to SBA.
(b) Level of Loan Loss Reserve Fund in first year. In your first
year as an Intermediary, the balance on deposit in the LLRF must equal
not less than 15% of the total outstanding balance of all notes
receivable owed by your Microloan Borrowers.
(c) Level of Loan Loss Reserve Fund in subsequent years. In
subsequent years as an Intermediary, you must maintain a balance on
deposit in the LLRF at a level which reflects your loss experience as
determined by SBA. The maximum amount is 15% of the total outstanding
balance owed by your Microloan Borrowers.
Sec. 120.707 What are the terms and conditions of my Intermediary SBA
loan?
(a) Loan Amount. You, together with your affiliates, cannot borrow
more than $750,000 in the first year of your participation in this
program. In subsequent years, your obligations owed to SBA cannot
exceed an aggregate of $2,500,000.
(b) Repayment terms. During the first year of your loan, you do not
have to make any payments, but interest accrues from the date that SBA
disburses the loan proceeds to you. After that, SBA will determine your
periodic payments. The loan must be repaid within 10 years.
(c) Interest rate. If you are a Specialized Intermediary, your
interest rate is equal to the rate applicable to 5-year obligations of
the United States Treasury, adjusted to the nearest one-eighth percent,
less 2 percent; otherwise, your interest rate is equal to the rate
applicable to 5-year obligations of the United States Treasury,
adjusted to the nearest one-eighth percent, less 1.25 percent.
(1) In determining the applicable interest rate, SBA will measure
the average size of the microloans for each of your sites or offices.
For purposes of this section, the terms ``office'' or ``site'' shall
mean a fixed, existing, geographic location established at a specific
address.
(2) At the end of your first year of participation in this program,
SBA determines whether your actual lending practices qualify you as a
Specialized Intermediary. SBA then applies the applicable interest rate
retroactively (making adjustments to interest accrued on your loan).
(3) On the anniversary date of the first year interest rate
calculation (second and all later years), SBA will determine whether
your cumulative actual lending practices qualify you as a Specialized
Intermediary. SBA will apply the applicable rate for that year.
(d) Collateral. As security for repayment of your SBA loan, you
must pledge to SBA a first lien position in your MRF, LLRF, and all
notes receivable from your Microloans.
(e) Default. If for any reason you are unable to pay SBA when due,
SBA may accelerate maturity of your loan and demand payment in full. In
this event, or if you violate this part or the terms of your loan
agreement, you must surrender possession of all collateral described in
paragraph (d) of this section to SBA. You are not obligated to pay SBA
any loss or deficiency which may remain after liquidation of the
collateral unless the loss was caused by your fraud, negligence,
violation of any of the ethical requirements of Sec. 120.140, or
violation of any other provision of this part.
(f) Fees. SBA does not charge you any fees for a loan under this
program. You may, however, pay minimal closing costs to third parties,
such as filing and recording fees.
Sec. 120.708 What conditions apply to my loans to Microloan Borrowers?
(a) General. You may make Microloans to any small business eligible
to receive financial assistance under this Part. You may allow your
Borrower to use loan proceeds only for working capital and acquisition
of materials, supplies, furniture, fixtures, and equipment. You must
exercise prudent lending practices because SBA will not review your
Microloans for creditworthiness.
(b) Amount and maturity. Generally, you should not loan more than
$10,000 to any Borrower. You may loan more than $10,000 only if you are
satisfied that your Borrower is unable to obtain financing on
comparable terms elsewhere and has good prospects for success. You must
not loan more than $25,000 to any Borrower, including affiliates. Each
of your Microloans must be repaid within 6 years.
(c) Interest rate. (1) The maximum interest rate that you can
charge your Microloan Borrowers is:
[[Page 64393]]
(i) On loans of more than $7,500, the interest rate charged on your
SBA loan, plus 7.75 percentage points;
(ii) On loans of $7,500 or less, the interest rate charged on your
SBA loan, plus 8.5 percentage points.
(2) Until the determination of your interest rate by SBA at the end
of the first year, you should quote Microloan Borrowers two possible
interest rates. You may collect interest at the higher rate. After your
interest rate is established at the end of your first year, the actual
interest rate for your borrowers' loans will be set and their interest
payments during the first year adjusted.
Sec. 120.709 What records and reports does SBA require?
You must operate in accordance with applicable statutes,
regulations, policy notices, SBA's Standard Operating Procedures
(SOPs), and the information in your application. You must supply to SBA
current and accurate information about all operational requirements,
and maintain records as required by SBA.
Sec. 120.710 How does an Intermediary get a grant to assist Microloan
Borrowers?
(a) General. If you receive a loan from SBA, you are eligible to
receive a grant from SBA equal to 25 percent of the outstanding balance
of all loans made to you by SBA. You must contribute, solely from non-
Federal sources, an amount equal to 25 percent of the grant, unless you
make at least 50 percent of your loans to small businesses located in
or owned by residents of an Economically Distressed Area. If you make
at least 25 percent of your loans to small businesses located in or
owned by residents of an Economically Distressed Area, you will be
eligible to receive an additional grant from SBA equal to 5 percent of
the outstanding balance of all loans which you have received from SBA
(with no obligation to contribute additional matching funds). You may
not borrow your contribution. You may only use grant funds to provide
your Microloan Borrowers with marketing, management, and technical
assistance, except that you may use up to 15 percent of the grant funds
to provide information and technical assistance to prospective
Microloan Borrowers. You may not contract to have any other person or
entity provide these services.
(b) Specialized Intermediary. If you are a Specialized
Intermediary, you are eligible for an additional grant equal to 5
percent of the total outstanding balance of all loans which you have
received from SBA. You are not required to contribute additional
matching funds. You must use the grant proceeds only for marketing,
management and technical assistance.
(c) Determining eligibility. SBA will determine your eligibility
for a grant under this section separately for each loan-making office
or site. SBA will measure the average size of your Microloans for each
site to see if you qualify for the extra 5 percent.
Sec. 120.711 Does SBA provide technical assistance to Intermediaries?
SBA may procure technical assistance for an Intermediary to improve
its knowledge, skill, and understanding of microlending by awarding a
grant to a more experienced Intermediary. SBA may also obtain such
assistance for prospective Intermediaries in areas of the country that
are either underserved or not served by an existing Intermediary.
Sec. 120.712 How does a non-Intermediary get a grant?
(a) Grant procedure for non-Intermediaries. Any nonprofit entity
that is not an Intermediary may apply to SBA for a grant. To qualify,
it must submit information regarding its ability to provide marketing,
management, and technical assistance to Microloan Borrowers. If
approved, the grant agreement will establish the terms and conditions
of the grant.
(b) Number and amounts of grants. In each year of the Microloan
program, SBA may make no more than 25 grants to non-Intermediaries for
terms of up to 5 years. A grant may not exceed $125,000.
(c) Contribution by nonprofit entity. The nonprofit entity must
contribute an amount equal to 20 percent of the grant. The contribution
from the nonprofit entity shall come solely from non-Federal sources,
and may include direct costs or in-kind contributions paid for under
non-Federal programs.
Sec. 120.713 Does SBA guarantee any loans an Intermediary obtains from
another source?
(a) SBA may guarantee not less than 90 percent of no more than 10
loans by for-profit or non-profit entities (or an alliance of such
entities) to intermediaries in urban areas and no more than 10 loans by
such entities to intermediaries in Rural Areas.
(b) Any loan under this section shall have a term of 10 years. If
you receive such a loan, you will not need to repay any principal or
interest during the first year, although the interest will accrue.
During the second through fifth years, you will pay interest only.
During the sixth through tenth years you will pay interest and fully
amortize the principal.
(c) The interest rate on any loan under this section shall be
calculated as described in Sec. 120.707.
Subpart H--Development Company Loan Program (504)
Sec. 120.800 What is the purpose of the 504 program?
As authorized by Congress, SBA has established this program to
foster economic development, create or preserve job opportunities, and
stimulate growth, expansion, and modernization of small businesses.
Sec. 120.801 How is a 504 Project financed?
A small business may apply for 504 financing through the CDC
servicing the area in which the business is located. SBA issues an
Authorization if it agrees to guarantee part of the funding for a
Project. Usually, a Project requires interim (construction) financing
from an interim lender (often the same lender that later provides a
portion of the permanent financing). Generally, permanent financing of
the Project consists of a private sector loan in the amount of 50
percent of the Project costs which is collateralized by a first lien on
the Project Property, a loan made with the proceeds of a CDC Debenture
in the amount of 40 percent of the Project costs, collateralized by a
second lien on the Project Property, and a contribution by the small
business in the amount of 10 percent of the Project costs. The
Debenture is guaranteed 100 percent by SBA (with the full faith and
credit of the United States), and sold to Underwriters who form
Debenture Pools. Investors purchase interests in Debenture Pools and
receive Certificates representing ownership of all or part of a
Debenture Pool. SBA and CDCs use various agents to facilitate the sale
and service of the Certificates and the orderly flow of funds among the
parties.
Sec. 120.802 Definitions.
The following terms have the same meaning wherever they are used in
this subpart. Defined terms are capitalized wherever they appear.
Area of Operations is a geographic area in which a CDC conducts its
activities.
Associate Development Company (ADC) is an entity approved by SBA to
assist CDCs to deliver 504 financing.
Central Servicing Agent (CSA) is an entity that receives and
disburses funds among the various parties involved in 504 financing
under a master servicing agent agreement with SBA.
Certificate is a document issued by SBA or its agent representing
ownership of all or part of a Debenture Pool.
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Debenture is an obligation issued by a CDC and guaranteed 100
percent by SBA, the proceeds of which are used to fund a 504 loan.
Debenture Pool is an aggregation of Debentures formed by an
Underwriter.
Job Opportunity is a full time (or equivalent) permanent job
created within two years of receipt of 504 funds, or retained in the
community because of a 504 loan.
Net Debenture Proceeds are the portion of Debenture proceeds that
finance eligible Project costs (excluding administrative costs).
Project is the purchase or lease, and/or improvement or renovation
of long-term fixed assets by a small business, with 504 financing, for
use in its business operations.
Project Property is one or more long-term fixed assets, such as
land, buildings, machinery, and equipment, acquired or improved by a
small business, with 504 financing, for use in its business operations.
Substantial Increase in Unemployment is:
(1) A reduction of one-third or more in the workforce of a
relocating small business; or
(2) An increase in unemployment in a redevelopment area (as
designated by the Department of Commerce), a Labor Surplus Area
(designated by the Department of Labor), or in an area which has an
unemployment rate at least 20 percent higher than the national average.
Third Party Loan is a loan from a commercial or private lender,
investor, or Federal (non-SBA), State or local government source
obtained by the Borrower as part of the Project financing.
Underwriter is an entity approved by SBA to form Debenture Pools
and arrange for the sale of Certificates.
Certificaiton Procedures To Become a CDC
Sec. 120.810 Applications for certification as a CDC.
(a) Applicants for certification as a CDC must apply to the SBA
District Office serving a proposed Area of Operations. An applicant
must demonstrate that it satisfies the certification and operating
criteria in Secs. 120.820-120.829, as well as:
(1) The need for 504 services (if there is already a CDC in the
Area of Operations, the applicant must justify the need for another and
present a plan to avoid duplication or overlap);
(2) A budget, approved by its Board of Directors; and
(3) A plan to meet CDC operating requirements (without specializing
in a particular industry).
(b) The AA/FA, with the recommendation of each District Office in
the applicant's proposed Area of Operations, shall make the
certification decision.
Sec. 120.811 Public notice of CDC certification application.
(a) As part of the application process, the applicant must publish
a notice in a general circulation newspaper in the proposed Area of
Operations, including the name and location of the proposed CDC, its
purpose and Area of Operations, and the names of its officers and
directors. The applicant shall send a copy of the notice to SBA. The
notice shall provide the public at least 30 days to submit written
comments to the District Office. The SBA shall consider the comments in
making its decision on the application.
(b) CDCs serving the proposed Area of Operations shall be directly
notified and given at least 30 days to comment.
Sec. 120.812 Probationary period for newly certified CDCs.
(a) Newly certified CDCs will be on probation for a period of two
years, at the end of which the CDC must petition for:
(1) Permanent CDC status;
(2) A single, one-year extension of probation; or
(3) ADC status.
(b) SBA shall consider failure to file a petition before the end of
the probationary period as a withdrawal from the 504 program. If the
CDC elects ADC status or withdrawal, it must transfer all funded and/or
approved loans to another CDC, SBA, or another servicer approved by
SBA.
Requirements for CDC Certification and Operation
Sec. 120.820 CDC non-profit status.
A CDC must be a non-profit corporation (or limited liability
company) in good standing. (For-profit CDCs certified by SBA prior to
January 1, 1987 may retain their certifications.) An SBIC may not
become a CDC.
Sec. 120.821 CDC Area of Operations.
A CDC must have a designated Area of Operations, specified by the
CDC and approved by SBA. There can be only one statewide CDC in each
state, which must foster economic development throughout the state and
provide 504 assistance to areas not adequately served by other CDCs.
Sec. 120.822 CDC membership.
A CDC must have at least 25 members (or stockholders for for-profit
CDCs approved prior to January 1, 1987). No person or entity may own or
control more than 10 percent of the CDC's voting membership (or stock).
Members must be representative of and provide evidence of active
support in the Area of Operations. Members must be from each of the
following groups:
(a) Government organizations responsible for economic development
in the Area of Operations and acceptable to SBA;
(b) Financial institutions that provide commercial long-term fixed
asset financing in the Area of Operations;
(c) Community organizations dedicated to economic development in
the Area of Operations such as chambers of commerce, foundations, trade
associations, colleges, or universities; and
(d) Businesses in the Area of Operations.
Sec. 120.823 CDC board of directors.
The CDC must have a Board of Directors chosen from the membership
by the members, and representing at least three of the four membership
groups. No single group shall control. The Board members must be
responsible officials of the organizations they represent, and at least
one must possess commercial lending experience. The Board must meet at
least quarterly and shall be responsible for CDC staff decisions and
actions. A quorum shall require at least 5 Directors. If there is a
vote on loan approval or servicing actions, at least one Board member
with commercial loan experience approved by SBA must be present and
vote. As an alternative, the Board may obtain the recommendation of
another person approved by SBA and possessing commercial lending
experience.
Sec. 120.824 Professional management and staff.
A CDC must have full-time professional management, including an
Executive Director (or the equivalent) managing daily operations. It
must also have a full-time professional staff qualified by training and
experience to market the 504 Program, package and process loan
applications, close loans, service the loan portfolio, and sustain a
sufficient level of service and activity in the Area of Operations.
(a) Contracting out to third parties. CDCs may obtain, under
contract, marketing, packaging, processing, and servicing services from
qualified Service Providers located in the Area of Operations, subject
to SBA's prior
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written approval. CDCs may contract for outside legal and accounting
services without SBA approval. Compensation under all such contracts
must be reasonable and customary for similar services in the Area of
Operations. SBA may audit the contracts.
(b) Contracting out to other CDCs. CDCs may contract with other
CDCs for specific services, subject to SBA's prior written approval.
Sec. 120.825 Financial ability to operate.
A CDC must be able to sustain its operations continuously, with
reliable sources of funds (such as income from services rendered and
contributions from government or other sponsors).
Sec. 120.826 Basic requirements for operating a CDC.
A CDC must operate in accordance with applicable statutes,
regulations, policy notices, SBA's Standard Operating Procedures
(SOPs), and the information in its application. It must supply to SBA
current and accurate information about all certification and
operational requirements, and maintain the records and submit the
reports required by SBA.
Sec. 120.827 Services a CDC provides to small businesses.
(a) A CDC must operate in and adequately service its Area of
Operations. It must market the 504 program, package and process 504
loan applications, and close and service 504 loans. A CDC's loan
portfolio must be diversified by business sector.
(b) A CDC may help small businesses obtain financial and technical
assistance from other sources, including preparing, closing, and
servicing loans under contract with Lenders in SBA's 7(a) program.
(c) A CDC also may loan amounts to the Borrower equal to the value
of all or part of the Borrower's contribution to a Project in the form
of cash or land, including site improvements, previously acquired by
the CDC.
Sec. 120.828 The minimum level of CDC lending activity.
Each full fiscal year, a CDC must provide at least the minimum
number of 504 Loans set by SBA in an annual program announcement.
Sec. 120.829 The Job Opportunity average a CDC must maintain.
(a) A CDC's portfolio must reflect an average of one Job
Opportunity per $35,000 of 504 loan funding. The AA/FA may permit a CDC
to average up to one per $45,000 for good cause in:
(1) Alaska;
(2) Hawaii;
(3) Redevelopment areas as defined in 42 U.S.C. 3161;
(4) State designated urban jobs and enterprise zones;
(5) Empowerment Zones and Enterprise Communities; and
(6) Labor Surplus Areas listed in the Department of Labor's
publication ``Area Trends''.
(b) A CDC must indicate in its annual report the Job Opportunities
actually or estimated to be provided by each Project.
(c) If a CDC does not maintain the required average, it may retain
its certification if it justifies to SBA's satisfaction its failure to
do so in its annual report and shows how it intends to attain the
required average.
Sec. 120.830 Reports a CDC must submit.
A CDC must submit the following reports to SBA:
(a) An annual report within 90 days after the end of the CDC's
fiscal year, and such interim reports as SBA may require;
(b) Resumes for all new Associates and staff;
(c) Reports of involvement in any legal proceeding;
(d) Changes in organizational status;
(e) Changes in any condition that affects its eligibility to
continue to participate in the 504 program; and
(f) Quarterly service reports on each loan in its portfolio which
is 60 days or more past due (and interim reports upon request by SBA).
Sec. 120.831 Disclosure of referral fees or other payments by or to a
CDC.
The CDC must disclose to SBA and the Borrower any referral fees,
remuneration, or payment made by the CDC to or received by the CDC from
the Lender or any other party to the 504 transaction.
Extending a CDC's Area of Operations
Sec. 120.835 Application to extend an Area of Operations.
SBA may expand a CDC's Area of Operations for good cause shown
including a showing that the proposed Area of Operations is not being
served adequately by the existing CDCs and that the expanding CDC is
well-qualified to serve it. SBA shall not consider an Area of
Operations adequately served if the existing CDCs in the Area of
Operation have not averaged, over the last two fiscal years, sufficient
loan approvals for the population in the CDC's Area of Operations, as
set by SBA in an annual program announcement. The CDC must apply in
writing to the SBA District Office serving the geographic area in which
the CDC proposes to expand. The District Office shall submit its
recommendation to the AA/FA for final decision.
Sec. 120.836 Public notice of application for extension.
SBA must notify all CDCs servicing the proposed area of expansion,
allowing at least 30 days for comment. The CDC also must publish a
notice in a general circulation newspaper in the proposed area of
expansion, giving the public at least 30 days to comment.
Sec. 120.837 Expiration of existing, temporary expansions.
All existing, temporary expansions of Areas of Operation shall
expire 6 months after the effective date of the final regulations,
unless a CDC applies for permanent expansion before the expiration
date.
Sec. 120.838 Case by case extensions.
(a) A CDC may apply to make an individual loan for a Project
outside its Area of Operations in an area not adequately served by
other CDCs to the District Office serving the area in which the Project
will be located. The District Director may approve the request for good
cause shown.
(b) A Borrower may request the services of a CDC not presently
servicing its area by writing to the AA/FA.
Accredited Lenders Program (ALP)
Sec. 120.840 Accredited Lenders Program.
The SBA may designate a CDC as an Accredited Lender. SBA will
provide an Accredited Lender with expedited loan processing or
servicing action (within three days of receiving a completed
application).
(a) Applications. CDCs may apply to the SBA field office with which
it is most active. The SBA office will send its recommendation and the
application to the AA/FA.
(b) Eligibility. SBA will consider the CDC's ability to work with
the local SBA office and the quality of past performance.
(c) Term of designation. CDCs will be designated as ALPs for a two
year period, and are eligible to renew the designation for additional
two year periods.
(d) Suspension and revocation. The AA/FA may suspend or revoke ALP
designation upon written notice stating the reasons therefore 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 or violations of applicable statutes,
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regulations or published SBA policies and procedures. An ALP 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.
Premier Certified Lenders Program
Sec. 120.845 Premier Certified Lenders Program.
The SBA has established a pilot program to designate a number of
CDCs as Premier Certified Lenders (``PCLPs''), which will be able to
process, approve, close and service 504 loans.
(a) Characteristics. Loans processed through the PCL Program will
be subject to the same provisions as other 504 loans, including final
approval by SBA.
(b) Applications. A CDC may obtain information concerning this
program from SBA's Office of Pilot Operations in Washington, D.C. A CDC
may apply to the SBA field office with which it is most active. The SBA
office will send the application with a recommendation to the AA/FA.
(c) Eligibility. SBA will consider the CDC's ability to work with
the local SBA office and the quality of past performance.
(d) Loss reserve. A PCLP must establish a loss reserve, secured by
its segregated assets in favor of SBA, in the amount of the PCLP's
historic loss rate or 10 percent of its exposure under the PCLP
program, whichever is greater. The PCLP must contribute to the loss
reserve every time a Debenture is issued, in intervals set by SBA.
(e) Review. The SBA shall review a PCLP's financings at least
annually.
(f) Suspension and revocation. The AA/FA may suspend or revoke PCLP
designation upon written notice stating the reasons therefore 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 PCLP may appeal the
suspension or revocation made under this section pursuant to the
procedures set forth in part 134 of this title. The action of the AA/FA
shall remain in effect pending resolution of the appeal.
(g) Program period. On October 1, 1997, the PCLP pilot program
ends.
Associate Development Companies (ADCs)
Sec. 120.850 ADC functions.
(a) An ADC must support local economic development efforts. An ADC
may package, close, and service loans for a CDC under a written
contract approved by SBA. Such contracts must meet Service Provider
criteria, and specify the rights and responsibilities of the parties
(including payment terms). The CDC remains solely responsible to SBA
for the processing, closing, and servicing of the loan. It may not
charge the Borrower a higher fee because it is using the ADC's
services.
(b) An ADC must operate in accordance with statutes, regulations,
policy notices, SBA's Standard Operating Procedures (SOPs), and the
information in its application. It must supply to SBA current and
accurate information about all certification and operational
requirements, and maintain the records required by SBA.
Sec. 120.851 ADC eligibility and operating requirements.
(a) An ADC must demonstrate to SBA and maintain the following:
(1) Adequate management ability;
(2) A Board of Directors meeting at least quarterly and chosen from
the membership by the members;
(3) A professional staff, including at least one qualified full-
time professional with small business lending experience available
during regular business hours; and
(4) A budget or financial statements showing the financial
capability and funding to sustain continuing operations.
(b) An ADC may contract out for staff services only if SBA gives
prior approval. The contract, subject to SBA audit, may not be self-
serving, and compensation must be reasonable and customary.
Sec. 120.852 Suspension and revocation of ADCs.
SBA may require corrective action, or the AA/FA may suspend or
revoke ADC status upon written notice stating the reasons therefore at
least 10 business days prior to the effective date of the suspension or
revocation. Reasons for suspension or revocation may include violations
of applicable statutes, regulations or published SBA policies and
procedures. An ADC 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.
Ethical Requirements
Sec. 120.855 CDC and ADC ethical requirements.
CDCs and ADCs and their Associates must act ethically and exhibit
good character. They must meet all of the ethical requirements of
Sec. 120.140. In addition, they are subject to the following:
(a) Any benefit flowing to an Associate or the Associate's employer
from the Associate's activities as an Associate shall be merely
incidental (this requirement does not prevent an Associate or an
Associate's employer from engaging in a business relationship with the
CDC and/or the Borrower in the regular course of business, including
providing interim financing or Third-Party loans); and
(b) Unless waived by SBA, an Associate may not be an officer,
director, or manager of more than one CDC or ADC (except that the
membership or Board of Directors of a broader-based CDC may include a
member or director of a local CDC within its Area of Operations).
Project Economic Development Goals
Sec. 120.860 Required objectives.
A Project must achieve at least one of the economic development
objectives set forth in Sec. 120.861 or Sec. 120.862.
Sec. 120.861 Job creation or retention.
A Project must create or retain one Job Opportunity for every
$35,000 guaranteed by SBA.
Sec. 120.862 Other economic development objectives.
A Project that achieves any of the following community development
or public policy goals is eligible if the CDC's overall portfolio of
504 loans, including the subject loan, meets or exceeds the CDC's
required Job Opportunity average. Applications for assistance must
indicate how the Project will meet the specified economic development
objective.
(a) Community Development goals:
(1) Improving, diversifying or stabilizing the economy of the
locality;
(2) Stimulating other business development;
(3) Bringing new income into the community; or
(4) Assisting manufacturing firms (Standard Industrial
Classification Manual (SIC) Codes 20-49).
(b) Public Policy goals:
(1) Revitalizing a business district of a community with a written
redevelopment plan;
(2) Expanding exports;
(3) Expanding Minority Enterprise development (See Sec. 124.103(b)
of this chapter.);
(4) Aiding rural development;
(5) Increasing productivity and competitiveness (retooling,
robotics, modernization, competition with imports);
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(6) Modernizing or upgrading facilities to meet health, safety, and
environmental requirements;
(7) Assisting businesses affected by Federal budget reductions,
such as base closings; or
(8) Assisting businesses in Labor Surplus Areas as defined by the
Department of Labor.
Leasing Policies Specific to 504 Loans
Sec. 120.870 Leasing Project Property.
(a) A Borrower may use the proceeds of a 504 loan to acquire,
construct, or modify buildings and improvements, and/or to purchase and
install machinery and equipment located on land leased to the Borrower
by the CDC or an unrelated lessor if:
(1) The remaining term of the lease, including options to renew,
exercisable solely by the lessee, equals or exceeds the term of the
Debenture, or, in the case of machinery or equipment, equals or exceeds
the useful life of the property or the term of the Debenture, whichever
is lesser;
(2) The Borrower assigns its interest in the lease to the CDC with
right of reassignment to SBA; and
(3) The 504 loan is secured by a recorded lien against the
leasehold estate and other collateral as necessary.
(b) If a CDC leases property to a small business, the rent paid by
the small business during the term of the Debenture must be enough to
pay principal and interest on all debt incurred by the CDC to finance
the Project, and all related expenses. The rent also may include a
reasonable return on the CDC's investment.
Sec. 120.871 Leasing part of a new construction Project to another
business.
If a Project is the construction of a new building, a Borrower may
lease up to 33% of the square footage of the rentable property (total
square footage of all buildings or facilities used for business
operations) for a short term to any third party if reasonable growth
projections show that the Borrower will need additional space within
three years and will use all of the additional space within ten years.
If the Borrower is an Eligible Passive Company leasing 100 percent of
the Project space to an Operating Company, the Operating Company may
sublease up to 33 percent to a third party under the same conditions.
Sec. 120.872 Leasing part of an existing building to another business.
If a Project involves the acquisition, renovation, or
reconstruction of an existing building, the Borrower (or Operating
Company) must occupy at least 51 percent of the Rentable Property. The
balance of the Rentable Property may be leased out to any third party,
if the 504 loan proceeds were not used to remodel or convert the space
to be leased out. The costs of interior finishing of the space to be
leased out are not eligible Project costs, and third-party loan
proceeds used to renovate the leased space shall not count towards the
504 first mortgage requirement or the Borrower's contribution.
Loan-Making Policies Specific to 504 Loans
Sec. 120.880 Basic eligibility requirements.
In addition to the eligibility requirements specified in subpart A,
to be an eligible Borrower for a 504 loan, a small business must:
(a) Use the Project Property (except for loans to Passive
Companies); and
(b) Together with its affiliates, meet one of the following size
standards:
(1) It does not have a net worth in excess of $6 million, and does
not have an average net income after Federal income taxes (excluding
any carry-over losses) for the preceding two years in excess of $2
million; or
(2) It meets the size standards in Part 121 of this chapter for the
industry in which it is primarily engaged.
Sec. 120.881 Ineligible Projects for 504 loans.
In addition to the ineligible businesses and uses of proceeds
specified in subpart A of this part, the following Projects are
ineligible for 504 financing:
(a) Relocation of any of the operations of a small business which
will cause a Substantial Increase in Unemployment, unless the CDC can
justify the loan because:
(1) The relocation is for key economic reasons and crucial to the
continued existence, economic wellbeing, and/or competitiveness of the
applicant; and
(2) The economic development benefits to the applicant and the
receiving community outweigh the negative impact on the community from
which the applicant is moving;
(b) Projects in foreign countries (loans financing real or personal
property located outside the United States or its possessions); and
(c) Speculative Projects (such as oil wildcatting).
Sec. 120.882 Eligible Project costs for 504 loans.
Eligible Project costs which may be paid with the proceeds of 504
loans are:
(a) Costs directly attributable to the Project including
expenditures incurred by the Borrower (with its own funds or from a
loan):
(1) To acquire land used in the Project prior to applying to SBA
for the 504 loan; or
(2) For any other expense toward a Project within six months of
receipt by SBA of a complete loan application;
(b) In construction Projects, a contingency reserve for cost
overruns not to exceed 10 percent of construction cost;
(c) Professional fees directly attributable and essential to the
Project, such as title insurance, architecture, engineering,
accounting, legal fees and environmental studies; and
(d) Repayment of interim financing including points, fees and
interest.
Sec. 120.883 Eligible administrative costs for 504 loans.
The following costs and fees are not part of Project costs but may
be paid with the proceeds of the 504 loan and the Debenture:
(a) SBA guarantee fee;
(b) Funding fee (to cover cost of public issuance of securities);
(c) CDC processing fee;
(d) Closing costs, including legal fees; and
(e) Underwriters fee.
Sec. 120.884 Ineligible costs for 504 loans.
Costs not directly attributable and necessary for the Project may
not be paid with proceeds of the 504 loan. These include, but are not
limited to, the following:
(a) Debt refinancing (other than interim financing);
(b) Third-Party Loan fees (commitment, broker, finders,
origination, processing fees of permanent financing);
(c) Ancillary business expenses, such as:
(1) Working capital;
(2) Counseling or management services fees;
(3) Incorporation/organization costs;
(4) Franchise fees; and
(5) Advertising;
(d) Non fixed-asset project components, such as:
(1) Short-term equipment, furniture, and furnishings (unless
essential to and a minor portion of the Project);
(2) Automobiles, trucks, and airplanes; and
(3) Construction equipment (except for heavy duty construction
equipment integral to a business' operations and meeting the IRS
definition of capital equipment).
Interim Financing
Sec. 120.890 Source of interim financing.
A Project may use interim financing for all Project costs except
the
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Borrower's contribution. Any source (including a CDC) may supply
interim financing provided:
(a) The financing is not derived from any SBA program, directly or
indirectly;
(b) The terms and conditions of the financing are acceptable to
SBA;
(c) The source is not the Borrower or an Associate of the Borrower;
and
(d) The source has the experience and qualifications to monitor
properly all construction and progress payments. (If the source lacks
such experience or qualifications, SBA may require the interim loan to
be managed by a third party such as a bank or professional construction
manager.)
Sec. 120.891 Certifications of disbursement and completion.
Before the Debenture is issued, the interim lender must certify
that the interim financing has been disbursed in a manner consistent
with the terms of the Authorization. Also, the CDC must certify that
the Project was completed in accordance with the final plans and
specifications (except as provided in Sec. 120.962).
Sec. 120.892 Certifications of no adverse change.
Following completion of the Project, the following certifications
must be made before the 504 loan closing:
(a) The interim lender must certify to the CDC that it has no
knowledge of any adverse change in the condition of the small business
since the application;
(b) The Borrower (or Operating Company) must certify to the CDC
that there has been no adverse change in its financial condition or its
ability to repay the 504 loan since the date of application, and must
furnish interim financial statements, current within 90 days of
closing; and
(c) The CDC must issue an opinion to the best of its knowledge that
there has been no adverse change in the Borrower's (or Operating
Company's) ability to repay the 504 loan since SBA's approval of the
loan application.
Permanent Financing
Sec. 120.900 What are the sources of permanent financing?
Permanent financing for each Project must come from three sources:
the Borrower's contribution, Third-Party Loans, and the 504 loan.
Typically, the Borrower contributes 10 percent of the permanent
financing, Third-Party Loans 50 percent and the 504 loan 40 percent.
The Borrower's Contribution
Sec. 120.910 How much must the Borrower contribute?
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) valued at 10 percent or more of the Project cost
(exclusive of administrative cost). 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).
Sec. 120.911 Land contributions.
The Borrower's contribution may be land, including site
improvements, previously acquired by the Borrower or the CDC. The
amount of the contribution shall be the value of the contributor's
equity in the land, excluding the value of any structures, under SBA's
policy guidelines.
Sec. 120.912 Borrowed contributions.
The Borrower may borrow its cash contribution from the CDC or a
third party. If any of the contribution is borrowed, the interest rate
must be reasonable. If the loan is secured by any of the Project
assets, the loan must be subordinate to the liens securing the 504
Loan, and the loan may not be repaid at a faster rate than the 504 Loan
unless SBA gives prior written approval. A third party lender may not
receive voting rights, stock options, or any other actual or potential
voting interest in the small business.
Sec. 120.913 May an SBIC provide the contribution?
Subject to part 107 of this chapter, SBIC's may provide financing
for all or part of the Borrower's contribution to the project. SBA
shall consider SBIC funds to be derived from federal sources if the
SBIC has leverage (as defined in part 107 of this chapter). If the SBIC
does not have leverage, the investment will be considered to be from
private funds. SBIC financing must be subordinated to the 504 loan and
may not be repaid at a faster rate than the Debenture.
Third Party Loans
Sec. 120.920 The first lien position.
The Borrower must obtain one or more Third Party Loans totaling at
least as much as the 504 loan. Third Party Loans usually have the first
lien position. They cannot be guaranteed by SBA.
Sec. 120.921 Terms of Third Party loans.
(a) Maturity. A Third Party Loan must have a term of at least 7
years when the 504 loan is for a term of 10 years and 10 years when the
504 loan is for 20 years. If there is more than one Third Party Loan,
an overall loan maturity must be calculated, taking into account the
maturities and amounts of each loan. If there is a balloon payment, it
must be justified in the loan report and clearly identified in the Loan
Authorization.
(b) Interest rates. Interest rates must be reasonable. SBA must
establish and publish in the Federal Register a maximum interest rate
for any Third Party Loan from commercial financial institutions. The
rate shall remain in effect until changed.
(c) Other terms. The Third Party Loan must not have any early call
feature or contain any demand provisions unless the loan is in default.
By participating, a Third Party Loan lender waives, as to the CDC/SBA
financing, any provision in its deed of trust, or mortgage, or other
documents prohibiting further encumbrances or subordinate debt. In the
event of default, the Third Party Lender must give the CDC and SBA
written notice of default within 30 days of the event of default and at
least 60 days prior to foreclosure.
Sec. 120.922 Pre-existing debt on the Project Property.
In addition to its share of Project cost, a Third Party Loan may
include consolidation of existing debt on the Project Property. The
consolidation must not improve the lien position of the Lender on the
pre-existing debt, unless the debt is a previous Third Party Loan.
Sec. 120.923 What are the policies on subordination?
(a) Financing provided by the seller of Project Property must be
subordinate to the 504 loan. SBA may waive the subordination
requirement if the property is classified as ``other real estate
owned'' by a national bank or other Federally regulated lender and SBA
considers the property to be of sufficient value to support the 504
loan.
(b) By participating, Third Party Loan lienholders subordinate to
the CDC/SBA lien future advances in excess of the Third Party Loans
except expenditures for collection, maintenance, and protection of the
Third Party Loan lienholder's lien position.
(c) A Borrower is eligible for a 504 loan even if part of the
Project financing is tax-exempt. SBA's lien position must not be
subordinate to loans made from the proceeds of the tax-exempt
obligation.
[[Page 64399]]
Sec. 120.924 Prepayment of subordinate financing.
The Borrower must not prepay any Project financing subordinate to
the 504 loan without SBA's prior written consent.
Sec. 120.925 Preferences.
No Third Party Lender shall establish a Preference.
504 Loans and Debentures
Sec. 120.930 Amount.
(a) Generally, a 504 loan may not exceed 40 percent of total
Project cost plus 100 percent of eligible administrative costs. For
good cause shown, SBA may authorize an increase in the percentage of
Project costs covered up to 50 percent. No more than 50 percent of
eligible Project costs can be from Federal sources, whether received
directly or indirectly through an intermediary.
(b) Generally, the minimum 504 loan must be $50,000, although, upon
good cause shown, SBA may permit a 504 loan as small as $25,000. The
amount of the Debenture must equal the amount of the 504 Loan. If the
cost of the completed Project is less than 98 percent of the authorized
Debenture amount, the amount of the Debenture to be issued shall be
reduced by the difference. If the cost of the completed project is at
least 98 percent of the authorized Debenture amount, the full
authorized amount of the Debenture shall be disbursed.
Sec. 120.931 504 lending limits.
The outstanding balance of all SBA financial assistance to a
Borrower and its affiliates under the 504 program covered by this Part
must not exceed $750,000 ($1,000,000 if one or more of the public
policy goals enumerated in Sec. 120.861(b) applies to the Project).
Sec. 120.932 Interest rate.
The interest rate of the 504 Loan and the Debenture which funds it
is set by the Underwriter and approved by the Secretary of the
Treasury. Each 504 loan must have a fixed interest rate.
Sec. 120.933 Maturity.
The term of a 504 Loan and the Debenture which funds it shall be
either 10 or 20 years.
Sec. 120.934 Collateral.
The CDC/SBA takes at least a second lien position on the Project
collateral. In rare circumstances, collateral other than the Project
collateral may be accepted by SBA. Sometimes secondary collateral is
required. All collateral must be insured against such hazards and risks
as SBA may require, with provisions for notice to SBA and the CDC in
the event of impending lapse of coverage.
Sec. 120.935 Deposit.
At the time of application for a 504 loan, the CDC may require a
deposit from the Borrower of $2,500 or 1 percent of the Net Debenture
Proceeds, whichever is less. The deposit may be applied to the loan
processing fee if the application is accepted, but must be refunded if
the application is denied. If the small business withdraws its
application, the CDC may deduct from the deposit reasonable costs
incurred in packaging and processing the application.
Sec. 120.936 Subordination to CDC.
SBA, in its sole discretion, may permit subordination of the
Debenture to any other obligation of the CDC, except debt incurred by
the CDC to obtain funds to loan to the Borrower for the Borrower's
required contribution to the Project financing.
Sec. 120.937 Assumption.
A 504 loan may be assumed with SBA's prior written approval.
Sec. 120.938 Default.
(a) Upon occurrence of an event of default specified in the 504
note which requires automatic acceleration, the note becomes due and
payable. Upon occurrence of an event of default which does not require
automatic acceleration, SBA may forbear acceleration of the note and
attempt to resolve the default. If the default is not cured
subsequently, the note shall be accelerated. In either case, upon
acceleration of the note, the Debenture which funded it is also due
immediately, and SBA must honor its guarantee of the Debenture. SBA
shall not reimburse the investor for any premium paid.
(b) If a CDC defaults on a Debenture, SBA generally shall limit its
recovery to the payments made by the small business to the CDC on the
loan made from the Debenture proceeds, and the collateral securing the
defaulted loan. However, SBA will look to the CDC for the entire amount
of the Debenture in the case of fraud or negligence by the CDC.
Sec. 120.939 Borrower prohibition.
Neither a 504 loan recipient nor its Small Business Associate may
purchase the Debenture that funded its 504 loan.
Sec. 120.940 Prepayment of the 504 loan or Debenture.
The Borrower may prepay its 504 loan, if it pays the entire
principal balance, unpaid interest, any unpaid fees, and any prepayment
premium established in the note. If the Borrower prepays, the CDC must
prepay the corresponding Debenture with interest and premium. If one of
the Debentures in a Debenture Pool is prepaid, Certificate holders must
be paid pro rata, and SBA's guarantee on the entire Debenture Pool must
be proportionately reduced. If the entire Debenture Pool is paid off,
SBA may call all Certificates backed by the Pool for redemption.
Sec. 120.941 Certificates.
(a) The face value of a Certificates must be at least $25,000.
Certificates are issued in registered form and transferred only by
entry on the central registry maintained by the Trustee. No transfer
may take place within 10 business days of a payment date. SBA
guarantees the timely payment of principal and interest on the
Certificates.
(b) Before the sale of a Certificate, the seller, or the broker or
dealer acting as the seller's agent, must disclose to the purchaser the
terms, conditions, yield, and premium and other characteristics not
guaranteed by SBA.
Debenture Sales and Service Agents
Sec. 120.950 SBA and CDC must appoint agents.
SBA and the CDC must appoint the following agents to facilitate the
sale and service of the Certificates and disbursement of the proceeds.
Sec. 120.951 Selling agent.
The CDC, with SBA approval, shall appoint a Selling Agent to select
underwriters, negotiate the terms and conditions of Debenture offerings
with the underwriters, and direct and coordinate Debenture sales.
Sec. 120.952 Fiscal agent.
SBA shall appoint a Fiscal Agent to assess the financial markets,
minimize the cost of sales, arrange for the production of the Offering
Circular, Debenture Certificates, and other required documents, and
monitor the performance of the transfer agent and the underwriters.
Sec. 120.953 Trustee.
SBA must appoint a Trustee (known as a Transfer Agent for the
December l986 Debenture sale) to:
(a) Issue Certificates;
(b) Transfer the Certificates upon resale in the secondary market;
(c) Maintain physical possession of the Debentures for SBA and the
Certificate holders;
(d) Establish and maintain a central registry of:
[[Page 64400]]
(1) Debenture Pools, including the CDC obligors and the interest
rate payable on the Debentures in each Pool;
(2) Certificates issued or transferred, including the Debenture
Pool backing the Certificate, name and address of the purchaser, price
paid, the interest rate on the Certificate, and fees or charges
assessed by the transferror; and
(3) Brokers and dealers in Certificates, and the commissions, fees
or discounts granted to the brokers and dealers;
(e) Receive semi-annual Debenture payments and prepayments;
(f) Make regularly scheduled and prepayment payments to Registered
Holders of Debentures or Certificates; and
(g) Assure before any resale of a Debenture or Certificate is
recorded in the registry that the seller has provided the purchaser a
written disclosure statement approved by SBA.
Sec. 120.954 Central Servicing Agent.
(a) SBA has entered into a Master Servicing Agreement designating a
Central Servicing Agent (CSA) to support the orderly flow of funds
among Borrowers, investors, CDCs, and SBA. The CDC and Borrower must
enter into an individual Servicing Agent Agreement with the CSA for
each 504 loan, constituting acceptance by the CDC and the Borrower of
the terms of the Master Servicing Agreement.
(b) The CSA has established a master reserve account. All funds
related to the 504 loans and Debentures flow through the master reserve
account under the provisions of the Master Servicing Agreement. The
master reserve account shall be funded by a reserve deposit, a funding
fee to be published from time to time in the Federal Register, and by
principal and interest payments of 504 loans. At SBA's direction, the
CSA uses the funds in the master reserve account to defray program
expenses. In the event a Borrower defaults and the 504 note is
accelerated, SBA shall add funds under its guarantee to ensure the full
and timely payment of the Debenture which funded the 504 loan. The CSA
shall pay to the CDC servicing each loan the interest accruing in the
master reserve account on loan payments made by each Borrower between
the date of receipt of each monthly payment and the date of
disbursement to investors. The CSA may disburse such interest
periodically to CDCs on a pro rata basis. SBA may use interest accruals
in the account earned prior to October 1991 on such payments (not
previously distributed to the CDCs) for 504 program administration.
Sec. 120.955 Agent bonds and records.
(a) Each agent (in Secs. 120.951-120.955) must provide a fidelity
bond or insurance in such amount as necessary to fully protect the
interest of the government.
(b) SBA must have access at the agent's place of business to all
books, records and other documents relating to Debenture activities.
Sec. 120.956 Suspension or revocation of brokers and dealers.
The AA/FA may suspend or revoke the privilege of any broker or
dealer to participate in the sale or marketing of Debentures and
Certificates for actions or conduct bearing negatively on the broker's
fitness to participate in the securities market. SBA must give the
broker or dealer written notice, stating the reasons therefore, at
least 10 business days prior to the effective date of the suspension or
revocation of ADC status. A broker or dealer 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. SBA may suspend or revoke
of the opportunity for a hearing under part 134 of this chapter.
Closings
Sec. 120.960 Responsibility for closing.
The CDC is responsible for the 504 Loan closing. The Debenture
closing is the joint responsibility of the CDC and SBA.
Sec. 120.961 CDC closing fees.
(a) The CDC may charge the Borrower an amount sufficient to
reimburse it for reasonable legal fees related to closing the 504 loan.
The legal fees and other professional fees and closing costs are
administrative costs eligible for reimbursement from the debenture
proceeds.
(b) The CDC may charge a finder's fee of up to 1.5 percent of the
504 loan if the CDC secured the lender for the Borrower under a written
contract. Either the Borrower or the lender may pay the fee. It may not
be reimbursed from the Debenture proceeds.
Sec. 120.962 Construction escrow accounts.
The CSA, title company, or bank may hold Debenture proceeds in
escrow to complete Project components such as landscaping and parking
lots, and acquire machinery and equipment if the component or
acquisition is a minor portion of the total Project and has been
contracted for completion or delivery at a specified price and specific
future date. The escrow agent must disburse funds upon approval by the
CDC and the SBA, supported by invoices and payable jointly to the small
business and the designated contractor.
Servicing and Post-Closing Fees
Sec. 120.970 Servicing of 504 loans and Debentures.
The CDC must service the 504 loan in accordance with the Loan
Authorization, these regulations, SBA policies and procedures, and
prudent lending standards until paid in full, including review of the
small business's financial statements, tax filings, insurance, and
security filings. CDCs must comply with the provisions of Sec. 120.513.
In addition, the CDC must comply with the servicing requirements set
forth in SBA's SOP. The CDC must report promptly to SBA any adverse
trend, condition or information. Upon request by a CDC, SBA may agree
to defer a Borrower's monthly payment. SBA may negotiate agreements
with CDCs to liquidate loans.
Sec. 120.971 Post-closing fees paid by Borrower.
(a) CDC fees. CDCs may charge the following fees to the Borrower:
(1) Service fee. A service charge of not less than 0.5 percent nor
more than 2 percent per annum on the outstanding balance of the 504
loan measured at 5 year anniversary intervals. A service charge in
excess of 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 CDC's monthly service fee shall be paid only from loan
payments received. The fees may be accrued without interest and
collected from the CSA when the payments are made;
(2) Late fees. Payments received after the 15th of each month may
be subject to a late payment fee of 5 percent of the late payment or
$100, whichever is greater, collected by the CSA on behalf of the CDC;
and
(3) Assumption fee. Upon SBA's written approval, a CDC may charge
an assumption fee equal to no more than 1 percent of the outstanding
principal balance of the loan being assumed.
(b) CSA fees. The CSA may charge an initiation fee on each loan and
a monthly service fee under the terms of the Master Servicing
Agreement.
(c) Other agent fees. Agent fees and charges necessary to market
and service Debentures and Certificates may be assessed to the Borrower
or the investor. The fees must be approved by SBA and published
periodically in the Federal Register.
[[Page 64401]]
(d) SBA fees. The Borrower shall pay SBA an annual fee of 0.125
percent of the outstanding balance of each 504 loan approved after
October 1, 1995.
Sec. 120.972 Oversight and evaluation of CDCs and ADCs.
SBA may conduct an operational review of a CDC or ADC. The SBA
Office of Inspector General may conduct, supervise or coordinate
compliance audits pursuant to the Inspector General Act. The CDC or ADC
must cooperate and make its staff, records, and facilities available.
CDC Transfer, Suspension and Revocation
Sec. 120.980 Transfer of CDC to ADC status.
SBA shall transfer to ADC status any CDC that fails to meet the
activity level required by SBA, on average over two consecutive fiscal
years. SBA shall notify the CDC in writing of the action and of the
opportunity for a hearing pursuant to part 134 of this chapter at least
10 business days prior to the transfer. During the pendency of a
hearing, SBA's action will remain in effect.
Sec. 120.981 Voluntary transfer and surrender of CDC certification.
A CDC may not transfer its certification or withdraw from the 504
program without SBA's consent. The CDC must provide a plan to SBA to
transfer its portfolio. The portfolio may only be transferred with
SBA's written consent. If a CDC desires to withdraw from the 504
program, it must forfeit its portfolio to SBA. SBA may conduct an audit
of the transferring or withdrawing CDC.
Sec. 120.982 Correcting CDC servicing deficiencies.
SBA may require corrective action, including the transfer of
existing or pending financings to another CDC in good standing. SBA
must notify the CDC in writing of any servicing, reporting or
collection deficiencies and the corrective actions to be taken. SBA may
instruct the CSA to withhold service and late fees and may assess the
CDC up to $250 per day for expenses incurred by SBA to correct the
deficiencies. If non-compliance continues for 90 days, SBA may take the
fees as compensation for its efforts to obtain compliance.
Sec. 120.983 Transfer of CDC servicing to SBA or another CDC.
If a CDC fails to correct servicing deficiencies, or is unable or
unwilling to service its portfolio, SBA may assume the servicing or
require the transfer of all or part of the CDC's portfolio to another
CDC within or adjoining the deficient CDC's Area of Operations. If
there is no suitable CDC, SBA may approve a transfer to another entity.
Future service fees from transferred loans will be paid to the
transferee. In addition, the CDC's processing authority will be
temporarily suspended.
Sec. 120.984 Suspension or revocation of CDC certification.
(a) Suspend or revoke. SBA may suspend or revoke the CDC's
certification if a CDC:
(1) Violates a statute, an SBA regulation, or the terms of a
Debenture, authorization, or agreement with SBA;
(2) Makes a material false statement, knowingly misrepresents, or
fails to state a material fact;
(3) Fails to maintain good character;
(4) Fails to operate according to prudent lending standards;
(5) Fails to correct servicing, collection, reporting, or other
deficiencies; or
(6) Is unable or unwilling to operate in accordance with the
requirements of this part.
(b) Transfer portfolio. Upon suspension or revocation, the CDC must
transfer its remaining portfolio and any 504 applications or financings
in process to another CDC designated or approved by SBA. If a pending
504 financing is completed after a transfer, any deposit must also be
transferred. Any fees must be apportioned by SBA between the two CDCs
in proportion to services performed.
(c) Provide written notice. SBA must give written notice to the CDC
at least 10 business days prior to the effective date of a suspension
or revocation, informing the CDC of the opportunity for a hearing
pursuant to part 134 of this chapter.
Enforceability of 501, 502 and 503 Loans and Other Laws
Sec. 120.990 501, 502, and 503 loans.
SBA has discontinued loan programs for 501, 502, and 503 loans.
Outstanding loans remain under these programs, and Borrowers, CDCs, and
SBA must comply with the terms and conditions of the corresponding
notes and Debentures, and the regulations in effect when the
obligations were undertaken or last in effect, if applicable.
Sec. 120.991 Effect of other laws.
No State or local law may preclude or limit SBA's exercise of its
rights with respect to notes, guarantees, Debentures and Debenture
Pools, or of its enforcement rights to foreclose on collateral.
PARTS 108, 116, 122, AND 131--[REMOVED]
2. Parts 108, 116, 122, and 131 are removed.
Dated: November 13, 1995.
Philip Lader,
Administrator.
[FR Doc. 95-30327 Filed 12-14-95; 8:45 am]
BILLING CODE 8025-01-P
