[Federal Register Volume 64, Number 63 (Friday, April 2, 1999)]
[Proposed Rules]
[Pages 15942-15944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8148]
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SMALL BUSINESS ADMINISTRATION
13 CFR part 120
Business Loan Program
AGENCY: Small Business Administration (SBA).
ACTION: Proposed rule.
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SUMMARY: SBA proposes to limit the fees that a Certified Development
Company (CDC) can charge a Borrower or Third Party Lender in connection
with the processing of a 504 financing to the 1.5 percent processing
fee currently authorized by SBA regulations. SBA invites comment on
this proposed change and the policies underlying the change.
DATES: Submit comments on or before May 3, 1999.
ADDRESSES: Comments should be mailed to Jane Palsgrove Butler,
Associate Administrator for Financial Assistance, Small Business
Administration, 409 Third Street, SW, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: Michael J. Dowd, 202-205-6660.
SUPPLEMENTARY INFORMATION: SBA proposes to delete Sec. 120.926 (13 CFR
120.926) and amend Sec. 120.971 (13 CFR 120.971) of its regulations.
The proposed amendments would clarify SBA's policy prohibiting a CDC
from charging a Borrower more than 1.5 percent of the net debenture
proceeds for all services related to processing a 504 financing. SBA
invites comment on this policy. In addition, SBA proposes to amend its
regulations to prohibit a CDC from charging a Third Party Lender for
any services related to the processing or packaging of a 504 financing.
SBA also invites comment on this proposed policy change.
Before March 1, 1996, the fees that SBA permitted a CDC to charge a
Borrower for services related to a 504 financing were contained in
SBA's regulations, 13 CFR 108.503-6. In addition to a fee from the
Borrower of up to 1.5 percent of the net debenture proceeds to cover
CDC costs for loan packaging, processing, and non-legal staff
functions, the regulations permitted a CDC to charge the Borrower or
Third-Party Lender an additional fee of up to 1.5 percent of the third
party financing for services actually rendered by the CDC under a
written agreement.
On December 15, 1995, in response to directives from the President
for Federal agencies to streamline their regulations, SBA published
proposed regulations (60 FR 64356) which consolidated parts 108, 116,
120, 122, and 131 of its regulations into a revised part 120. Former
Sec. 108.503-6 (except paragraph (c)) became Sec. 120.971 in the
proposed regulations under the heading ``Post-closing fees paid by
Borrower.'' Proposed Sec. 120.971 listed the fees that a CDC could
charge a Borrower in connection with a 504 financing. Paragraph
108.503-6(c) became paragraph 120.961(b) in the proposed regulations.
Proposed paragraph 120.961(b) allowed CDCs to charge a ``finder's fee''
which either the Borrower or Third Party Lender could pay.
On January 31, 1996, SBA published final regulations in the Federal
Register with an effective date of March 1, 1996 (61 FR 3226) (the
``new regulations''). The heading of Sec. 120.971 was changed to
``Allowable fees paid by Borrower,'' but in all other respects remained
as proposed. Proposed paragraph 120.961(b) became Sec. 120.926 in the
new regulations. It allowed CDCs to charge only the Third Party Lender,
and allowed a CDC to receive that fee from the Third Party Lender if
the CDC secured the lender for the Borrower under a written contract.
Section 120.926 of the new regulations, specifically prohibited a CDC
from obtaining that fee directly from the Borrower.
SBA now proposes to prohibit a CDC from charging a Borrower or a
Third Party Lender a referral fee or any other fee related to
processing or packaging a 504 financing other than the 1.5 percent
processing fee a CDC may charge a Borrower pursuant to Sec. 120.971,
whatever the CDC may call the fee. Specifically named as prohibited are
application fees, finder's fees, referral fees, packaging fees, and
additional fees of any kind (``Additional Fees''),
[[Page 15943]]
although the proposed rule makes clear that this prohibition applies to
any fee the CDC might charge to the Borrower, regardless of what it
would be called.
SBA intends that Borrowers not pay Additional Fees either directly
or indirectly. SBA believes that Third Party Lenders sometimes pass
Additional Fees on to Borrowers in the form of higher interest rates,
points, or other charges. SBA considers it good public policy to
prohibit a CDC from directly charging a Borrower Additional Fees, or
from charging a Third Party Lender Additional Fees which may get passed
along to a Borrower, because SBA believes a finder's fee or referral
fee is not necessary since there is an established Third Party Lender
community readily available to potential 504 borrowers and CDCs.
When the program first began in 1980, it was sometimes difficult
for CDCs to locate Third Party Lenders willing to participate in a new
program. So, SBA permitted CDCs to charge Additional Fees under former
Sec. 108.503-6(c) for services rendered in connection with obtaining a
Third Party Loan. Today most CDCs have developed working relationships
with one or more lender(s) who regularly participate in 504 financings.
In fact, in many instances, the Borrower goes first to a Third Party
Lender who refers the Borrower to the CDC. On most other occasions, a
CDC refers a Borrower to a Third Party Lender that has participated
with the CDC in previous 504 financings; or rarely, a CDC will use a
packager to obtain a Third Party Lender. However this Third Party
financing is placed, SBA no longer believes that the effort necessary
to get a Third Party Lender justifies allowing a CDC to charge a small
business Borrower Additional Fees.
SBA believes the compensation for any actions a CDC performs in
connection with the origination and processing of a 504 financing is
adequately covered by the 1.5 percent processing fee permitted to be
paid by a Borrower pursuant to Sec. 120.971(a)(1). A 504 financing
includes the CDC loan, Third Party Loan, and Borrower injection (see 13
CFR 120.801). A CDC cannot process a 504 financing unless there is a
qualified Third Party Lender. The participation of a Third Party Lender
is an integral part of a CDC's processing of a 504 financing. Without
it, a 504 financing cannot occur. SBA concludes that a CDC should not
receive an Additional Fee of any kind for any actions related to
obtaining a Third Party Lender, or processing the Third Party Loan,
because the fee a CDC receives under Sec. 120.971(a)(1) covers those
actions. Whether a Borrower pays an Additional Fee directly to a CDC or
indirectly to a Third Party Lender in the form of higher interest
rates, points, or other charges, the Borrower is essentially paying
twice for the same services--the processing of its 504 financing. SBA
believes that the fee a CDC may charge under Sec. 120.971(a)(1) is the
all-inclusive processing fee for a CDC and that this fee covers any
services performed by the CDC related to the processing of a 504
financing.
SBA emphasizes that the proposed regulatory amendments would
prevent a CDC from charging a Borrower or Third Party Lender any fees
related to processing or packaging a 504 financing other than the 1.5
percent processing fee a CDC may charge a Borrower pursuant to
Sec. 120.971. For example, a CDC would not be able to receive fees from
a Borrower or Third Party Lender for (1) referring a Borrower to a
Third Party Lender (or the reverse); (2) referring a Borrower to a
packager; or (3) helping to process the Third Party Loan.
Since it is proposing to prohibit Additional Fees, SBA proposes to
delete Sec. 120.926 in its entirety. As was the case prior to March 1,
1996, all fees which a CDC would be able to charge with respect to a
504 financing would be found in one section of SBA's regulations,
Sec. 120.971. SBA proposes to change the heading of Sec. 120.971 to
``Fees Which a CDC May Charge,'' and to add the word ``only'' to
Sec. 120.971(a) to make clear that a CDC may charge a Borrower only the
fees enumerated in that paragraph.
SBA invites comments on any aspect of these proposed regulations
and on the underlying policies as discussed in this preamble.
Specifically, SBA invites comment on (but not limited to) the following
issues:
1. Whether the fees now permitted to be charged to the borrower,
1.5 percent of the net debenture proceeds, is adequate compensation for
processing a 504 financing.
2. Whether a CDC should be able to charge either a Borrower or a
Third Party Lender Additional Fees when the fees are clearly itemized
and the fees are for special and non-routine work performed in
connection with obtaining a Third Party Lender or processing a Third
Party Loan.
3. Whether there is any need for a CDC to receive an Additional Fee
for its efforts relating to the Third Party Loan in specific
situations, such as in urban and rural areas, or with respect to the
CDC's efforts to increase the number of loans to New Market small
businesses.
4. Whether SBA should establish separate fee limitations depending
on whether the CDC is a for-profit or a not-for-profit entity.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601-612) and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this proposed rule does not constitute a
significant rule within the meaning of Executive Order 12866, since it
is not likely to have an annual effect on the economy of $100 million
or more, result in a major increase in costs or prices, or have a
significant adverse effect on competition or the U.S. economy.
SBA certifies that this proposed rule will not have a significant
economic impact on a substantial number of small entities within the
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. Last year,
SBA made approximately four thousand 504 loans. Currently there are
approximately 270 CDCs.
SBA certifies that this proposed rule does not impose any
additional reporting or recordkeeping requirements under the Paperwork
Reduction Act, 44 U.S.C., chapter 35.
For purposes of Executive Order 12778, SBA certifies that this
proposed rule is drafted, to the extent practicable, to accord with the
standards set forth in paragraph 2 of that Order.
List of Subjects in 13 CFR part 120
Loan programs--business, Small Businesses.
For the reasons stated in the preamble, the Small Business
Administration proposes to amend 13 CFR part 120 as follows:
PART 120--BUSINESS LOANS
1. The authority citation for part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6) and 636(a) and (h).
Sec. 120.926 [Remove]
2. Remove Sec. 120.926.
3. Amend Sec. 120.971 to revise the heading, to revise paragraph
(a), to redesignate paragraphs (b), (c), (d), and (e) as paragraphs
(c), (d), (e), and (f), respectively, and to add new paragraph (b) as
follows:
Sec. 120.971 Fees a CDC may charge.
(a) Fees a CDC may charge a Borrower. A CDC may charge only the
following fees to a Borrower:
* * * * *
(b) Fees a CDC may charge a Third Party Lender. None.
* * * * *
[[Page 15944]]
Dated: March 24, 1999.
Aida Alvarez,
Administrator.
[FR Doc. 99-8148 Filed 4-1-99; 8:45 am]
BILLING CODE 8025-01-P
