00-17560. Military Reservist Economic Injury Disaster Loans

AGENCY:

Small Business Administration (SBA).

ACTION:

Notice of proposed rulemaking.

SUMMARY:

With this document, SBA proposes to amend its Disaster Loan Program regulations to implement a new program authorized by the Veterans Entrepreneurship and Small Business Development Act of 1999. Under this new program, SBA would make a low interest, fixed rate loan available to a small business employing a military reservist if that reservist is called up to active military duty during a period of military conflict and if he or she is an essential employee critical to the success of the business' daily operation.

DATES:

Submit comments on or before August 14, 2000.

ADDRESSES:

Written comments should be sent to Bernard Kulik, Associate Administrator, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT:

Herbert Mitchell, Deputy Associate Administrator, Office of Disaster Assistance, 202-205-6734.

SUPPLEMENTARY INFORMATION:

SBA proposes adding Disaster Loan Program regulations to implement the Military Reservist Economic Injury Disaster Loan Program (“program”). This rule proposes the program's requirements, application and loan approval process.

The Military Reservist Economic Injury Disaster Loan Program was authorized by Public Law 106-50, enacted on August 17, 1999. The program will allow SBA to make economic injury disaster loans (EIDL) to small businesses employing military reservists if those employees are called up to active duty during a period of military conflict (call-up) and those employees are essential to the success of the small businesses' daily operations.

Under this proposed rule, to qualify for the Military Reservist EIDL, a business would be required to show that the call-up of an essential employee has caused or will cause the business substantial economic injury. The interest rate for a Military Reservist EIDL would be the same as for other EIDL assistance. At the present time the statutory interest rate may not exceed 4 percent. SBA calculates interest rates quarterly, which could result in a lower rate in the future, but SBA proposes that the interest rate at the time the Military Reservist EIDL application is filed would be the fixed rate for the entire term of the loan.

Section 123.500 contains program definitions conforming with those in Public Law 106-50.

Section 123.501 sets out the proposed program eligibility requirements including a reference to an “eligible small business as defined in 13 CFR Part 121.” While Public Law 106-50 describes an eligible or “qualified borrower” as a small business that “employs” an eligible reservist, Congress” intent was that this program also include assistance to a small business sole proprietor who is an essential employee. See S. Rep. No.254, 106th Cong., 1st Sess. 4 (1999). Therefore, SBA proposes to include such a category in the program eligibility requirements. In addition, this section includes the legislative requirement that the program apply only to military conflicts occurring or ending on or after March 24, 1999.

Under § 123.502 of this proposed rule, a small business would not be eligible to apply for a Military Reservist EIDL if it is an enterprise included in any of the categories described in §§ 123.101, 123.201, and 123.301 of this part. These sections include general ineligibility categories applying to all EIDL assistance. For example, a business would not be eligible if a principal owner of the business had been convicted, during the year preceding its application for a Military Reservist EIDL, of a felony during and in connection with a riot or civil disorder. Another example, a business would not be eligible if it is an agricultural enterprise as defined in § 123.201 of this part.

Under § 123.503 of this regulation, a business could not apply for a Military Reservist EIDL in anticipation of a call-up to active duty. It could only apply during a period beginning on the date the essential employee receives a call-up order and ending 90 days after the date the employee is discharged or released from active duty. The call-up of the essential employee would be the basis that triggers SBA's assistance under this program.

Under proposed § 123.504, the business must submit a copy of the reservist's call-up orders to show compliance with the statutory requirements described above. Also under this section, as a part of the application, the business owner must certify that the reservist is an essential employee and must detail the employee's duties and responsibilities. In addition, the employee must indicate in writing whether he or she concurs with such assessment. The application must also support a determination by SBA that the essential employee's absence will result in substantial economic injury to the business.

SBA recognizes that the owner of a small business may be an essential employee of that business and may be called up and start active duty before applying for a Military Reservist EIDL. Accordingly, SBA proposes that it would accept a program application from a representative of the reservist if that representative has power of attorney to act on the behalf of the reservist for such matters.

SBA proposes to offer this program, in part, to support individuals who choose to serve the United States as military reservists. These individuals should not be put in a position where a call to military service jeopardizes their employment situation. Therefore, under this proposed rule, SBA would require that the business offer the essential employee the same or similar job upon return from active duty.

Under proposed § 123.506, an eligible small business may borrow from SBA up to $1,500,000 necessary to meet its obligations as they mature, pay its ordinary and necessary expenses, and enable it to market, produce or provide products or services ordinarily marketed, produced, or provided by the business, which cannot be done as a result of the essential employee's active military service. This amount may not exceed the amount of working capital the business could have generated had the call-up not occurred. It may not include amounts the business, together with its affiliates and principal owners, could provide without undue hardship. SBA may consider waiving this loan limit if it determines that the conditions identified in § 123.507 are satisfied.

Under § 123.509, this rule proposes prohibitions on the use of loan proceeds. For example, EIDL funds could not be used to:

(1) Refinance debt which the business incurred before the call up of the essential employee,

(2) Make payments on loans owned by SBA or another federal agency or a Small Business Investment Company licensed under the Small Business Investment Act,

(3) Pay any obligations resulting from a tax penalty or any non-tax criminal fine, or penalty for non-compliance with a law, regulation, or order of a federal, state, regional, or local agency or similar matter,

(4) Repair physical damage, or

(5) Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.

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

The Office of Management and Budget (OMB) reviewed this rule as a “significant” regulatory action under Executive Order 12866.

SBA has determined 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. Since October, 1997, only 19,592 military reservists have been called up for active duty. This figure averages just under 10,000 call-ups per year. Further, 52 percent of the non-farm workforce of this country is employed by businesses that employ 500 or fewer persons. Applying this percentage to the average number of call-ups for the past years indicates that 5,200 of the call-ups affected non-farm businesses with less than 500 employees. Of this figure, SBA estimates that 30 percent of these individuals may be essential employees. This results in an estimate of approximately 1,590 businesses that could be affected by this proposed rule. SBA does not believe that this is a substantial number of small businesses. Furthermore, SBA has taken steps to simplify the loan documentation process for small business owners and permits small business owners to self-certify the designation of essential employees. These steps will substantially reduce any economic impact on small business owners applying for assistance.

For the purposes of the Paperwork Reduction Act, 44 U.S.C. ch. 35, SBA has submitted the Military Reservist Economic Injury Disaster Loan Program Loan Application (application) to OMB for review. SBA is requesting that OMB approves or disapproves of this collection of information 30 days after submission. This application would allow small businesses to apply for Military Reservist EIDLs and would provide SBA with the information necessary to evaluate applicants. The application would request such information as name, address, type of business, management information, organization type, name of essential employee who is a military reservist employed by the small business, explanation of the designation of the employee as “essential” and financial information to permit SBA to determine repayment ability.

The applicant would complete an application each time it applies for a Military Reservist Economic Injury Disaster Loan. SBA estimates that the time necessary to complete an application for the Military Reservist Economic Injury Disaster Loan Program would average 2 hours.

In addition, SBA is proposing to collect ordinary and usual financial statements before making subsequent loan disbursements under the Military Reservist EIDL Program (see § 123.511). This information will allow SBA to assess the continued need for disbursements under this program.

SBA is seeking comments on: (a) Whether the information SBA proposes to collect is necessary for the proper performance of this program, (b) the accuracy of the burden estimate (time estimated to complete the application), (c) ways to minimize the burden estimate, and (d) ways to enhance the quality of the information being collected. Please send comments regarding this proposed collection to David Rostker, Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street, NW., Washington, DC 20503, and to Bernard Kulik, Associate Administrator, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Washington, DC 20416.

For purposes of Executive Order 13132, SBA has determined that this proposed rule has no federalism implications.

For purposes of Executive Order 12988, SBA certifies that this proposed rule is drafted, to the extent practicable, to be in accordance with the standards set forth in section 3 of that Order.

List of Subjects in 13 CFR Part 123

• Disaster assistance
• Loan programs—business
• Reporting and recordkeeping requirements
• Small businesses

For the reasons stated in the preamble, SBA amends 13 CFR part 123 as follows:

PART 123—DISASTER LOAN PROGRAM

1. The authority citation for part 123 is revised to read as follows:

Authority: 15 U.S.C. 634(b)(6), 636(b), 636(c) and 636(f); Pub. L. 102-395, 106 Stat. 1828, 1864; Pub. L. 103-75, 107 Stat. 739; Pub. L. 106-50, 113 Stat. 233.

2. In part 123 add the designated centerheading “Military Reservist Economic Injury Disaster Loans” and §§ 123.500 through 123.512 to read as follows:

Military Reservist Economic Injury Disaster Loans

123.500

Definitions.

123.501

When is your business eligible to apply for a Military Reservist Economic Injury Disaster Loan (EIDL)?

123.502

When is your business ineligible to apply for a Military Reservist EIDL?

123.503

When can you apply for a Military Reservist EIDL?

123.504

How do you apply for a Military Reservist EIDL?

123.505

What if you are both an essential employee and the owner of the small business and you started active duty before applying for a Military Reservist EIDL?

123.506

How much can you borrow under the Military Reservist EIDL Program?

123.507

Under what circumstances will SBA consider waiving the $1.5 million loan limit?

123.508

How can you use Military Reservist EIDL funds?

123.509

What can't you use Military Reservist EIDL funds for?

123.510

What if you don't use your Military Reservist EIDL funds as authorized?

123.511

How will SBA disburse Military Reservist EIDL funds?

123.512

What is the interest rate on a Military Reservist EIDL?

Military Reservist Economic Injury Disaster Loans

§ 123.500

Definitions.

The following terms have the same meaning wherever they are used in §§ 123.500 through 123.512.

(a) Essential employee is an individual (whether or not an owner of a small business) whose managerial or technical expertise is critical to the successful day-to-day operations of a small business.

(b) Military reservist is a member of a reserve component of the Armed Forces ordered to active duty during a period of military conflict.

(c) Period of military conflict means:

(1) A period of war declared by the Congress,

(2) A period of national emergency declared by the Congress or by the President, or

(3) A period of contingency operation, as defined in 10 U.S.C. 101(a).

(d) Principal owner is a person, legal entity or affiliate(s) which owns 20 percent or more of the small business.

(e) Substantial economic injury means an economic harm to the small business such that it cannot:

(1) Meet its obligations as they mature,

(2) Pay its ordinary and necessary operating expenses, or

(3) Market, produce or provide a product or service ordinarily marketed, produced or provided by the business. Loss of anticipated profits or a drop in sales is not considered substantial economic injury for this purpose.

§ 123.501

When is your business eligible to apply for a Military Reservist Economic Injury Disaster Loan (EIDL)?

Your business is eligible to apply for a Military Reservist EIDL if:

(a) It is a small business as defined in 13 CFR part 121,

(b) The owner of the business is a military reservist and an essential employee or the business employs a military reservist who is an essential employee,

(c) The essential employee has been called-up to active military duty during a period of military conflict existing on or after March 24, 1999, and

(d) The business has suffered or is likely to suffer substantial economic injury as a result of the absence of the essential employee.

§ 123.502

When is your business ineligible to apply for a Military Reservist EIDL?

Your business is ineligible for a Military Reservist EIDL if it, together with its affiliates, is subject to any of the following conditions:

(a) Any of your business' principal owners has been convicted, during the past year, of a felony during and in connection with a riot or civil disorder;

(b) You have assumed the risk associated with employing the military reservist, as determined by SBA (for example, hiring the “essential employee” after the employee has received call-up orders or been notified that they are imminent);

(c) Any of your business' principal owners is presently incarcerated, or on probation or parole following conviction of a serious criminal offense;

(d) Your business is an agricultural enterprise. Agricultural enterprise means a business primarily engaged in the production of food and fiber, ranching and raising of livestock, aquaculture and all other farming and agriculture-related industries. (See 13 CFR 121.107, “How does SBA determine a concern's ‘primary industry’?”) Sometimes a business is engaged in both agricultural and non-agricultural business activities. If the primary business activity of the business is not an agricultural enterprise, it may apply for a Military Reservist EIDL, but loan proceeds may not be used, directly or indirectly, for the benefit of the agricultural enterprises.

(e) Your business is engaged in any illegal activity;

(f) Your business is a government owned entity (except for a business owned or controlled by a Native American tribe);

(g) Your business presents live performances of a prurient sexual nature or derives directly or indirectly more than insignificant gross revenue through the sale of products or services or through the presentation of any depictions or displays, of a prurient sexual nature;

(h) Your business is engaged in lending, multi-level sales distribution, speculation, or investment (except for real estate investment with property held for commercial rental);

(i) Your business is a non-profit or charitable concern;

(j) Your business is a consumer or marketing cooperative;

(k) Your business is not a small business concern;

(l) Your business derives more than one-third of its gross annual revenue from legal gambling activities;

(m) Your business is a loan packager which earns more than one-third of its gross annual revenue from packaging SBA loans;

(n) One of several of your business' principal activities is teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting; or

(o) Your business' principal activity is political or lobbying activities.

§ 123.503

When can you apply for a Military Reservist EIDL?

Your small business can apply for a Military Reservist EIDL any time beginning on the date your essential employee receives official call-up orders and ending 90 days after the date the essential employee is discharged or released from active duty.

§ 123.504

How do you apply for a Military Reservist EIDL?

To apply for a Military Reservist EIDL you must complete a SBA Military Reservist EIDL application package (SBA Form 5R and supporting documentation) including:

(a) A copy of the essential employee's official call-up orders for active duty showing the date of call up, and if known, the date of release from active duty;

(b) A statement from the business owner that the reservist is essential to the successful day-to-day operations of the business (detailing the employee's duties and responsibilities and explaining why these duties and responsibilities can't be completed in the essential employee's absence);

(c) A certification by the essential employee supporting that he or she concurs with the business owner's statement as described in paragraph (b) of this section;

(d) A written explanation and financial estimate of how the call-up of the essential employee has or will result in economic injury to your business;

(e) The steps your business is taking to alleviate the economic injury; and

(f) The business owners' certification that the essential employee will be offered the same or a similar job upon the employee's return from active duty.

§ 123.505

What if you are both an essential employee and the owner of the small business and you started active duty before applying for a Military Reservist EIDL?

If you are both an essential employee and the owner of the small business and you started active duty before applying for an Military Reservist EIDL, a person who has a power of attorney with the authority to borrow and make other related commitments on your behalf, may complete and submit the EIDL loan application package for you.

§ 123.506

How much can you borrow under the Military Reservist EIDL Program?

You can borrow a total loan amount of up to $1.5 million until normal operations resume regardless of the number of essential employees called to active duty. You can't borrow more than the amount of working capital your business could have generated had the essential employee not been called to active duty.

§ 123.507

Under what circumstances will SBA consider waiving the $1.5 million loan limit?

SBA will consider waiving the $1.5 million dollar limit if you can certify to the following conditions and SBA approves of such certification based on the information supplied in your application:

(a) Your small business is a major source of employment. A major source of employment:

(1) Employs 10 percent or more of the work force within the commuting area of the geographically identifiable community (no larger than a county) in which the business employing the essential employee is located, provided that the commuting area does not extend more than 50 miles from such community; or

(2) Employs 5 percent of the work force in an industry within such commuting area and, if the small business is a non-manufacturing small business, employs no less than 50 employees in the same commuting area, or if the small business is a manufacturing small business, employs no less than 150 employees in the commuting area; or

(3) Employs no less than 250 employees within such commuting area;

(b) Your small business is in imminent danger of going out of business as a result of one or more essential employees being called up to active duty during a period of military conflict, and a loan in excess of $1.5 million is necessary to reopen or keep open the small business; and

(c) Your small business has used all reasonably available funds from the small business, its affiliates, its principal owners and all available credit elsewhere to alleviate the small business' economic injury. Credit elsewhere means that SBA believes your small business, its affiliates and principal owners could obtain financing from non-Federal sources on reasonable terms given your available cash flow and disposable assets.

§ 123.508

How can you use Military Reservist EIDL funds?

Your small business can use Military Reservist EIDL to:

(a) Meet obligations as they mature,

(b) Pay ordinary and necessary operating expenses, or

(c) Enable the business to market, produce or provide products or services ordinarily marketed, produced, or provided by the business, which cannot be done as a result of the essential employee's military call-up.

§ 123.509

What can't you use Military Reservist EIDL funds for?

Your small business can not use Military Reservist EIDL funds for purposes described in 13 CFR 123.303(b) (See § 123.303, “How can my business spend my economic injury disaster loan?”).

§ 123.510

What if you don't use your Military Reservist EIDL funds as authorized?

If your small business does not use Military Reservist EIDL funds as authorized by § 123.509, then § 123.9 applies (See § 123.9, “What happens if I don't use loan proceeds for the intended purpose?”).

§ 123.511

How will SBA disburse Military Reservist EIDL funds?

SBA will disburse your funds in quarterly installments (unless otherwise specified in your loan authorization agreement) based on a continued need as demonstrated by comparative financial information. On or about 30 days before your scheduled fund disbursement, SBA will request ordinary and usual financial statements (including balance sheets and profit and loss statements). Based on this information, SBA will assess your continued need for disbursements under this program. Upon making such assessment, SBA will notify you of the status of future disbursements.

§ 123.512

What is the interest rate on a Military Reservist EIDL?

The interest rate on a Military Reservist EIDL will be 4 percent per annum or less. SBA will publish the interest rate quarterly in the Federal Register.

Dated: June 30, 2000.

Aida Alvarez,

Administrator.