Title 13—Business Credit and Assistance--Volume 1
PART 120—BUSINESS LOANS
§ 120.620   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 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, will make advances to maintain the schedule of interest and principal payments to the Registered Holders.
(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.
§ 120.621   SBA guarantee of an Individual Certificate.
(a) Extent of SBA guarantee. With respect to Individual Certificates, SBA guarantees to purchase from the Registered Holder the guaranteed portion of the loan for an amount equal to the unpaid principal and accrued interest due as of the date of SBA's purchase, less deductions for applicable fees. Unlike the SBA guarantee with respect to pooled loans, SBA does not guarantee timely payment on Individual Certificates.
(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 on a timely basis payments it received from the Borrower; or
(3) The FTA fails to send to the Registered Holder on a timely basis any payments it has received from the Lender.
(c) Full faith and credit. SBA's guarantee to the Registered Holder is backed by the full faith and credit of the United States.
§ 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 D/FA. In order to qualify as a Pool Assembler, an entity must send the application to the D/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 1986, 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 D/FA determines in his or her discretion), and is Satisfactory with the Office of the Comptroller of the Currency (“OCC”) if it is a national bank, the Federal Deposit Insurance Corporation if it is a bank not regulated by the OCC, or the Financial Industry Regulatory Authority (“FINRA”) if it is a member as determined by SBA.
(5) For any pool assembler that is an SBA Lender, that the SBA Lender has satisfactory SBA performance, as determined by SBA in its discretion. The Lender's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission).
(b) Approval by SBA. An entity may not submit Pool applications to the FTA until SBA has approved the application to become a Pool Assembler.
(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.
§ 120.631   Suspension or termination of Pool Assembler.
(a) Suspension or termination. The D/FA may suspend a Pool Assembler from operating in the Secondary Market for up to 18 months or terminate its status as a Pool Assembler, if the Pool Assembler (and/or its Associates):
(1) Does not comply with any of the requirements in § 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 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 three years; or
(5) Is under investigation by its regulating authority for activities which may affect its fitness to participate in the Secondary Market.
(b) Suspension procedures. The D/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 D/FA shall remain in effect pending resolution of the appeal.
(c) Notice of termination. In order to terminate a Pool Assembler, the D/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 pursuant to procedures set forth in part 134 of this chapter. The action of the D/FA shall remain in effect pending resolution of the appeal.
§ 120.640   Administration of the Pool and Individual Certificates.
(a) FTA responsibility. The FTA has the responsibility to administer each Pool or Individual Certificate. It shall maintain a registry of Registered Holders and other information as SBA requires.
(b) Self-liquidating. Each Pool or individual guaranteed portion of a loan 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. Substitution of the guaranteed portions of existing loans for defaulted loans is not permitted.
(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.
§ 120.641   Disclosure to purchasers.
(a) Information to purchaser. Prior to any sale, the Pool Assembler, Registered Holder of an Individual Certificate, or any subsequent seller must disclose to the purchaser, verbally 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 paragraph (a) of this section to investors through a prospectus and other promotional material if an Individual Certificate or Pool Certificate is placed into or used as the backing for the investment vehicle.
§ 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) Individual 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.
§ 120.643   Requirements before the FTA issues Individual Certificates.
(a) FTA issuance of initial Certificate. Before the FTA can issue the Individual Certificate for a guaranteed portion of a loan, 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.
§ 120.644   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 must reflect it on its 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 in the letter:
(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) The Registered Holder must also send the fee which the FTA charges for this service. The FTA will supply fee information to the Registered Holder.
(d) Lender cannot purchase guaranteed portion of loan it made. The Lender (or its Associate) that made a 7(a) guaranteed loan cannot purchase the guaranteed portion of that loan 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.
§ 120.645   Redemption of Certificates.
(a) Redemption of Individual Certificate. 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.
(b) Redemption of Pool Certificate. The FTA and SBA may redeem a Pool Certificate because of prepayment or default of all loans in a Pool.
§ 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. In fulfilling its obligation to keep the central registry current, the FTA may, with SBA's approval, obtain any necessary information from the parties involved in the Secondary Market.
§ 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
(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.
§ 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.
§ 120.660   Suspension or revocation.
(a) Temporary suspension or revocation of Lender, broker, dealer, or Registered Holder for violation of Secondary Market rules and regulations or other risks to SBA. The D/FA together with the Director, Office of Credit Risk Management (D/OCRM) may suspend for a period of no more than 120 calendar days or revoke for a period of no more than two (2) years, 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 regulations governing the Secondary Market; or
(ii) Any provisions in the contracts entered into by the parties, including SBA Forms 1086, 1088 and 1454;
(2) Knowingly submitting false or fraudulent information to the SBA or FTA; or
(3) A Lender's receipt, from its primary Federal or state regulator (including SBA), of a cease and desist order, a consent agreement affecting capital or commercial lending issues, a supervisory action citing unsafe or unsound banking practices, or any other supervisory action a primary regulator establishes hereafter that addresses unsafe or unsound lending practices; or a going concern opinion issued by the Lender's auditor. A Lender subject to a public action or going concern opinion must notify the D/FA and the D/OCRM within five (5) business days (or as soon as practicable thereafter) of the public issuance of any such action or the issuance of a going concern opinion. The Lender notice shall include copies of all relevant documents for SBA review.
(b) Additional rules for suspension or revocation of broker or dealer. In addition to acting under paragraph (a) of this section, the D/FA may suspend or revoke the privilege of any broker or dealer to sell or otherwise deal 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 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 D/FA and the D/OCRM 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 taken by the D/FA and the D/OCRM will remain in effect pending resolution of the appeal.
(d) Early termination of suspension or revocation. SBA may, by written notice, terminate a Secondary Market suspension or revocation under this section, if the D/FA and the D/OCRM, in their sole discretion, determine that such termination is warranted for good cause.
§ 120.700   What is the Microloan Program?
The Microloan Program assists women, low income individuals, minority entrepreneurs, and other small businesses which need small amounts of financial assistance. Under this program, SBA makes direct and guaranteed loans to Intermediaries (as defined below) who use the proceeds to make loans to eligible borrowers. SBA may also make grants under the program to Intermediaries and other qualified nonprofit entities to be used for marketing, management, and technical assistance to the program's target population.
§ 120.701   Definitions.
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).
Economically Distressed Area is a county or equivalent division of local government of a State in which the small business concern is located, in which, according to the most recent data available from the Bureau of the Census, Department of Commerce, not less than 40 percent of residents have an annual income that is at or below the poverty level.
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.
Insured depository institution means any federally insured bank, savings association, or credit union.
Intermediary is an entity participating in the Microloan Program which makes and services Microloans to eligible small businesses and which provides marketing, management, and technical assistance to its 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 nonprofit entity established by a Native American Tribal Government.
Microloan is a short-term, fixed interest rate loan of not more than $50,000 made by an Intermediary to an eligible small business.
Non-Federal sources are sources of funds other than the Federal Government and may include indirect costs or in-kind contributions paid for under non-Federal programs. Community Block Development Grants are considered non-Federal sources.
Rural Area is any political subdivision or unincorporated area:
(1) In a nonmetropolitan county (as defined by the Secretary of Agriculture) or its equivalent thereof; or
(2) In a metropolitan county or its equivalent that has a resident population of less than 20,000 if the Small Business Administration has determined such political subdivision or area to be rural.
Specialized Intermediary is an Intermediary which maintains a portfolio of Microloans averaging $10,000 or less.
§ 120.702   Are there limitations on who can be an Intermediary or on where an Intermediary may operate?
(a) Prior experience requirement. To be eligible to be an Intermediary, an organization must:
(1) Have made and serviced short-term fixed rate loans of not more than $50,000 to newly established or growing small businesses for at least one year: and
(2) Have at least one year of experience providing technical assistance to its borrowers.
(b) Limitation to one state. An Intermediary may not operate in more than one state unless the appropriate Office of Capital Access official in accordance with Delegations of Authority determines that it would be in the best interests of the small business community for it to operate across state lines.
§ 120.703   How does an organization apply to become an Intermediary?
(a) Application Process. Organizations interested in becoming Intermediaries should contact SBA for information on the application process.
(b) Documentation in support of application. The application must include a detailed narrative statement describing:
(1) The types of businesses assisted in the past and those the applicant intends to assist with Microloans;
(2) The average size of the loans made in the past and the average size of intended Microloans;
(3) The extent to which the applicant will make Microloans to small businesses in rural areas;
(4) The geographic area in which the applicant intends to operate, including a description of the economic and demographic conditions existing in the intended area of operations;
(5) The availability and cost of obtaining credit for small businesses in the area;
(6) The applicant's experience and qualifications in providing marketing, management, and technical assistance to small businesses; and
(7) Any plan to use other technical assistance resources (such as counselors from the Service Corps of Retired Executives) to help Microloan borrowers.
§ 120.704   How are applications evaluated?
(a) Evaluation criteria. In selecting Intermediaries, SBA will attempt to insure that Microloans are available to small businesses in all industries and particularly to small businesses located in urban and rural areas.
(b) Preference for organizations which make very small loans. In selecting Intermediaries, SBA will give priority to applicants which maintain a portfolio of loans averaging $10,000 or less.
(c) Consideration of quasi-governmental organizations. Generally, SBA will consider applications by quasi-governmental organizations only when it determines that program services for a particular geographic area would be best provided by such organization.
§ 120.705   What is a Specialized Intermediary?
At the end of an Intermediary's first year of participation in the program, SBA will determine whether it qualifies as a Specialized Intermediary. An Intermediary qualifies as a Specialized Intermediary if it maintains a portfolio of Microloans averaging $10,000 or less. Specialized Intermediaries qualify for more favorable interest rates on SBA loans. If, after the first year, an Intermediary qualifies as a Specialized Intermediary, the special interest rate is applied retroactively to SBA loans made to the Intermediary. After the first year SBA will determine an Intermediary's qualifications as a Specialized Intermediary annually, based on its lending practices during the term of its participation in the program. Specialized Intermediaries also qualify for a greater amount of technical assistance grant funding.
§ 120.706   What are the terms and conditions of an SBA loan to an Intermediary?
(a) Loan amount. An Intermediary may not borrow more than $750,000 in the first year of participation in the program, or more than $3,000,000 in any subsequent year. An Intermediary's obligation to SBA may not exceed an aggregate of $7 million, subject to statutory limitations on the total amount of funds available per state.
(b) Repayment terms. During the first year of the loan, an Intermediary is not required to make any payments, but interest accrues from the date that SBA disburses the loan proceeds to the Intermediary. After that, SBA will determine the periodic payments. The loan must be repaid within 10 years.
(c) Interest rate. The interest rate is equal to the rate applicable to five-year obligations of the United States Treasury, adjusted to the nearest one-eighth percent, less 1.25 percent. However, the interest rate for Specialized Intermediaries is equal to the rate applicable to five-year obligations of the United States Treasury, adjusted to the nearest one-eighth percent, less two percent.
(d) Collateral. As security for repayment of the SBA loan, an Intermediary must pledge to SBA a first lien position in the MRF (described below), LLRF (described below), and all notes receivable from Microloans.
(e) Default. If for any reason an Intermediary is unable to make payment to SBA when due, SBA may accelerate maturity of the loan and demand payment in full. In this event, or if an Intermediary violates this part or the terms of its loan agreement, it must surrender possession of all collateral described in paragraph (d) of this section to SBA. The Intermediary is not obligated to pay SBA any loss or deficiency which may remain after liquidation of the collateral unless the loss was caused by fraud, negligence, violation of any of the ethical requirements of § 120.140, or violation of any other provision of this part.
(f) Fees. SBA does not charge Intermediaries any fees for loans under this Program. An Intermediary may, however, pay minimal closing costs to third parties, such as filing and recording fees.
§ 120.707   What conditions apply to loans by Intermediaries to Microloan borrowers?
(a) General. Except as otherwise provided in this paragraph (a), an Intermediary may only make Microloans to small businesses eligible to receive financial assistance under this part. A borrower may also use Microloan proceeds to establish a nonprofit childcare business. An Intermediary may not make Microloans to businesses with an Associate who is currently incarcerated, serving a sentence of imprisonment imposed upon adjudication of guilty, or to childcare businesses with an Associate who is currently on probation or parole for an offense against children. Proceeds from Microloans may be used only for working capital and acquisition of materials, supplies, furniture, fixtures, and equipment. SBA does not review Microloans for creditworthiness.
(b) Amount and maturity. Generally, Intermediaries should not make a Microloan of more than $10,000 to any borrower. An Intermediary may not make a Microloan of more than $20,000 unless the borrower demonstrates that it is unable to obtain credit elsewhere at comparable interest rates and that it has good prospects for success. An Intermediary may not make a Microloan of more than $50,000, and no borrower may owe an Intermediary more than $50,000 at any one time. Each Microloan must be repaid within seven years.
(c) Interest rate. The maximum interest rate that can be charged a Microloan borrower is:
(1) On loans of more than $10,000, the interest rate charged on the SBA loan to the Intermediary, plus 7.75 percentage points; and
(2) On loans of $10,000 or less, the interest rate charged on the SBA loan to the Intermediary, plus 8.5 percentage points.
§ 120.708   What is the Intermediary's financial contribution?
The Intermediary must contribute from non-Federal sources an amount equal to 15 percent of any loan that it receives from SBA. The contribution may not be borrowed. For purposes of this program, Community Development Block Grants are considered non-Federal sources.
§ 120.709   What is the Microloan Revolving Fund?
The Microloan Revolving Fund (“MRF”) is a Deposit Account into which an Intermediary must deposit the proceeds from SBA loans, its contributions from non-Federal sources, and payments from its Microloan borrowers. An Intermediary may only withdraw from this account the money needed to establish the Loan Loss Reserve Fund (§ 120.710), proceeds for each Microloan it makes, and any payments to be made to SBA.
§ 120.710   What is the Loan Loss Reserve Fund?
(a) General. The Loan Loss Reserve Fund (“LLRF”) is a Deposit Account which an Intermediary must establish to pay any shortage in the MRF caused by delinquencies or losses on Microloans.
(b) Level of Loan Loss Reserve Fund. Until it is in the Microloan program for at least five years, an Intermediary must maintain a balance on deposit in its LLRF equal to 15 percent of the outstanding balance of the notes receivable owed to it by its Microloan borrowers (“Portfolio”).
(c) SBA review of Loan Loss Reserve Fund. After an Intermediary has been in the Microloan program for five years, it may request SBA's appropriate Office of Capital Access official in accordance with Delegations of Authority to reduce the percentage of its Portfolio which it must maintain in its LLRF to an amount equal to the actual average loan loss rate during the preceding five-year period. Upon receipt of such request, he/she will review the Intermediary's annual loss rate for the most recent five-year period preceding the request.
(d) Reduction of Loan Loss Reserve Fund. The appropriate Office of Capital Access official in accordance with Delegations of Authority has the authority to reduce the percentage of an Intermediary's Portfolio that it must maintain in its LLRF to an amount equal to the actual average loan loss rate during the preceding five-year period. The appropriate Office of Capital Access official in accordance with Delegations of Authority cannot reduce the LLRF to less than ten percent of the Portfolio.
(e) What must an intermediary demonstrate to get a reduction in Loan Loss Reserve Fund? To receive a reduction in its LLRF, an Intermediary must:
(1) Have satisfactory SBA performance, as determined by SBA in its discretion. The Intermediary's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission); and
(2) No other factors exist that may impair the Intermediary's ability to repay all obligations which it owes to the SBA under the Microloan program.
§ 120.711   What rules govern Intermediaries?
Intermediaries must operate in accordance with applicable statutes, regulations, policy notices, SBA's Standard Operating Procedures (SOPs), and the information in the application.
§ 120.712   How does an Intermediary get a grant to assist Microloan borrowers?
(a) General. (1) Except as provided in (a)(2) of this section, an Intermediary is eligible to receive a base grant of not more than 25 percent of the outstanding balance of all SBA loans to the Intermediary.
(2) In fiscal years in which the amount appropriated for grants is sufficient to provide all Intermediaries with a base grant equal to 25 percent or more of their total outstanding SBA loan balances, then the amount of base grants to eligible Intermediaries will be equal to at least 25 percent of the outstanding balance of all SBA loans to the Intermediary and not more than 30 percent of such balance.
(3) The Intermediary must contribute, solely from non-Federal sources, an amount equal to 25 percent of the grant. Contributions may be made in cash or in kind.
(b) Limitations on grant funds. An Intermediary may not borrow its contribution. It may only use grant funds to provide Microloan borrowers with marketing, management, and technical assistance, except that:
(1) Up to 50 percent of the grant funds may be used to provide information and technical assistance to prospective Microloan borrowers; provided, however, that no more than 5 percent of the grant funds may be used to market or advertise the products and services of the Microloan Intermediary directly related to the Microloan Program; and
(2) Grant monies may be used to attend training required by SBA.
(c) Intermediaries eligible to receive additional bonus grant monies. An Intermediary may receive an additional SBA grant equal to five percent of the outstanding balance of all loans received from SBA (with no obligation to contribute additional matching funds) if the Intermediary:
(1) Is a Specialized Intermediary;
(2) Provides not less than 25 percent of its loans to small business concerns located in or owned by one or more residents of an Economically Distressed Area; or
(3) Maintains a portfolio of Microloans of which at least 25 percent is serving Rural Areas.
(d) Third party contracts for technical assistance. An Intermediary may use no more than 50 percent of the grant funds it receives from SBA for contracts with third parties for the latter to provide technical assistance to Microloan borrowers.
§ 120.713   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 not served or underserved by an existing Intermediary.
§§ 120.714-120.715   [Reserved]
§ 120.716   What is the minimum number of loans an Intermediary must make each Federal fiscal year?
(a) Minimum loan requirement. Intermediaries must close and fund the required number of microloans per year (October 1-September 30) as follows, except that an Intermediary entering the program will not be required to meet the minimum in that year:
(1) For fiscal year 2015, four microloans,
(2) For fiscal year 2016, six microloans,
(3) For fiscal year 2017, eight microloans, and
(4) For fiscal years 2018 and thereafter, ten microloans per year.
(b) Intermediaries that do not meet the minimum loan requirement are not eligible to receive new grant funding unless they submit a corrective action plan acceptable to SBA, in its discretion. Intermediaries that have submitted acceptable corrective action plans may receive a reduced grant at SBA's discretion.
§ 120.800   [Reserved]
§ 120.801   How a 504 Project is financed.
(a) One or more small businesses may apply for 504 financing through a CDC serving the area where the 504 Project is located. SBA issues a loan number if it agrees to guarantee part of the funding for a Project.
(b) Usually, a Project requires interim financing from an interim lender (often the same lender that later provides a portion of the permanent financing).
(c) Generally, permanent financing of the Project consists of:
(1) A contribution by the small business in an amount of at least 10 percent of the Project costs;
(2) A loan made with the proceeds of a CDC Debenture for up to 40 percent of the Project costs and certain administrative costs, collateralized by a second lien on the Project Property; and
(3) A Third Party Loan comprising the balance of the financing, collateralized by a first lien on the Project property (see § 120.920).
(d) 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.
§ 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 the geographic area where SBA has approved a CDC's request to provide 504 program services to small businesses on a permanent basis. The minimum Area of Operations is the State in which the CDC is incorporated.
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.
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. SBA, in its discretion, may authorize either paper or electronic Debentures.
Debenture Pool is an aggregation of Debentures.
Designated Attorney is the CDC closing attorney that SBA has approved to close loans under an expedited closing process for a Priority CDC.
Investor is an owner of a beneficial interest in a Debenture Pool.
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.
Lead SBA Office is the SBA District Office designated by SBA as the primary liaison between SBA and a CDC and with responsibility for managing SBA's relationship with that CDC.
Local Economic Area is an area, as determined by SBA, that is in a State other than the State in which an existing CDC (or an applicant applying to become a CDC) is incorporated, is contiguous to the CDC's existing Area of Operations (or the applicant's proposed Area of Operations) of its State of incorporation, and is a part of a local trade area that is contiguous to the CDC's Area of Operations (or applicant's proposed Area of Operations) of its State of incorporation. Examples of a local trade area would be a city that is bisected by a State line or a metropolitan statistical area that is bisected by a State line.
Multi-State CDC is a CDC that is incorporated in one State and is authorized by SBA to operate as a CDC in a State contiguous to its State of incorporation beyond any contiguous Local Economic Areas.
Net Debenture Proceeds are the portion of Debenture proceeds that finance eligible Project costs (excluding administrative costs).
Priority CDC is a CDC certified to participate on a permanent basis in the 504 program (see § 120.812) that SBA has approved to participate in an expedited 504 loan and Debenture closing process.
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.
Third Party Loan is a loan from a commercial or private lender, investor, or Federal (non-SBA), State or local government source that is part of the Project financing.
Underwriter is an entity approved by SBA to form Debenture Pools and arrange for the sale of Certificates.
§ 120.810   Applications for certification as a CDC.
(a) An applicant for certification as a CDC must apply to the SBA District Office serving the jurisdiction in which the applicant has or proposes to locate its headquarters (see § 101.103 of this chapter).
(b) The applicant must apply for an Area of Operations. The applicant's proposed Area of Operations must include the entire State in which the applicant is incorporated, and may include Local Economic Areas. An applicant may not apply to cover an area as a Multi-State CDC.
(c) The applicant must demonstrate that it satisfies the CDC certification and operational requirements in §§ 120.820, and 120.822 through 120.824. The applicant also must include an operating budget, approved by the applicant's Board of Directors, which demonstrates the required financial ability (as described in § 120.825), and a plan to meet CDC operational requirements (without specializing in a particular industry) in §§ 120.821, and 120.826 through 120.830.
(d) The District Office will forward the application and its recommendation to the D/FA, who will make the final decision. SBA will notify the CDC in writing of its decision, and, if the petition is declined, the reasons for the decision.
§ 120.812   Probationary period for newly certified CDCs.
(a) Newly certified CDCs will be on probation for a period of two years from the date of certification, at the end of which the CDC must petition the Lead SBA Office for:
(1) Permanent CDC status; or
(2) A one-year extension of probation. If a one-year extension of probation is granted, at the end of this extension period, the CDC must petition the Lead SBA Office for permanent CDC status or an additional one-year extension of probation.
(b) SBA will consider the failure to file a petition before the end of the probationary period as a withdrawal from the 504 program. If the CDC elects withdrawal, SBA will direct the CDC to transfer all funded and/or approved loans to another CDC, SBA, or another servicer approved by SBA.
(c) The Lead SBA Office will send the petition and its recommendation to the D/FA, who will make the final decision. SBA will determine permanent CDC status or an extension of probation, in part, based upon the CDC's compliance with the certification and operational requirements in §§ 120.820 through 120.830. To be considered for permanent CDC status or an extension of probation, the CDC must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission).
(d) SBA will notify the CDC in writing of its decision, and, if the petition is declined, the reasons for the decision. If SBA declines the petition, the CDC will no longer have authority to participate in the 504 Loan Program and SBA will direct the CDC to transfer all funded and/or approved loans to another CDC, SBA, or another servicer approved by SBA.
§ 120.816   CDC non-profit status and good standing.
A CDC must be a non-profit corporation, except that for-profit CDCs certified by SBA prior to January 1, 1987 may retain their certifications. An SBIC may not become a CDC. A CDC must be in good standing based upon the following criteria:
(a) In good standing in the State in which the CDC is incorporated and any other State in which the CDC conducts business.
(b) In compliance with all laws, including taxation requirements, in the State in which the CDC is incorporated and any other State in which the CDC conducts business.
(c) Must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission).
(d) If a non-profit CDC has a membership and the members are responsible for electing or appointing voting directors to the CDC's Board of Directors, no person or entity can control more than 25 percent of the CDC's voting membership.
§ 120.818   Applicability to existing for-profit CDCs.
(a) Unless expressly provided otherwise in the regulations, any Loan Program Requirement that applies to non-profit CDCs also applies to for-profit CDCs.
(b) No person or entity can own or control more than 25 percent of a for-profit CDC's stock.
§ 120.820   CDC Affiliation.
(a) A CDC must be independent and must not be affiliated (as determined in accordance with § 121.103 of this chapter) with any Person (as defined in § 120.10) except as permitted under this section.
(b) A CDC may be affiliated with an entity (other than a 7(a) Lender or another CDC) whose function is economic development in the same Area of Operations and that is either a non-profit entity or a State or local government or political subdivision (e.g., council of governments).
(c) A CDC must not be affiliated (as determined in accordance with § 121.103) with or invest, directly or indirectly, in a 7(a) Lender. A CDC that was affiliated with a 7(a) Lender as of November 6, 2003 may continue such affiliation.
(d) A CDC must not be affiliated (as determined in accordance with § 121.103 of this chapter) with another CDC. In addition, a CDC must not directly or indirectly invest in or finance another CDC, except with the prior written approval of D/FA or designee and D/OCRM or designee if they determine in their discretion that such approval is in the best interests of the 504 Loan Program.
(e) A CDC may remain affiliated with a for-profit entity (other than a 7(a) Lender) if such affiliation existed prior to March 21, 2014. A CDC may also be affiliated with a for-profit entity (other than a 7(a) Lender) whose function is economic development in the same Area of Operations with the prior written approval of the D/FA or designee if he or she determines in his or her discretion that such approval is in the best interests of the 504 Loan Program.
(f) A CDC must not directly or indirectly invest in a Licensee (as defined in § 107.50 of this chapter) licensed by SBA under the SBIC program authorized in Part A of Title III of the Small Business Investment Act, 15 U.S.C. 681 et seq. A CDC that has an SBA-approved investment in a Licensee as of November 6, 2003 may retain such investment.
(g) Notwithstanding paragraphs (b), (c), and (e) of this section, a CDC may be affiliated with a Community Advantage SBLC. Additionally, CDCs that are also Community Advantage Pilot Program Lenders as of May 11, 2023 may be licensed as Community Advantage SBLCs.
§ 120.821   CDC Area of Operations.
A CDC must operate only within its designated Area of Operations approved by SBA except as provided in § 120.839.
§ 120.823   CDC Board of Directors.
(a) The CDC, whether for-profit or non-profit, must have a Board of Directors with at least seven (7) voting directors who live or work in the CDC's State of incorporation or in an area that is contiguous to that State that meets the definition of a Local Economic Area for the CDC. The Board must be actively involved in encouraging economic development in the Area of Operations. The initial Board may be created by any method permitted by applicable State law. At a minimum, the Board must have directors with background and expertise in internal controls, financial risk management, commercial lending, legal issues relating to commercial lending, corporate governance, and economic, community or workforce development. Directors may be either currently employed or retired.
(b) At least two voting members of the Board of Directors, other than the CDC manager, must possess commercial lending experience satisfactory to SBA. When the Board votes on SBA loan approval or servicing actions, at least two voting Board members, with such commercial lending experience, other than the CDC manager, must be present and vote.
(c) The Board of Directors must meet at least quarterly and shall be responsible for the actions of the CDC and any committees established by the Board of Directors. In addition, the Board of Directors is subject to the following requirements:
(1) Except for the CDC manager, no person on the CDC's staff may be a voting director of the Board;
(2) A quorum must be present to transact business. The quorum shall be set by the CDC but shall be no less than 50% of the voting members of the Board of Directors;
(3) Attendance at meetings may be through any format permitted by State law;
(4) No CDC Board member may serve on the Board of another CDC.
(d) The Board shall have and exercise all corporate powers and authority and be responsible for all corporate actions and business. There must be no actual or appearance of a conflict of interest with respect to any actions of the Board. The Board is responsible for ensuring that the structure and operation of the CDC, as set forth in the Bylaws, comply with SBA's Loan Program Requirements. The responsibilities of the Board include, but are not limited, to the following:
(1) Approving the mission and the policies for the CDC;
(2) Hiring, firing, supervising and annually evaluating the CDC manager;
(3) Setting the salary for the CDC manager and reviewing all salaries;
(4) Establishing committees, at its discretion, including the following:
(i) Executive Committee. To the extent authorized in the Bylaws, the Board of Directors may establish an Executive Committee. The Executive Committee may exercise the authority of the Board; however, the delegation of its authority does not relieve the Board of its responsibility imposed by law or Loan Program Requirements. No further delegation or redelegation of this authority is permitted. If the Board establishes an Executive Committee and delegates any of its authority to the Executive Committee as set forth in the Bylaws of the CDC, the Executive Committee must:
(A) Be chosen by and from the Board of Directors from the Board; and
(B) Meet the same organizational and representational requirements as the Board of Directors, except that the Executive Committee must have a minimum of four voting members who must be present to conduct business.
(ii) Loan Committee. The Board of Directors may establish a Loan Committee. The Loan Committee may exercise the authority of the Board only as set forth below; however, the delegation of its authority does not relieve the Board of its responsibility imposed by law or Loan Program Requirements. If the Board of Directors chooses to establish a Loan Committee, no CDC staff or manager may serve on the Loan Committee. The Loan Committee must:
(A) Be chosen by the Board of Directors, and consist of individuals with a background in either financial risk management, commercial lending, or legal issues relating to commercial lending who are not associated with another CDC;
(B) Have a Quorum of at least four Loan Committee members authorized to vote;
(C) Have at least two (2) Loan Committee members with commercial lending experience satisfactory to SBA;
(D) Have no actual or appearance of a conflict of interest, including for example, a Loan Committee member participating in deliberations on a loan for which the Third Party Lender is the member's employer or the member is otherwise associated with the Third Party Lender; and
(E) Consist only of Loan Committee members who live or work in the CDC's State of incorporation or in an area that meets the definition of a Local Economic Area for the CDC, except that, for Projects that are financed under a CDC's Multi-State authority, the CDC must satisfy the requirements of either § 120.835(c)(1) or (2) when voting on that Project.
(5) Ensuring that the CDC's expenses are reasonable and customary;
(6) Hiring directly an independent auditor to provide the financial statements in accordance with Loan Program Requirements;
(7) Monitoring the CDC's portfolio performance on a regular basis;
(8) Reviewing a semiannual report on portfolio performance from the CDC manager, which would include, but not be limited to, asset quality and industry concentration;
(9) Ensuring that the CDC establishes and maintains adequate reserves for operations;
(10) Ensuring that the CDC invests in economic development in each of the States in its Area of Operations in which it has a portfolio, and approving each investment. If the investment is included in the CDC's budget, the Board's approval of the budget may be deemed approval of the investment. If the investment is not included in the budget, the Board must separately approve the investment;
(11) Establishing a policy in the Bylaws of the CDC prohibiting an actual conflict of interest or the appearance of same, and enforcing such policy (see § 120.140 and § 120.851);
(12) Retaining accountability for all of the actions of the CDC;
(13) Establishing written internal control policies, in accordance with § 120.826;
(14) Establishing commercially reasonable loan approval policies, procedures, and standards. The Bylaws must include any delegations of authority to the Loan Committee and Executive Committee, if either Committee has been established. In addition, the CDC must establish and set forth in detail in a policy manual its credit approval process. All 504 loan applications must have credit approval prior to submission to the Agency. The Loan Committee, if established, may be delegated the authority to provide credit approval for loans up to $2,000,000 but, for loans of $1,000,000 to $2,000,000, the Loan Committee's action must be ratified by the Board or Executive Committee prior to Debenture closing. Only the Board or Executive Committee, if authorized by the Board, may provide credit approval for loans greater than $2,000,000.
(15) All members of the Board of Directors must annually certify in writing that they have read and understand this section, and copies of the certification must be included in the Annual Report to SBA.
(e) The Board of Directors shall maintain Directors' and Officers' Liability and Errors and Omissions insurance in amounts established by SBA that are based on the size of the CDC's portfolio and other relevant factors.
§ 120.824   Professional management and staff, and contracts for services.
(a) Management. A CDC must have full-time professional management, including an executive director or the equivalent (CDC manager) to manage daily operations. This requirement is met if the CDC has at least one salaried professional employee that is employed directly (not a contractor or an officer, director, 20 percent or more equity owner, or key employee of a contractor) on a full-time basis to manage the CDC. The CDC manager must be hired by the CDC's Board of Directors and subject to termination only by the Board. A CDC may obtain, under a written contract, management services provided by a qualified individual under the following circumstances:
(1) The CDC must submit a request for the D/FA (or designee) to approve, in consultation with the D/OCRM (or designee), a waiver of the requirement that the manager be employed directly by the CDC. In its request, the CDC must demonstrate that:
(i) Another non-profit entity (that is not a CDC) that has the economic development of the CDC's Area of Operations as one of its principal activities will provide management services to the CDC and, if the manager is also performing services for the non-profit entity, the manager will be available to small businesses interested in the 504 program and to 504 loan borrowers during regular business hours; or
(ii) The CDC submitting the request for the waiver is rural, has insufficient loan volume to justify having management employed directly by the CDC, and is requesting to contract with another CDC located in the same general area to provide the management.
(2) The CDC must submit a request for the D/FA (or designee), in consultation with the D/OCRM (or designee), to pre-approve the contract for management services. This contract must comply with paragraphs (c)(2) through (4) and, if applicable, paragraph (d) of this section.
(b) Professional staff. The CDC must have a full-time professional staff qualified by training and experience to market the 504 Loan Program, package and process loan applications, close loans, service, and, if authorized by SBA, liquidate the loan portfolio, and to sustain a sufficient level of service and activity in the Area of Operations.
(c) Professional services contracts. Through a written contract with qualified individuals or entities, a CDC may obtain services for marketing, packaging, processing, closing, servicing, or liquidation functions, or for other services ( e.g., legal, accounting, information technology, independent loan reviews, and payroll and employee benefits), provided that:
(1) The contract must be pre-approved by the D/FA (or designee), subject to the following exceptions:
(i) CDCs may contract for legal, accounting, and information technology services without SBA approval, except for legal services in connection with loan liquidation or litigation.
(ii) CDCs may contract for independent loan review services with non-CDC entities without SBA approval. Contracts between CDCs for independent loan reviews must be pre-approved by SBA in accordance with paragraph (d) of this section.
(2) If the contract requires SBA's prior approval under paragraph (c)(1) of this section, the CDC's Board must explain to SBA why it is in the best interest of the CDC to obtain services through a contract and must demonstrate that:
(i) The compensation under the contract is paid only by the CDC obtaining the services, is reasonable and customary for similar services in the Area of Operations, and is only for actual services performed;
(ii) The full term of the contract (including options) is necessary and appropriate and the contract permits the CDC procuring the services to terminate the contract prior to its expiration date with or without cause; and
(iii) There is no actual or apparent conflict of interest or self-dealing on the part of any of the CDC's officers, management, or staff, including members of the Board and Loan Committee, in the negotiation, approval or implementation of the contract.
(3) Neither the contractor nor any officer, director, 20 percent or more equity owner, or key employee of a contractor may be a voting or non-voting member of the CDC's Board.
(4) The CDC procuring the services must provide a copy of all executed contracts requiring SBA prior approval to SBA as part of the CDC's Annual Report submitted under § 120.830(a) unless the CDC certifies that it has previously submitted an identical copy of the executed contract to SBA.
(5) With respect to any contract under which the CDC's staff are deemed co-employees of both the CDC and the contractor ( e.g., contracts with professional employer organizations to obtain employee benefits, such as retirement and health benefits, for the CDC's staff), the contract must provide that the CDC retains the final authority to hire and fire the CDC's employees.
(6) If the contract is between CDCs, the CDCs and the contract must also comply with paragraph (d) of this section.
(d) Professional Services Contracts between CDCs. Notwithstanding the prohibition in 13 CFR 120.820(d) against a CDC affiliating with another CDC, a CDC may obtain services through a written contract with another CDC for managing, marketing, packaging, processing, closing, servicing, independent loan review, or liquidation functions, provided that:
(1) The contract between the CDCs must be pre-approved by the D/FA (or designee), in consultation with the D/OCRM (or designee), who determines in his or her discretion that such approval is in the best interests of the 504 Loan Program and that the terms and conditions of the contract are satisfactory to SBA. For management services, a CDC may contract with another CDC only in accordance with paragraph (a)(1)(ii) of this section.
(2) Except for contracts for liquidation services and independent loan reviews:
(i) The CDCs entering into the contract must be located in the same SBA Region or, if not located in the same SBA Region, must be located in contiguous States. For purposes of this provision, the location of a CDC is the CDC's State of incorporation;
(ii) A CDC may provide assistance to only one CDC per State; and
(iii) No CDC may provide assistance to another CDC in its State of incorporation or in any State in which it has Multi-State authority.
(3) The Board of Directors for each CDC entering into the contract must be separate and independent and may not include any common directors. In addition, if either of the CDCs is for-profit, neither CDC may own any stock in the other CDC. The CDCs are also prohibited from comingling any funds.
(4) With respect to contracts for independent loan reviews, CDCs may not review each other's portfolios or exchange any other services, nor may they enter into any other arrangement with each other that could appear to bias the outcome or integrity of the independent loan review.
(5) The contract must satisfy the requirements set forth in paragraphs (c)(2) through (4) of this section.
§ 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). Any funds generated from 503 and 504 loan activity by a CDC remaining after payment of staff and overhead expenses must be retained by the CDC as a reserve for future operations or for investment in other local economic development activity in its Area of Operations. If a CDC is operating as a Multi-State CDC, it must maintain a separate accounting for each State of all 504 fee income and expenses and provide, upon SBA's request, evidence that the funds resulting from its Multi-State CDC operations are being invested in economic development activities in each State in which they were generated.
§ 120.826   Basic requirements for operating a CDC.
A CDC must operate in accordance with the following requirements:
(a) In general. CDCs must meet all 504 Loan Program Requirements. In its Area of Operations, a CDC must market the 504 program, package and process 504 loan applications, close and service 504 loans, and if authorized by SBA, liquidate and litigate 504 loans. It must supply to SBA current and accurate information about all certification and operational requirements, and maintain the records and submit all reports required by SBA.
(b) Operations and internal controls. Each CDC's board of directors must adopt an internal control policy which provides adequate direction to the institution for effective control over and accountability for operations, programs, and resources. The board adopted internal control policy must, at a minimum:
(1) Direct management to assign the responsibility for the internal control function (covering financial, credit, credit review, collateral, and administrative matters) to an officer or officers of the CDC;
(2) Adopt and set forth procedures for maintenance and periodic review of the internal control function;
(3) Direct the operation of a program to review and assess the CDC's 504-related loans. For the 504 review program, the internal control policies must specify the following:
(i) Loan, loan-related collateral, and appraisal review standards, including standards for scope of selection (for review of any such loan, loan-related collateral or appraisal) and standards for work papers and supporting documentation;
(ii) Loan quality classification standards consistent with the standardized classification systems used by the Federal Financial Institution Regulators;
(iii) Specific control requirements for the CDC's oversight of Lender Service Providers; and
(iv) Standards for training to implement the loan review program; and
(4) Address other control requirements as may be established by SBA.
(c) Annual Audited/Reviewed Financial Statements. Each CDC with a 504 loan portfolio balance of $30 million or more (as calculated by SBA) must have its financial statements audited annually by a certified public accountant that is independent and experienced in auditing financial institutions. The audit must be performed in accordance with generally accepted auditing standards as adopted by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA). The auditor must be independent, as defined by the AICPA, of the CDC. Annually, the auditor must issue an opinion as to the fairness of the CDC's financial statements and their compliance with GAAP. For CDCs with a 504 portfolio balance of less than $30 million (as calculated by SBA), the CDC's annual financial statements submitted to SBA must be reviewed by an independent CPA in accordance with GAAP, except that the D/OCRM may require a CDC with a portfolio balance of less than $30 million to submit an audited financial statement in the event the D/OCRM determines, in his or her discretion, that such audit is necessary or appropriate when the CDC is in material noncompliance with Loan Program Requirements.
(d) Auditor qualifications. The audit or review must be conducted by an independent certified public accountant who:
(1) Is registered or licensed to practice as a public accountant, and is in good standing, under the laws of the state or other political subdivision of the United States in which the CDC's principal office is located;
(2) Agrees in the engagement letter with the CDC to provide the SBA with access to and copies of any work papers, policies, and procedures relating to the services performed;
(3)(i) Is in compliance with the AICPA Code of Professional Conduct; and
(ii) Meets the independence requirements and interpretations of the Securities and Exchange Commission and its staff;
(4) Has received a peer review or is enrolled in a peer review program that meets AICPA guidelines; and
(5) Is otherwise acceptable to SBA.
§ 120.827   Other services a CDC may provide to small businesses.
A CDC may provide a small business with assistance unrelated to the 504 loan program as long as the CDC does not make such assistance a condition of the CDC accepting from that small business an application for a 504 loan. An example of other services a CDC may provide is assisting a small business in applying for a 7(a) loan (as described in § 120.2). A CDC is subject to part 103 of this chapter when providing such assistance.
§ 120.828   Minimum level of 504 loan activity and restrictions on portfolio concentrations.
(a) A CDC is required to receive SBA approval of at least four 504 loan approvals during two consecutive fiscal years.
(b) A CDC's 504 loan portfolio must be diversified by business sector.
§ 120.829   Job Opportunity average a CDC must maintain.
(a) A CDC's portfolio must maintain a minimum average of one Job Opportunity per an amount of 504 loan funding that will be specified by SBA from time to time in a Federal Register notice. Such Job Opportunity average remains in effect until changed by subsequent Federal Register publication. A CDC is permitted two years from its certification date to meet this average.
(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.
§ 120.830   Reports a CDC must submit.
A CDC must submit the following reports to SBA:
(a) An Annual Report within one hundred-eighty days after the end of the CDC's fiscal year (to include Federal tax returns for that year). A CDC that is certified by SBA within 6 months of the CDC's fiscal year-end is not required to submit an Annual Report for that year. The Annual Report must include, but is not limited to, the following:
(1) Audited or Reviewed Financial Statements as required in § 120.826(c) and (d) for the CDC and any affiliates or subsidiaries of the CDC.
(i) Audited financial statements must, at a minimum, include the following:
(A) Audited balance sheet;
(B) Audited statement of income (or receipts) and expenses;
(C) Audited statement of source and application of funds;
(D) Such footnotes as are necessary to an understanding of the financial statements;
(E) Auditor's letter to management on internal control weaknesses; and
(F) The auditor's report; and
(ii) Reviewed financial statements must, at a minimum, include the following:
(A) Balance sheet;
(B) Statement of income (or receipts) and expenses;
(C) Statement of source and application of funds;
(D) Such footnotes as are necessary to an understanding of the financial statements;
(E) The accountant's review report; and
(2) Report on compensation: CDCs are required to provide detailed information on total compensation (including salary, bonuses and expenses) paid within the CDC's most recent tax year for current and former officers and directors, and for current and former employees and independent contractors with total compensation of more than $100,000 during that period.
(3) Certification of members of the Board of Directors. Written annual certification by each Board member that he or she has read and understands the requirements set forth in § 120.823.
(4) Report on investment in economic development. Written report on investments in economic development in each State in which the CDC has an outstanding 504 loan.
(b) For each new associate and staff, a Statement of Personal History (for use by non-bank lenders and CDCs) and other information required by SBA;
(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).
(g) Other reports as required by SBA.
§ 120.835   Application to expand an Area of Operations.
(a) General. A CDC that has been certified to participate in the 504 program may apply to expand its Area of Operations if it meets all requirements to be an Accredited Lender Program (ALP) CDC, as set forth in § 120.840(c), and demonstrates that it can competently fulfill its 504 program responsibilities in the proposed area.
(b) Local Economic Area Expansion. A CDC seeking to expand its Area of Operations into a Local Economic Area must apply in writing to the Lead SBA Office.
(c) Multi-State expansion. A CDC seeking to become a Multi-State CDC must apply to the SBA District Office that services the area within each State where the CDC intends to locate its principal office for that State. A CDC may apply to be a Multi-State CDC only if the State the CDC seeks to expand into is contiguous to the State of the CDC's incorporation and either:
(1) The CDC establishes a Loan Committee in the additional State consisting only of members who live or work in that State and that satisfies the other requirements in § 120.823(d)(4)(ii)(A) through (D); or
(2) For any Project located in the additional State, the CDC's Board or Loan Committee (if established in the CDC's State of incorporation) includes at least two members who live or work in that State when voting on that Project. These two members may vote only on Projects located in the additional State.
§ 120.837   SBA decision on application for a new CDC or for an existing CDC to expand Area of Operations.
The processing District Office must solicit the comments of any other District Office in which the CDC operates or proposes to operate. The processing District Office must determine that the CDC is in compliance with SBA's regulations, policies, and performance benchmarks, including pre-approval and annual review by SBA of any management or staff contracts, and the timely submission of all annual reports. In making its recommendation on the application, the District Office may consider any information presented to it regarding the requesting CDC, the existing CDC, or CDCs that may be affected by the application, and the proposed Area of Operations.
(a) The SBA District office will submit the application, recommendation, and supporting materials within 60 days of the receipt of a complete application from the CDC to the D/FA, who will make the final decision. The D/FA may consider any information submitted or available related to the applicant and the application.
(b) SBA will notify the CDC of its decision in writing, and if the application is denied, the reasons for its decision.
(c) If a CDC is approved to operate as a Multi-State CDC, the CDC's ALP, PCLP, or Priority CDC authority will carry over into every additional State in which it is approved to operate as a Multi-State CDC.
§ 120.839   Case-by-case application to make a 504 loan outside of a CDC's Area of Operations.
A CDC may apply to make a 504 loan for a Project outside its Area of Operations by submitting a request to the 504 loan processing center. The applicant CDC must demonstrate that it can adequately fulfill its 504 program responsibilities for the 504 loan, including proper servicing. In addition, the CDC must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission). The 504 loan processing center may approve the application if:
(a) The applicant CDC has previously assisted the business or its affiliate(s) to obtain a 504 loan; or
(b) The existing CDC or CDCs serving the area agree to permit the applicant CDC to make the 504 loan; or
(c) There is no CDC within the Area of Operations.
§ 120.840   Accredited Lenders Program (ALP).
(a) General. Under the ALP program, SBA designates qualified CDCs as ALP CDCs, gives them increased authority to process, close, and service 504 loans, and provides expedited processing of loan approval and servicing actions.
(b) Application. A CDC must apply for ALP status by submitting an application in accordance with SBA's Standard Operating Procedure 50 10, available at http://www.sba.gov. A final decision will be made by the appropriate SBA official in accordance with Delegations of Authority.
(c) Eligibility. In order for a CDC to be eligible to receive ALP status, its application must show that it meets the criteria set forth in § 120.841.
(d) Additional application requirements. The CDC's application must include the following:
(1) Certified copy of the CDC's Board of Directors' resolution authorizing the application for ALP status.
(2) Summary of the experience of each of the CDC's loan processing, closing, and servicing staff members with significant authority.
(3) Name, address, and summary of experience of Designated Attorney.
(4) Documentation of any SBA required insurance.
(5) Any other documentation required by SBA.
(e) Term of ALP designation. SBA generally will designate a CDC as an ALP CDC for a two-year period. SBA may renew the designation for additional two-year periods if the CDC continues to meet the ALP program eligibility requirements.
(f) SBA approval or decline decision. SBA will notify the CDC in writing of an approval or decline of either an ALP application or of an ALP renewal. If the SBA approves the CDC's application, the ALP CDC may exercise its ALP authority in its entire Area of Operations. If an application or renewal is declined, SBA will notify the CDC of the reasons for the decision.
§ 120.841   Qualifications for the ALP.
An applicant for ALP status must show that it substantially meets the following criteria:
(a) CDC staff experience. The CDC's staff must have well-trained, qualified loan officers who are knowledgeable concerning SBA's lending policies and procedures for the 504 program. The CDC must have at least one loan officer with three years of 504 loan processing experience and at least one loan officer with three years of 504 servicing experience or two years experience plus satisfactory completion of SBA-approved processing and servicing training. The same loan officer may meet these qualifications. In addition, the CDC's staff must have demonstrated satisfactorily to SBA the ability to process and service 504 loans.
(b) Number of 504 loans approved and size of portfolio. SBA must have approved at least 20 504 loan applications by the CDC in the most recent three years, and the CDC must have a portfolio of at least 30 active 504 loans. (An “active” 504 loan is a loan that was approved and closed by the CDC and has a status of either current, delinquent, or in liquidation.)
(c) CDC reviews. CDC reviews conducted by SBA must be current (within the last 24 months, if applicable) for applicants for ALP status. The CDC must have received a review assessment of either “Acceptable” or “Acceptable With Corrective Actions Required.” In addition, the CDC must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission);
(d) Record of compliance with 504 program requirements. The CDC must have a record of conforming to SBA's policies and procedures and of satisfactorily underwriting, closing and servicing 504 loans. SBA will consider all relevant material information, which will include but is not limited to whether the CDC meets all SBA's CDC portfolio benchmarks, when determining the CDC's record of compliance, including:
(1) Submission of satisfactory 504 loan analyses and applications, and all required, and properly completed, loan documents.
(2) Careful and thorough analysis and screening of all 504 loan applications for conformance with SBA credit and eligibility standards;
(3) Proper completion of required 504 loan closing documents and compliance with SBA 504 loan closing policies and procedures.
(4) Compliance with SBA loan servicing policies and procedures.
(5) Compliance with the certification and operational requirements as set forth in §§ 120.820 through 120.830.
(6) Submission of timely, complete and acceptable annual reports.
(7) Compliance with CDC ethical requirements (see § 120.851).
(e) Priority CDC. The CDC must be a Priority CDC with a Designated Attorney and SBA required insurance.
(f) Record of Cooperation. The CDC must have a record of effective communication and a cooperative relationship with all SBA offices including district offices and SBA's loan processing and servicing centers.
§ 120.842   ALP Express Loans.
(a) Definition. For the purposes of this section, an ALP Express Loan means a 504 loan in an amount that is not more than $500,000 and which is underwritten, approved, closed and serviced using the authorities set forth in this section.
(b) Requirements for the underwriting, approving, closing, and servicing of ALP Express Loans —(1) General. When underwriting, approving, closing, and servicing 504 loans under this section, the ALP CDC must comply with Loan Program Requirements and conduct such activities in accordance with prudent and commercially reasonable lending standards.
(2) Documentation of decision making. For each ALP Express Loan, the ALP CDC must document in its files the basis for its decisions with respect to underwriting, approving, closing, and servicing the loan.
(3) Processing requirements —(i) Eligibility. An ALP Express Loan is subject to SBA's final approval as to eligibility and, for each loan, an ALP CDC must submit the documents required by SBA to complete the eligibility review. ALP CDCs must submit to SBA for review and approval any servicing action that the ALP CDC proposes prior to closing that may affect the eligibility of the borrower or the ALP Express Loan.
(ii) Credit decisions. The ALP CDC is responsible for properly determining the applicant's creditworthiness and establishing the terms and conditions under which the ALP Express Loan will be made in accordance with SBA's Loan Program Requirements and prudent lending standards. The ALP CDC's determination regarding creditworthiness will not be subject to SBA review.
(4) Submission of loan documents. An ALP CDC must notify SBA of its credit decision on an ALP Express Loan by submitting to SBA all required documentation. SBA will review these documents to determine whether the applicant and the ALP Express Loan are eligible and whether SBA funds are available for the ALP Express Loan. If approved, SBA will notify the ALP CDC of the loan number assigned to the loan.
(5) Loan and Debenture closing. After receiving notification of the loan number from SBA, the ALP CDC is responsible for properly undertaking all actions necessary to close the ALP Express Loan and Debenture in accordance with the expedited loan closing procedures applicable to a Priority CDC and with § 120.960, and in compliance with all applicable Loan Program Requirements.
(6) Servicing. The ALP CDC is responsible for servicing its ALP Express Loans in accordance with § 120.970. SBA may in certain circumstances, in its discretion, elect to handle such duties with respect to a particular ALP Express Loan or Loans. Additional servicing requirements are set forth in subpart E of this part. The CDC must promptly notify SBA when it approves any servicing action delegated to the CDC under Loan Program Requirements.
(c) Prohibition against making a 504 loan previously submitted to the SBA. An ALP CDC may not process a 504 loan application under paragraph (b)(3) of this section from an applicant whose application was previously submitted to SBA and was withdrawn by the CDC or was declined or otherwise not approved by SBA.
§ 120.845   Premier Certified Lenders Program (PCLP).
(a) General. Under the PCLP, SBA designates qualified CDCs as PCLP CDCs and delegates to them increased authority to process, close, service, and liquidate 504 loans. SBA also may give PCLP CDCs increased authority to litigate 504 loans.
(b) Application. A CDC must apply for PCLP status to the Lead SBA Office. The Lead SBA Office will send its written recommendation and the application to SBA's PCLP Loan Processing Center. The PCLP Loan Processing Center will review these materials and forward them to the appropriate Office of Capital Access official in accordance with Delegations of Authority for final determination.
(c) Eligibility. In order for a CDC to be eligible to receive PCLP status, its application must show that it meets the following criteria:
(1) The CDC must be an ALP CDC in substantial compliance with Loan Program Requirements or meet the criteria to be an ALP CDC set forth in § 120.841(a) through (f).
(2) The CDC can adequately comply with SBA liquidation and litigation requirements.
(d) Additional application requirements. The application must include the following:
(1) Certified copy of the CDC's Board of Directors' resolution authorizing the application for PCLP status.
(2) Summary of the experience of each of the CDC's loan processing, closing, servicing and liquidation staff members with significant authority.
(3) Name, address and summary of experience of Designated Attorney.
(4) Documentation of any SBA required insurance.
(5) Any other documentation required by SBA.
(e) Term of designation. If approved, SBA generally will confer PCLP status for a period of two years. However, if SBA deems it appropriate, it may confer PCLP status for a period of less than two years.
(f) Area of Operations for PCLP CDCs. If the SBA approves the CDC's application, the PCLP CDC may exercise its PCLP authority in its entire Area of Operations.
(g) SBA approval or decline decision. SBA will notify the CDC in writing of an approval or decline of a PCLP application. If an application is declined, SBA will notify the CDC of the reasons for the decision.
§ 120.846   Requirements for maintaining and renewing PCLP status.
(a) To maintain its status as a PCLP CDC, a CDC must continue to:
(1) Meet the PCLP eligibility requirements in § 120.845.
(2) Timely conform with all requirements and deadlines set forth in SBA's regulations and policy and procedural guidance concerning properly establishing, funding and reporting a PCLP Loan Loss Reserve Fund (LLRF).
(3) Substantially comply with all Loan Program Requirements.
(4) Remain an active CDC.
(5) In accordance with statutory requirements set forth in section 508(i) of Title V, 15 U.S.C. 697e(i), establish a goal of processing at least 50 percent of its 504 loans using PCLP procedures.
(b) SBA will notify the PCLP CDC in writing of a renewal or non-renewal of PCLP status. If PCLP status is not renewed, SBA will notify the CDC of the reasons for the decision.
§ 120.847   Requirements for the Loan Loss Reserve Fund (LLRF).
(a) General. PCLP CDCs must establish and maintain a LLRF (or multiple accounts which together constitute one LLRF) which complies with paragraphs (b) through (g) of this section. A PCLP CDC must use the LLRF or other funds to reimburse the SBA for 10 percent of any loss sustained by SBA as a result of a default in the payment of principal or interest on a Debenture it issued under the PCLP (“PCLP Debenture”). A CDC that is participating in the PCLP as of January 1, 2004, and a CDC that has participated in the PCLP in the past but which does not have PCLP status as of that date, must establish a LLRF within 30 days of that date to cover potential losses for all 504 loans made in connection with PCLP Debentures that remain outstanding as of that date. A CDC that receives PCLP status after that date must establish and maintain a LLRF prior to closing any 504 loans processed under its PCLP status. The LLRF is the accumulation of deposits that a PCLP CDC must establish and maintain for each PCLP Debenture that it issues. PCLP CDCs must coordinate with their Lead SBA Office to ensure that the LLRF is properly established, that all necessary documentation is executed and delivered by all parties in a timely fashion, and that all required deposits are made.
(b) PCLP CDC Exposure and LLRF deposit requirements. A PCLP CDC's “Exposure” is defined as its reimbursement obligation to SBA with respect to default in the payment of any PCLP Debenture. The amount of a PCLP CDC's Exposure is 10 percent of any loss (including attorney's fees; litigation costs; and care of collateral, appraisal and other liquidation costs and expenses) sustained by SBA as a result of a default in the payment of principal or interest on a PCLP Debenture. 

For each PCLP Debenture a PCLP CDC issues, it must establish and maintain an LLRF equal to one percent of the original principal amount of the PCLP Debenture. The amount the PCLP CDC must maintain in the LLRF for each PCLP Debenture remains the same even as the principal balance of the PCLP Debenture is paid down over time except that, after the first 10 years of the term of the Debenture, the amount maintained in the LLRF may be based on one percent of the current principal amount of the PCLP Debenture (the declining balance methodology), as determined by SBA. All withdrawals must be made in accordance with the requirements of paragraph (g) of this section. A CDC may not use the declining balance methodology:
(1) With respect to any Debenture that has been purchased. Within 30 days after purchase, the CDC must restore the balance maintained in the LLRF for the Debenture that was purchased to one percent of the original principal amount of that Debenture; or
(2) With respect to any other Debenture if SBA notifies the CDC in writing that it has failed to satisfy the requirements in paragraph (e), (f), (h), (i), or (j) of this section. In such case, the CDC will not be required to restore the balance maintained in the LLRF to one percent of the original principal amount of the Debenture but must base the amount maintained in the LLRF on one percent of the principal amount of the Debenture as of the date of notification. The CDC may not begin to use the declining balance methodology again until SBA notifies the CDC in writing that SBA has determined, in its discretion, that the CDC has corrected the noncompliance and has demonstrated its ability to comply with these requirements.
(c) Establishing a LLRF. The LLRF must be a deposit account (or accounts) with a federally insured depository institution selected by the PCLP CDC. A “deposit account” is a demand, time, savings, or passbook account, including a certificate of deposit (CD) which is either uncertificated or, if certificated, non-transferable. A “deposit account” is not an investment account and must not contain securities or other investment properties. A deposit account may contain only cash and CDs credited to that account. A PCLP CDC may pool its deposits for multiple PCLP Debentures in a single account in one institution. The LLRF must be segregated from the PCLP CDC's other operating accounts. The PCLP CDC is responsible for all fees, costs and expenses incurred in connection with establishing, managing and maintaining the LLRF, including fees associated with transferring funds or early withdrawal of CDs, and related income tax expenses.
(d) Creating and perfecting a security interest in a LLRF. A PCLP CDC must give SBA a first priority, perfected security interest in the LLRF to secure the PCLP CDC's obligation to reimburse SBA for the PCLP CDC's Exposure under all of its outstanding PCLP Debentures. (If a PCLP CDC's LLRF is comprised of multiple deposit accounts, it must give SBA this security interest with respect to each such account.) The PCLP CDC must grant to SBA the security interest in the LLRF pursuant to a security agreement between the PCLP CDC and SBA, and a control agreement between the PCLP CDC, SBA, and the applicable depository institution. The control agreement must include provisions requiring the depository institution to follow SBA instructions regarding withdrawal from the account without a requirement for obtaining further consent from the PCLP CDC, and must restrict the PCLP CDC's ability to make withdrawals from the account without SBA consent. When establishing the LLRF, a PCLP CDC must coordinate with its Lead SBA Office to execute and deliver the required documentation. The PCLP CDC must provide to the Lead SBA Office a fully executed original of the security and control agreements. All documents must be satisfactory to SBA in both form and substance.
(e) Schedule for contributions to a LLRF. The PCLP CDC must contribute to the LLRF the required deposits for each PCLP Debenture in accordance with the following schedule:
(1) At least 50 percent of the required deposits to the LLRF on or about the date that it issues the PCLP Debenture.
(2) At least an additional 25 percent of the required deposits to the LLRF no later than one year after it issues the PCLP Debenture.
(3) Any remainder of the required deposits to the LLRF no later than two years after it issues the PCLP Debenture.
(f) LLRF reporting requirements. Each PCLP CDC must periodically report to SBA the amount in the LLRF in a form that will readily facilitate reconciliation of the amount maintained in the LLRF with the amount required to meet a PCLP CDC's Exposure for its entire portfolio of PCLP Debentures.
(g) Withdrawal of excess funds. Interest and other funds in the LLRF that exceed the required minimums as set forth in paragraph (b) of this section, within the time frames set forth in paragraph (e) of this section, accrue to the benefit of the PCLP CDC. PCLP CDCs are authorized to withdraw excess funds, including interest, from the LLRF if such funds exceed the required minimums set forth in paragraph (b) of this section. The PCLP CDC must forward requests for withdrawals to the Lead SBA Office, which will verify the existence and amount of excess funds and notify the financial institution to transfer the excess funds to the PCLP CDC.
(h) Determining SBA loss. When a PCLP CDC has concluded the liquidation of a defaulted 504 loan made with the proceeds of a PCLP Debenture and has submitted a liquidation wrap-up report to SBA, or when SBA otherwise determines that the PCLP CDC has exhausted all reasonable collection efforts with respect to that 504 loan, SBA will determine the amount of the loss to SBA. SBA will notify the PCLP CDC of the amount of its reimbursement obligation to SBA (if any) and will explain how SBA calculated the loss.
(1) If the PCLP CDC agrees with SBA's calculations of the loss, it must reimburse SBA for ten percent of the amount of that loss no later than 30 days after SBA's notification to the PCLP CDC of the CDC's reimbursement obligation.
(2) If the PCLP CDC disputes SBA's calculations, it must reimburse SBA for ten percent of any loss amount that is not in dispute no later than 30 days after SBA's notification to the PCLP CDC of the CDC's reimbursement obligation. No later than 30 days after SBA's notification, the PCLP CDC may submit to the D/FA or his or her delegate a written appeal of any disagreement regarding the calculation of SBA's loss. The PCLP CDC must include with that appeal an explanation of its reasons for the disagreement. Upon the D/FA's final decision as to the disputed amount of the loss, the PCLP CDC must promptly reimburse SBA for ten percent of that amount.
(i) Reimbursing SBA for loss. A PCLP CDC may use funds in the LLRF or other funds to reimburse SBA for the PCLP CDC's Exposure on a defaulted PCLP Debenture. If a PCLP CDC does not satisfy the entire reimbursement obligation within 30 days after SBA's notification to the PCLP CDC's of its reimbursement obligation, SBA may cause funds in the LLRF to be transferred to SBA in order to cover the PCLP CDC's Exposure, unless the PCLP CDC has filed an appeal under paragraph (h)(2) of this section. If the PCLP CDC has filed such an appeal, SBA may cause such a transfer of funds to SBA 30 days after the D/FA's or his or her delegate's decision. If the LLRF does not contain sufficient funds to reimburse SBA for any unpaid Exposure with respect to any PCLP Debenture, the PCLP CDC must pay SBA the difference within 30 days after demand for payment by SBA.
(j) Insufficient funding of LLRF. A PCLP CDC must diligently monitor the LLRF to ensure that it contains sufficient funds to cover its Exposure for its entire portfolio of PCLP Debentures. If, at any time, the LLRF does not contain sufficient funds, the PCLP CDC must, within 30 days of the earlier of the date it becomes aware of this deficiency or the date it receives notification from SBA of this deficiency, make additional contributions to the LLRF to make up this difference.
§ 120.848   Requirements for 504 loan processing, closing, servicing, liquidating, and litigating by PCLP CDCs.
(a) General. In processing closing, servicing, liquidating and litigating 504 loans under the PCLP (“PCLP Loans”), the PCLP CDC must comply with Loan Program Requirements and conduct such activities in accordance with prudent and commercially reasonable lending standards.
(b) Documentation of decision making. For each PCLP Loan, the PCLP CDC must document in its files the basis for its decisions with respect to loan processing, closing, servicing, liquidating, and litigating.
(c) Processing requirements. SBA expects PCLP CDCs to handle most 504 loan processing situations, although SBA may require that the PCLP CDC process 504 loans involving complex or problematic eligibility issues through the SBA using standard 504 loan processing procedures. The PCLP CDC is responsible for properly determining borrower creditworthiness and establishing the terms and conditions under which the PCLP Loan will be made. The PCLP CDC also is responsible for properly undertaking such other processing actions as SBA may delegate to the PCLP CDC.
(d) Submission of loan documents. A PCLP CDC must notify SBA of its approval of a 504 loan by submitting to SBA's PCLP Loan Processing Center all documentation required by SBA, including SBA's PCLP eligibility checklist, signed by an authorized representative of the PCLP CDC. The PCLP Loan Processing Center will review these documents to determine whether the PCLP CDC has identified any problems with the PCLP Loan approval, and whether SBA funds are available for the PCLP Loan. If appropriate, the PCLP Processing Center will notify the PCLP CDC of the loan number assigned to the loan.
(e) Loan and Debenture closing. After receiving notification from SBA PCLP Loan Processing Center, the PCLP CDC is responsible for properly undertaking all actions necessary to close the PCLP Loan and Debenture in accordance with the expedited loan closing procedures applicable to a Priority CDC and with § 120.960.
(f) Servicing, liquidation and litigation responsibilities. The PCLP CDC generally must service, liquidate and litigate its entire portfolio of PCLP Loans, although SBA may in certain circumstances elect to handle such duties with respect to a particular PCLP Loan or Loans. Additional servicing and liquidation requirements are set forth in subpart E of this part.
(g) Making a 504 loan previously considered by another CDC. A PCLP CDC also may utilize its PCLP status to process a 504 loan application from an applicant whose application was declined or rejected by another CDC operating in that same Area of Operations, if the applicant is located within that area and as long as SBA has not previously declined that applicant's 504 loan application. This may include the processing of a 504 loan application from an applicant that has withdrawn its application from another CDC.
§ 120.851   CDC ethical requirements.
CDCs and their Associates must act ethically and exhibit good character. They must meet all of the ethical requirements of § 120.140. In addition, they are subject to the following:
(a) Any benefit flowing to a CDC's Associate or his or her employer from activities as an Associate must be merely incidental (this requirement does not prevent an Associate or an Associate's employer from providing interim financing as described in § 120.890 or Third Party Loans as described in § 120.920, as long as such activity does not violate § 120.140); and
(b) A CDC's Associate may not be an officer, director, or manager of more than one CDC.
§ 120.852   [Reserved]
§ 120.853   Inspector General audits of CDCs.
The SBA Office of Inspector General may also conduct, supervise or coordinate audits pursuant to the Inspector General Act. The CDC must cooperate and make its staff, records, and facilities available.
§ 120.857   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.
§ 120.860   Required objectives.
A Project must achieve at least one of the economic development objectives set forth in § 120.861 or § 120.862.
§ 120.861   Job creation or retention.
A Project must create or retain one Job Opportunity per an amount of 504 loan funding that will be specified by SBA from time to time in a Federal Register notice. Such Job Opportunity average remains in effect until changed by subsequent Federal Register publication.
§ 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. Loan applications 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;
(4) Assisting manufacturing firms (North American Industry Classification System (NAICS), Sectors 31 “ 33); or
(5) Assisting businesses in Labor Surplus Areas as defined by the Department of Labor.
(b) Public Policy goals:
(1) Revitalizing a business district of a community with a written revitalization or redevelopment plan;
(2) Expansion of exports;
(3) Expansion of small businesses owned and controlled by women as defined in section 29(a)(3) of the Act, 15 U.S.C. 656(a)(3);
(4) Expansion of small businesses owned and controlled by veterans (especially service-disabled veterans) as defined in section 3(q) of the Act, 15 U.S.C. 632(q);
(5) Expansion of minority enterprise development (see § 124.103(b) of this chapter for minority groups who qualify for this description);
(6) Aiding rural development;
(7) Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports);
(8) Modernizing or upgrading facilities to meet health, safety, and environmental requirements;
(9) Assisting businesses in or moving to areas affected by Federal budget reductions, including base closings, either because of the loss of Federal contracts or the reduction in revenues in the area due to a decreased Federal presence;
(10) Reduction of rates of unemployment in labor surplus areas, as such areas are determined by the Secretary of Labor;
(11) Reduction of energy consumption by at least 10 percent;
(12) Increased use of sustainable design, including designs that reduce the use of greenhouse gas emitting fossil fuels, or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact; or
(13) Plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings' or communities' consumption, commonly known as micropower, or renewable fuels producers including biodiesel and ethanol producers.
§ 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 an unrelated lessor if:
(1) The remaining term of the lease, including options to renew, exercisable only by the lessee, equals or exceeds the term of the Debenture;
(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 the Project is for new construction, the Borrower may lease long term up to 20 percent of the Rentable Property in the Project to one or more tenants if the Borrower immediately occupies at least 60 percent of the Rentable Property, plans to occupy within three years some of the remaining space not immediately occupied and not leased long term, and plans to occupy all of the remaining space not leased long term within ten years.
§ 120.871   Leasing part of Project Property to another business.
(a) The costs of interior finishing of space to be leased out to another business are not eligible Project costs.
(b) Third-party loan proceeds used to renovate the leased space do not count towards the 504 first mortgage requirement or the Borrower's contribution.
§ 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 that an Eligible Passive Company may lease to an Operating Company); and
(b) Together with its Affiliates, meet one of the size standards set forth in § 121.301(b) of this chapter.
§ 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 net reduction of one-third or more in the workforce of a relocating small business or a substantial increase in unemployment in any area of the country, 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; and
(b) Projects in foreign countries (loans financing real or personal property located outside the United States or its possessions).
§ 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) to acquire land used in the Project, or for any other expense directly attributable to the Project, prior to applying to SBA for the 504 loan;
(b) In Projects involving construction, 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, opinion of title, architectural and engineering costs, appraisals, environmental studies, and legal fees related to zoning, permits, or platting; and
(d) Repayment of interim financing including points, fees and interest.
(e) If the project involves expansion of a small business concern, any amount of existing indebtedness that does not exceed 100 percent of the project cost of the expansion may be refinanced and added to the expansion cost if:
(1) Substantially all (75% or more) of the proceeds of the indebtedness were used to acquire land, including a building situated thereon, to construct a building thereon, or to purchase equipment. The assets acquired must be eligible for financing under the 504 loan program. If the acquisition, construction, or purchase of the asset was originally financed through a commercial loan that would have satisfied the “substantially all” requirement and that was subsequently refinanced one or more times, with the current commercial loan being the most recent refinancing, the current commercial loan will be deemed to satisfy this paragraph (e)(1).
(2) The existing indebtedness is collateralized by fixed assets. The 504 eligible fixed assets collateralizing any debt to be refinanced or relating to the portion of debt being refinanced in the case of a partial refinance must also collateralize the 504 Loan unless SBA approves a waiver due to extraordinary circumstances. PCLP CDCs may not use their delegated authority to approve a loan requiring this waiver;
(3) The existing indebtedness was incurred for the benefit of the small business concern for which any new Project costs are incurred. Existing 7(a) and 504 loans may be refinanced under this section in accordance with SBA policies or procedures;
(4) The financing will be used only for refinancing existing indebtedness or costs relating to the project financed;
(5) The financing will provide a substantial benefit to the borrower when prepayment penalties, financing fees, and other financing costs are accounted for. For purposes of this paragraph (e)(5), substantial benefit means that the portion of the new installment amount attributable to the debt being refinanced must be less than the existing installment amount(s). Prepayment penalties, financing fees, and other financing costs must also be added to the amount being refinanced in calculating the percentage reduction in the new installment payment. Exceptions to the reduction requirement may be approved by the Director, Office of Financial Assistance (D/FA) or designee for good cause. PCLP CDCs may not use their delegated authority to approve a loan requiring this exception.
(6) The borrower has been current on all payments due on the existing debt for not less than 1 year preceding the date of refinancing. For purposes of this section, “date of refinancing” refers to the date the 504 loan is approved by SBA. Any unremedied delinquency after approval must be reported to SBA as an adverse change;
(7) The financing under section 504 will provide better terms or rate of interest than the existing indebtedness on the date of refinancing. For purposes of this paragraph, “better terms or rate of interest” may include longer maturity (but always commensurate with the assets' useful life), a lower interest rate committed on the Third Party Lender Loan or projected on the 504 loan, improved collateral conditions, or less restrictive loan covenants.
(8) The authority to approve the refinancing of same institution debt must be approved by SBA and is not delegated to the PCLP CDCs. For the purposes of this paragraph, “same institution debt” means any debt of the CDC or the Third Party Lender financing the new project, or of affiliates of either.
(f) For the purposes of paragraph (e), the phrase “project involves expansion of a small business concern” includes any project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business concern.
(g) SBA may approve a Refinancing Project of a qualified debt subject to the following conditions and requirements:
(1) The Refinancing Project does not involve the expansion of a small business;
(2) The applicant for the refinancing available under this paragraph (g) has been in operation for all of the 2 year period ending on the date of application;
(3) A loan that is subject to a guarantee by a Federal agency or department may be refinanced under the following conditions and requirements:
(i) An existing 504 loan may be refinanced if both the Third Party Loan and the 504 Loan are being refinanced or the Third Party Loan has been paid in full. If the 504 Loan being refinanced received approval through another CDC, the CDC working on the current refinancing must provide advance notice to the other CDC in writing (by email or letter).
(ii) An existing 7(a) loan may be refinanced if the CDC notifies the 7(a) lender in advance in writing (by email or letter).
(iii) The refinancing will provide a substantial benefit to the Borrower. For purposes of this paragraph (g)(3)(iii), substantial benefit means that the portion of the new installment amount attributable to the debt being refinanced must be less than the existing installment amount(s). Prepayment penalties (including subsidy recoupment fees), financing fees, and other financing costs must be added to the amount being refinanced in calculating the percentage reduction in the new installment payment, but the portion of the new installment amount attributable to Eligible Business Expenses (as described in paragraph (g)(16) of this section) is not included in this calculation. Exceptions to the reduction requirement may be approved by the D/FA or designee for good cause. PCLP CDCs may not use their delegated authority to approve a loan requiring the exception in this paragraph (g)(3)(iii).
(4) In addition to the annual guarantee fee assessed under § 120.971(d)(2), Borrower must pay SBA a supplemental annual guarantee fee to cover the additional cost attributable to the refinancing in an amount established by SBA each fiscal year.
(5) The funding for the Refinancing Project must come from three sources based on the current fair market value of the fixed assets serving as collateral for the Refinancing Project, including a Third Party Loan that is at least as much as the 504 loan, not less than 10% from the Borrower (excluding administrative costs), and not more than 40% from the 504 loan. If the Refinancing Project involves a limited or single purpose building or structure, the Borrower must contribute not less than 15% (excluding administrative costs), unless SBA determines, in its discretion, and publishes a notice in the Federal Register, that due to an economic recession, as determined by the National Bureau of Economic Research or its equivalent, Borrowers may contribute not less than 10% for Refinancing Projects involving a limited or single purpose property during the recession. The lower required contribution by the Borrower will be in effect until the first day of the calendar quarter following the end of the economic recession as determined by the National Bureau of Economic Research or its equivalent. SBA will publish a notice in the Federal Register announcing the date on which the requirement of the lower Borrower contribution ended. In addition to a cash contribution, the Borrower's contribution may be satisfied as set forth in § 120.910 or by the equity in any other fixed assets that are acceptable to SBA as collateral for the Refinancing Project, provided that there is an independent appraisal of the fair market value of the asset;
(6)(i) The portion of the Refinancing Project provided by the 504 loan and the Third Party Loan may be no more than 90% of the fair market value of the fixed assets that will serve as collateral.
(ii) The Borrower's application may include a request to finance Eligible Business Expenses as part of the Refinancing Project if the amount of cash funds that will be provided for the Refinancing Project exceeds the amount to be paid to the lender of the qualified debt. The Borrower's application must include a specific description of the Eligible Business Expenses for which the financing is requested and an itemization of the amount of each expense. Any debt for Operating Expenses of the business that was incurred with a credit card or a business line of credit may be included if the credit card or business line of credit is issued in the name of the small business and the Applicant certifies that the debt being refinanced was incurred exclusively for business related purposes. Loan proceeds must not be used to refinance any personal expenses. Both the CDC and the Borrower must certify in the application that the funds will be used to cover Eligible Business Expenses. Borrower must, upon request, substantiate the use of the funds provided for business expenses through, for example, bank statements, invoices marked “paid,” cleared checks, or any other documents that demonstrate that a business obligation was satisfied with the funds provided.
(7) If the qualified debt is not fully satisfied by the funding provided by the Refinancing Project, the lender of the qualified debt must take one of the following actions, or some combination thereof, to address the deficiency:
(i) Forgiveness of all or part of the deficiency;
(ii) Acceptance of payment by the Borrower, or
(iii) Acceptance of a Note executed by the Borrower for the balance, or any portion of the balance. Such Note must be subordinate to the 504 loan if the Note and the 504 loan are secured by any of the same collateral. The Note is subject to any other restrictions that SBA may establish to protect its creditor position, including standby requirements;
(8) The Third Party Lender must have a first lien position, and the 504 loan must have a second lien position, on all Eligible Fixed Assets securing the Refinancing Project. Any other lien must be junior in priority to these lien positions. For other fixed assets serving as collateral for the Refinancing Project, the lien positions of the Third Party Lender and the 504 loan may be junior to any existing liens acceptable to SBA;
(9) Eligible Project costs which may be paid with the proceeds of the 504 loan are the amount used to refinance the qualified debt and other costs under § 120.882(c) and (d) and eligible administrative costs under § 120.883;
(10) [Reserved]
(11) PCLP CDCs may not approve the refinancing of same institution debt under their delegated authority and must submit the application to SBA for approval.
(12) The 504 loans approved under this paragraph (g) must be disbursed within 9 months after loan approval. The Director, Office of Financial Assistance, or his or her designee, may approve a request for extension of the disbursement period for an additional 6 months for good cause.
(13) The Third Party Loan may not be sold on the secondary market as a part of a pool guaranteed under subpart J of this part, or any successor to this program, when the debt being refinanced is same institution debt;
(14) The Third Party Lender must certify that it would not refinance the qualified debt except for the assistance provided under this paragraph (g);
(15) Notwithstanding § 120.860, a debt may be refinanced under this paragraph (g) if it does not meet the job creation or other economic development objectives set forth in § 120.861 or § 120.862. In such case, the 504 loan may not exceed the product obtained by multiplying the number of employees of the Borrower by $90,000. The number of employees of the Borrower is equal to the sum of:
(i) The number of full-time employees of the Borrower on the date of the application; and
(ii) The product obtained by multiplying:
(A) The number of part-time employees of the Borrower on the date of the application; by
(B) The quotient obtained by dividing the average number of hours each part-time employee of the Borrower works each week by 40.
Example 1 to paragraph (g)(15): 30 full-time employees and 35 part-time employees working 20 hours per week is calculated as follows: 30 + (35 × (20/40)) = 47.5. The maximum amount of the 504 loan would be 47.5 multiplied by $90,000, or $4,275,000.
(16) For the purposes of this paragraph (g), the terms below are defined as follows:
Date of application refers to the date the 504 loan application is received by SBA.
Eligible Business Expenses are payments of the business for either Operating Expenses or Other Secured Debt.
Eligible Fixed Assets are one or more long-term fixed assets, such as land, buildings, machinery, and equipment, acquired, constructed or improved by a small business for use in its business operations.
Fair market value refers to the current appraised value of an asset that is established by an independent appraiser in accordance with the standards established by SBA in its SOPs.
Operating Expenses are expenses of the business that were incurred but not paid prior to the date of the 504 application or that will become due for payment within 18 months after the date of application. Examples include salaries, rent, utilities, inventory, and other expenses of the business that are not capital expenditures.
Other Secured Debt is debt incurred prior to the 504 loan application that has been secured by the same Eligible Fixed Assets securing the qualified debt and incurred for the benefit of the Borrower and/or Operating Company. Other Secured Debt does not include debt incurred for the purposes of capital expenditures, and any existing liens must be released or subordinated to the amount of the debt being refinanced by the 504 loan.
Qualified debt is a commercial loan:
(A) That was incurred not less than 6 months before the date of the application for refinancing available under this paragraph (g).
(B) Substantially all (75% or more) of which was for an Eligible Fixed Asset. If the Eligible Fixed Asset was originally financed through a commercial loan that would have satisfied the “substantially all” standard (the “original loan”) and that was subsequently refinanced one or more times, with the current commercial loan being the most recent refinancing, the current commercial loan will be deemed to satisfy this paragraph (B). If the original loan was for the construction of a new building, or the acquisition, renovation, or reconstruction of an existing building, and such loan would not have satisfied the leasing policies set forth in §§ 120.131 and 120.870(b), the current commercial loan will be deemed to satisfy these policies, provided that Borrower demonstrates compliance with § 120.131(b) for existing buildings as of the date of application.
(C) That was for the benefit of the small business concern;
(D) That is collateralized by Eligible Fixed Assets; and
(E) That is not a Third Party Loan that is part of an existing 504 Project, except as allowed under paragraph (g)(3) of this section.
Refinancing Project means the fair market value of the Eligible Fixed Asset(s) securing the qualified debt and any other fixed assets acceptable to SBA, except that if the Refinancing Project includes the financing of Eligible Business Expenses, SBA will not accept as collateral any fixed assets other than the Eligible Fixed Asset(s) securing the Qualified Debt.
Same institution debt means any debt of the CDC or the Third Party Lender, or an affiliate of either, that is providing funds for the refinancing.
§ 120.883   Eligible administrative costs for 504 loans.
The following administrative costs are not part of Project costs, but may be paid with the proceeds of the 504 loan and the Debenture (see § 120.971):
(a) SBA guarantee fee;
(b) Funding fee (to cover the cost of a public issuance of securities and the Trustee);
(c) CDC processing fee;
(d) Borrower's out-of-pocket costs associated with 504 loan and Debenture closing other than legal fees (for example, certifications and the copying costs associated with them, overnight delivery, postage, and messenger services) but not to include fees and costs described in § 120.882;
(e) CDC Closing Fee (see § 120.971(a)(2)) up to a maximum of $10,000; and
(f) Underwriters' fee.
§ 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), except as provided in § 120.882(e) and (g).
(b) A CDC may not use 504 loan proceeds to pay any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from an existing debt.
(c) Third-Party Loan fees (commitment, broker, finders, origination, processing fees of permanent financing).
(d) Ancillary business expenses, such as:
(1) Working capital;
(2) Counseling or management services fees;
(3) Incorporation/organization costs;
(4) Franchise fees; and
(5) Advertising.
(e) 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 the business' operations with a remaining useful life of a minimum of 10 years).
§ 120.890   Source of interim financing.
A Project may use interim financing for all Project costs except the 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 Project 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.)
§ 120.891   Certifications of disbursement and completion.
Before the Debenture is issued, the interim lender must certify the amount disbursed. The CDC must certify that the Project was completed in accordance with the final plans and specifications (except as provided in § 120.961).
§ 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 unremedied substantial adverse change in the condition of the small business since the application to the interim lender;
(b) The Borrower (or Operating Company) must certify to the CDC that there has been no unremedied substantial 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 120 days of closing; and
(c) The CDC must issue an opinion to the best of its knowledge that there has been no unremedied substantial adverse change in the Borrower's (or Operating Company's) ability to repay the 504 loan since its submission of the loan application to SBA.
§ 120.900   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.
§ 120.910   Borrower contributions.
(a) The Borrower must contribute to the Project cash (or property acceptable to SBA obtained with the cash) or land (that is part of the Project Property), in an amount equal to the following percentage of the Project cost, excluding administrative costs:
(1) At least 15 percent, if the Borrower (or Operating Company if the Borrower is an Eligible Passive Company) has operated for two years or less;
(2) At least 15 percent, if the Project involves the acquisition, construction, conversion, or expansion of a limited or single purpose building or structure;
(3) At least 20 percent, if the Project involves conditions described in paragraphs (a)(1) and (2) of this section; or
(4) At least 10 percent, in all other circumstances.
(b) The source of the contribution may be a CDC or any other source except an SBA business loan program (see § 120.913 for SBIC exception).
§ 120.911   Land contributions.
The Borrower's contribution may be land (including buildings, structures and other site improvements which will be part of the Project Property) previously acquired by the Borrower.
§ 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.
§ 120.913   Limitations on any contributions by a Licensee.
Subject to part 107 of this chapter, a Licensee may provide financing for all or part of the Borrower's contribution to the Project. SBA will consider Licensee funds to be derived from federal sources if the Licensee has Leverage (as defined in § 107.50 of this chapter). If the Licensee does not have Leverage, SBA will consider the investment to be from private funds. Licensee financing must be subordinated to the 504 loan and must not be repaid at a faster rate than the Debenture. (Refer to § 120.930(a) for additional limitations.)
§ 120.920   Required participation by the Third Party Lender.
(a) Amount of Third Party Loans. A Project financing must include one or more Third Party Loans totaling at least as much as the 504 loan. However, the Third Party Loans must total at least 50 percent of the total cost of the Project if:
(1) The Borrower (or Operating Company, if the Borrower is an Eligible Passive Company) has operated for two years or less, or
(2) The Project is for the acquisition, construction, conversion or expansion of a limited or single purpose asset.
(b) Third party loan collateral. The 504 loan is usually collateralized by a second lien on Project Property. The Third Party Lender may obtain additional collateral or other security for the Third Party Loan (“Additional Collateral”) only if in the event of liquidation and unless otherwise approved in writing by SBA:
(1) The Third Party Lender liquidates or otherwise exhausts all reasonable avenues of collection with respect to the Additional Collateral no later than the disposition of the Project Property, and
(2) The Third Party Lender applies any proceeds received as a result of the Additional Collateral to the balance outstanding on the Third Party Loan prior to the application of proceeds from the disposition of the Project Property to the Third Party Loan.
§ 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.
(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.
(d) Future advances. The Third Party Loan must not be open-ended. After completion of the Project, the Third Party Lender may not make future advances under the Third Party Loan except expenditures to collect amounts due the Third Party Loan notes, maintain collateral and protect the Third Party Lender's lien position on the Third Party Loan.
(e) Subordination. The Third Party Lender's lien will be subordinate to the CDC/SBA lien regarding any prepayment penalties, late fees, other default charges, and escalated interest after default due under the Third Party Loan.
(f) Escalation upon default. A Third-Party Lender may not escalate the rate of interest upon default to a rate greater than the maximum rate set forth in paragraph (b) of this section. Regarding any Project that SBA approved after September 30, 1996, SBA will only pay the interest rate on the note in effect before the date of the Borrower's default.
§ 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.
§ 120.923   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) 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.
(c) The Borrower must not prepay any Project financing subordinate to the 504 loan without SBA's prior written consent.
§ 120.925   [Reserved]
§ 120.926   Referral fee.
The CDC can receive a reasonable referral fee from the Third Party Lender if the CDC secured the Third Party Lender for the Borrower under a written contract between the CDC and the Third Party Lender. Both the CDC and the Third Party Lender are prohibited from charging this fee to the Borrower. If a CDC charges a referral fee, the CDC will be construed as a Referral Agent under part 103 of this chapter.
§ 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) A 504 loan must not be less than $25,000.
(c) Upon completion of the Project, the Debenture amount will be reduced by the amount that the unused contingency reserve exceeds 2 percent of the anticipated Debenture.
§ 120.931   504 Lending limits.
504 loan amounts shall be limited to:
(a) An outstanding balance of $5,000,000 for each Borrower and its affiliates if the loan proceeds will not be directed towards a Project in paragraph (c) of this section,
(b) An outstanding balance of $5,000,000 for each Borrower and its affiliates if one or more of the public policy goals enumerated in § 120.862(b) applies to the Project; and
(c) $5,500,000 for each Project for:
(1) Small Manufacturers (NAICS Codes 31-33) with all production facilities located in the United States;
(2) Reduction of the Borrower's, or if the Borrower is an Eligible Passive Company, the Operating Company's energy consumption by at least 10%; or
(3) Plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings' or communities' consumption, commonly known as micropower, or renewable fuel producers including biodiesel and ethanol producers.
§ 120.932   Interest rate.
The interest rate of the 504 Loan and the Debenture which funds it is set by the SBA and approved by the Secretary of the Treasury.
§ 120.933   Maturity.
From time to time, SBA will publish in the Federal Register the available maturities for a 504 loan and the Debenture that funds it. Such available maturities remain in effect until changed by subsequent Federal Register publication.
§ 120.934   Collateral.
The CDC usually takes a second lien position on the Project Property to secure the 504 loan. Sometimes additional collateral is required. (In rare circumstances, SBA may permit other collateral substituted for Project Property.) 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.
§ 120.935   Deposit from the Borrower that a CDC may require.
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.
§ 120.937   Assumption.
A 504 loan may be assumed with SBA's prior written approval.
§ 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, negligence, or misrepresentation by the CDC.
§ 120.939   Borrower prohibition.
Neither a Borrower nor an Associate of the Borrower may purchase an interest in a Debenture Pool in which the Debenture that funded its 504 loan has been placed.
§ 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, the Investors in that Debenture Pool 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.
§ 120.941   Certificates.
(a) The face value of a Certificate 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. 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.
§ 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.
§ 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.
§ 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 Trustee and the underwriters.
§ 120.953   Trustee.
SBA must appoint a Trustee to:
(a) Issue Certificates;
(b) Transfer the Certificates upon resale in the secondary market;
(c) Hold in trust paper Debentures composing a Debenture Pool for the benefit of SBA and the Certificate holders;
(d) Establish and maintain a central registry of:
(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 Investors; 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.
§ 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, 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 will be funded by a guarantee fee, 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 may use funds in the master reserve account to defray program expenses. In the event a Borrower defaults and its 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. At SBA's direction, the CSA must 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 master reserve account earned prior to October 1991 (not previously distributed to the CDCs) for the costs of 504 program administration.
§ 120.955   Agent bonds and records.
(a) Each agent (in §§ 120.951 through 120.954) 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.
§ 120.956   Suspension or revocation of brokers and dealers.
The appropriate Office of Capital Access official in accordance with Delegations of Authority 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, at least 10 business days prior to the effective date of the suspension or revocation. 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 this official will remain in effect pending resolution of the appeal.
§ 120.960   Responsibility for closing.
(a) The CDC is responsible for the 504 loan closing.
(b) The Debenture closing is the joint responsibility of the CDC and SBA.
(c) SBA may, within its sole discretion, decline to close the Debenture; direct the transfer of the 504 loan to another CDC; or cancel its guarantee of the Debenture, prior to sale, if any of the following occur:
(1) The CDC has failed to comply materially with any Loan Program Requirement as defined in § 120.10;
(2) The CDC has failed to make or close the 504 loan or prepare the Debenture closing in a prudent or commercially reasonable manner;
(3) The CDC's improper action or inaction places SBA at risk;
(4) The CDC has failed to use required SBA forms or electronic versions of those forms;
(5) The CDC, Third Party Lender or Borrower has failed to timely disclose to SBA a material fact regarding the Project or 504 loan;
(6) The CDC, Third Party Lender or Borrower has misrepresented a material fact to SBA regarding the Project or 504 loan; or
(7) SBA determines that there has been an unremedied material adverse change, such as deterioration in the Borrower's financial condition, since the 504 loan was approved, or that approving the closing of the Debenture will put SBA at unacceptable financial risk.
§ 120.961   Construction escrow accounts.
The CSA, title company, CDC attorney, 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.
§ 120.970   Servicing of 504 loans and Debentures.
(a) In servicing 504 loans, CDCs must comply with Loan Program Requirements and in accordance with prudent and commercially reasonable lending standards.
(b) The CDC is responsible for routine servicing including receipt and review of the Borrower's or Operating Company's financial statements on an annual or more frequent basis and monitoring the status of the Borrower and 504 loan collateral.
(c) The CDC is responsible for assuring that the Borrower makes all required insurance premium payments and has paid all taxes when due.
(d) The CDC is responsible for filing renewals and extensions of security interests on collateral for the 504 loan, as required.
(e) The CDC must timely respond to Borrower requests for loan modifications.
(f) For any 504 loan that is more than three months past due, the CDC must promptly request that SBA purchase the Debenture unless the 504 loan has an SBA-approved deferment or is in compliance with an SBA-approved plan to allow the Borrower to catch up on delinquent loan payments.
(g) The CDC must cooperate with SBA to cure defaults and initiate workouts.
(h) Additional servicing requirements are set forth in subpart E of this part.
§ 120.971   Allowable fees paid by Borrower.
(a) CDC fees. The fees a CDC may charge the Borrower in connection with a 504 loan and Debenture are limited to the following:
(1) Processing fee. The CDC may charge up to 1.5 percent of the net Debenture proceeds to process the financing. Two-thirds of this fee will be considered earned and may be collected by the CDC when the loan number is issued by SBA. The portion of the processing fee paid by the Borrower may be reimbursed from the Debenture proceeds;
(2) Closing fee. The CDC may charge a reasonable closing fee sufficient to reimburse it for the expenses of its in-house or outside legal counsel, and other miscellaneous closing costs (CDC Closing Fee). Some closing costs may be funded out of the Debenture proceeds (see § 120.883 for limitations);
(3) Servicing fee. The CDC will charge a monthly servicing fee of at least 0.625 percent per annum and no more than 2 percent per annum on the unpaid balance of the loan as determined at five-year anniversary intervals. A servicing fee greater than 1.5 percent in a rural area and 1 percent everywhere else requires SBA's prior written approval, based on evidence of substantial need. The servicing fee may be paid only from loan payments received. The fees may be accrued without interest and collected from the CSA when the payments are made.
(4) Late fees. Loan 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. These fees will be collected by the CSA on behalf of the CDC; and
(5) Assumption fee. Upon SBA's written approval, a CDC may charge an assumption fee not to exceed 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 servicing 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.
(d) SBA fees. (1) SBA charges a 0.5 percent guarantee fee on the Debenture.
(2) For loans approved by SBA after September 30, 1996, SBA charges a fee of not more than 0.9375 percent annually on the unpaid principal balance of the loan as determined at five-year anniversary intervals.
(e) Miscellaneous fees. A funding fee not to exceed 0.25 percent of the Debenture may be charged to cover costs incurred by the trustee, fiscal agent, transfer agent.
§ 120.972   Third Party Lender participation fee and CDC fee.
(a) Participation fee. For loans approved by SBA after September 30, 1996, SBA must collect a one-time fee equal to 50 basis points on the Third Party Lender's participation in a Project when the Third Party Lender occupies a senior credit position to SBA in the Project.
(b) CDC fee. For loans approved by SBA after September 30, 1996, SBA must collect an annual fee from the CDC equal to 0.125 percent of the outstanding principal balance of the Debenture. The fee must be paid from the servicing fees collected by the CDC and cannot be paid from any additional fees imposed on the Borrower.
§ 120.975   CDC Liquidation of loans and debt collection litigation.
(a) PCLP CDCs. If a CDC is designated as a PCLP CDC under § 120.845, the CDC must liquidate and handle debt collection litigation with respect to all PCLP Loans in its portfolio on behalf of SBA as required by § 120.848(f), in accordance with subpart E of this part. With respect to all other 504 loans that a PCLP CDC makes, the PCLP CDC is an Authorized CDC Liquidator and must exercise its delegated authority to liquidate and handle debt-collection litigation in accordance with subpart E of this part for such loans, if the PCLP CDC is notified by SBA that it meets either of the following requirements to be an Authorized CDC Liquidator, as determined by SBA:
(1) The PCLP CDC has one or more employees who have not less than two years of substantive, decision-making experience in administering the liquidation and workout of defaulted or problem loans secured in a manner substantially similar to loans funded with 504 loan program debentures, and who have completed a training program on loan liquidation developed by the Agency in conjunction with qualified CDCs that meet the requirements of this section; or
(2) The PCLP CDC has entered into a contract with a qualified third party for the performance of its liquidation responsibilities and obtains the approval of SBA with respect to the qualifications of the contractor and the terms and conditions of the contract.
(b) All other CDCs. A CDC that is not authorized under paragraph (a) of this section may apply to become an Authorized CDC Liquidator with authority to liquidate and handle debt collection litigation with respect to 504 loans on behalf of SBA, in accordance with subpart E of this part, if the CDC meets the following requirements:
(1) The CDC meets either of the following criteria:
(i) The CDC participated in the loan liquidation pilot program established by the Small Business Programs Improvement Act of 1996 prior to October 1, 2006; or
(ii) During the three fiscal years immediately prior to seeking such authority, the CDC made an average of not less than ten 504 loans per year; and
(2) The CDC meets either of the following requirements:
(i) The CDC has one or more employees who have not less than two years of substantive, decision-making experience in administering the liquidation and workout of defaulted or problem loans secured in a manner substantially similar to loans funded with 504 loan program debentures, and who have completed a training program on loan liquidation developed by the Agency in conjunction with qualified CDCs that meet the requirements of this section; or
(ii) The CDC has entered into a contract with a qualified third party for the performance of its liquidation responsibilities and obtains the approval of SBA with respect to the qualifications of the contractor and the terms and conditions of the contract.
(c) CDC counsel. To perform debt collection litigation under paragraphs (a) or (b) of this section, a CDC must also have either in-house counsel with adequate experience as approved by SBA or entered into a contract for the performance of debt collection litigation with an experienced attorney or law firm as approved by SBA.
(d) Application for authority to liquidate and litigate. To seek authority to perform liquidation and debt collection litigation under paragraphs (b) and (c) of this section, a CDC other than a PCLP CDC must submit a written application to SBA and include documentation demonstrating that the CDC meets the requirements of paragraph (b) and (c) of this section. If a CDC intends to use a contractor to perform liquidation, it must obtain approval from SBA of both the qualifications of the contractor and the terms and conditions in the contract covering the CDC's retention of the contractor. SBA will notify a CDC in writing when the CDC can begin to perform liquidation and/or debt collection litigation under this section.
§ 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 this part in effect when the obligations were undertaken or last in effect, if applicable.
§ 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.
§ 120.1000   Risk-Based Lender Oversight.
(a) Risk-Based Lender Oversight. SBA monitors, supervises, examines, regulates, and enforces laws against SBA Supervised Lenders and the SBA operations of SBA Lenders and Intermediaries.
(b) Scope. Most rules and standards set forth in this subpart apply to SBA Lenders as well as Intermediaries; however, SBA has separate regulations for enforcement grounds and formal enforcement actions for Intermediaries at §§ 120.1425 and 120.1540.
§ 120.1005   Bureau of PCLP Oversight.
SBA's Bureau of PCLP Oversight within OCRM, monitors the capitalization of PCLP CDC pilot participants' LLRFs and performs other related functions.
§ 120.1010   SBA access to SBA Lender and Intermediary files.
An SBA Lender and Intermediary must allow SBA's authorized representatives, including representatives authorized by the SBA Inspector General, during normal business hours, access to its files to review, inspect, and copy all records and documents, relating to SBA guaranteed loans or as requested for SBA oversight.
§ 120.1015   Risk Rating System.
(a) Risk Rating. SBA may assign a Risk Rating to all SBA Lenders and Intermediaries on a periodic basis. Risk Ratings are based on certain risk-related portfolio performance factors as set forth in notices or SBA's SOPs and as published from time to time.
(b) Rating categories. Risk Ratings fall into one of two broad categories: Acceptable Risk Ratings or Less Than Acceptable Risk Ratings.
§ 120.1025   Monitoring.
SBA may conduct monitoring of SBA Lenders and Intermediaries including, but not limited to, SBA Lenders' or Intermediaries' self-assessments.
§ 120.1050   Reviews and examinations.
(a) Reviews. SBA may conduct reviews of the SBA loan operations of SBA Lenders. The review may include, but is not limited to, an evaluation of the following:
(1) Portfolio performance;
(2) SBA operations management;
(3) Credit administration; and
(4) Compliance with Loan Program Requirements.
(b) Examinations. SBA may conduct safety and soundness examinations of SBA Supervised Lenders, except SBA will not conduct safety and soundness examinations of Other Regulated SBLCs under §§ 120.1510 and 1511. The safety and soundness examination may include, but is not limited to, an evaluation of:
(1) Capital adequacy;
(2) Asset quality (including credit administration and allowance for loan losses);
(3) Management quality (including internal controls, loan portfolio management, and asset/liability management);
(4) Earnings;
(5) Liquidity; and
(6) Compliance with Loan Program Requirements.
(c) Reviews/examinations of Intermediaries. SBA may perform reviews or examinations of Intermediaries.
(d) Other reviews or examinations. SBA may perform other reviews/examinations as needed as determined by SBA in its discretion.
§ 120.1051   Frequency of reviews and examinations.
SBA may conduct reviews and examinations of SBA Lenders and Intermediaries on a periodic basis. SBA may consider, but is not limited to, the following factors in determining frequency:
(a) Results of monitoring, including an SBA Lender's or Intermediary's Risk Rating;
(b) SBA loan portfolio size;
(c) Previous review or examination findings;
(d) Responsiveness in correcting deficiencies noted in prior reviews or examinations; and
(e) Such other risk-related information as SBA, in its discretion, determines to be appropriate.
§ 120.1055   Review and examination results.
(a) Written Reports. SBA will provide an SBA Lender and Intermediary a copy of SBA's written report prepared as a result of the SBA Lender or Intermediary review or examination (“Report”). SBA will provide the Report generally within 60 business days following SBA's conclusion of the review/examination unless SBA notifies the SBA Lender or Intermediary of a later date and the reason for the delay. The Report may contain findings, conclusions, corrective actions, and recommendations. Each director (or manager, in the absence of a Board of Directors) of the SBA Lender or Intermediary, in keeping with his or her responsibilities, must become fully informed regarding the contents of the Report.
(b) Response to review and examination Reports. SBA Lenders and Intermediaries must respond to Report findings, recommendations, and corrective actions, if any, in writing to SBA and, if requested, submit proposed corrective actions and/or a capital restoration plan. An SBA Lender or Intermediary must respond within 45 business days from the date the Report is received unless SBA notifies the SBA Lender or Intermediary in writing that the response, proposed corrective actions or capital restoration plan is to be filed within a different time period (either shortened or extended in SBA's discretion). The SBA Lender or Intermediary response must address each finding, recommendation, and corrective action. In proposing a corrective action or capital restoration plan, the SBA Lender or Intermediary must detail the steps it will take to correct the finding(s); the time within which each step will be taken; the timeframe for accomplishing the entire corrective action plan; and the person(s) or department at the SBA Lender or Intermediary charged with carrying out the corrective action or capital restoration plan, as applicable. In addition, SBA Lenders and Intermediaries must implement corrective actions within 90 calendar days from the date the Report or SBA's letter requiring corrective action is received, unless SBA provides written notice of another timeframe. For purposes of this paragraph (b), a Report will be deemed to have been received on the date it was emailed to the last known email address of the SBA Lender or Intermediary unless the SBA Lender or Intermediary can provide compelling evidence to the contrary.
(c) SBA response. SBA will provide written notice of whether the response and, if applicable, any corrective action or capital restoration plan, is approved, or whether SBA will seek additional information or require other action.
(d) Failure to respond or to submit or implement an acceptable plan. If an SBA Lender or Intermediary fails to respond in writing to SBA, respond timely to SBA, or provide a response acceptable to SBA within SBA's discretion, or respond to all findings and required corrective actions in a Report, then SBA may take enforcement action under this subpart. If an SBA Lender or Intermediary that is requested to submit a corrective action plan or capital restoration plan to SBA fails to do so in writing; fails to submit timely such plan to SBA; or fails to submit a plan acceptable to SBA within SBA's discretion, then SBA may take enforcement action under this subpart. If an SBA Lender or Intermediary fails to implement in any material respect a corrective action or capital restoration plan within the required timeframe, then SBA may undertake enforcement action under this subpart.
§ 120.1060   Confidentiality of Reports, Risk Ratings and related Confidential Information.
(a) In general. Reports and other SBA prepared review or examination related documents are the property of SBA and are loaned to an SBA Lender or Intermediary for its confidential use only. The Reports, Risk Ratings, and related Confidential Information are privileged and confidential as more fully explained in paragraph (b) of this section. The Report, Risk Rating, and Confidential Information must not be relied upon for any purpose other than SBA's Lender oversight and SBA's portfolio management purposes. An SBA Lender or Intermediary must not make any representations concerning the Report (including its findings, conclusions, and recommendations), the Risk Rating, or the Confidential Information. For purposes of this regulation, Report means the review or examination report and related documents. For purposes of this regulation, Confidential Information is defined in the SBA Lender information portal and by notice issued from time to time. Access to the Lender information portal may be obtained by contacting the OCRM.
(b) Disclosure prohibition. Each SBA Lender and Intermediary is prohibited from disclosing its Report, Risk Rating, and Confidential Information, in full or in part, in any manner, without SBA's prior written permission. An SBA Lender and Intermediary may use the Report, Risk Rating, and Confidential Information for confidential use within its own immediate corporate organization. SBA Lender's and Intermediary's must restrict access to their Report, Risk Rating and Confidential Information to their respective parent entities, officers, directors, employees, auditors and consultants, in each case who demonstrate a legitimate need to know such information for the purpose of assisting in improving the SBA Lender's or Intermediary's SBA program operations in conjunction with SBA's Program and SBA's portfolio management (for purposes of this regulation, each referred to as a “permitted party”), and to those for whom SBA has approved access by prior written consent, and those for whom access is required by applicable law or legal process. If such law or process requires SBA Lender or Intermediaryto disclose the Report, Risk Rating, or Confidential Information to any person other than a permitted party, SBA Lender or Intermediary will promptly notify SBA and SBA's Information Provider in writing and in advance of such disclosure so that SBA and the Information Provider have, within their discretion, the opportunity to seek appropriate relief such as an injunction or protective order prior to disclosure. For purposes of this regulation, “consultants” means only those consultants that are under written contract with an SBA Lender or Intermediary specifically to assist with addressing its Report Findings and Corrective Actions to SBA's satisfaction. The consultant contract must provide for both the consultant's agreement to abide by the disclosure prohibition in this paragraph and the consultant's agreement not to use the Report, Risk Rating, and Confidential Information for any purpose other than to assist with addressing the Report Findings and Corrective Actions. “Information Provider” means any contractor that provides SBA with the Risk Rating. Each SBA Lender and Intermediary must ensure that each permitted party is aware of and agrees to these regulatory requirements and must ensure that each such permitted party abides by them. Any disclosure of the Report, Risk Rating, or Confidential Information other than as permitted by this regulation may result in appropriate action as authorized by law. An SBA Lender and Intermediary will indemnify and hold harmless SBA from and against any and all claims, demands, suits, actions, and liabilities to any degree based upon or resulting from any unauthorized use or disclosure of the Report, Risk Rating, or Confidential Information. Information Provider contact information is available from the Office of Capital Access.
§ 120.1070   SBA Lender oversight fees.
Lenders are required to pay to SBA fees to cover costs of examinations and reviews and, if assessed by SBA, other Lender oversight activities.
(a) Fee components: The fees may cover the following:
(1) Examinations. The costs of conducting a safety and soundness examination and related activities of an SBA-Supervised Lender, including any expenses that are incurred in relation to the examination and such activities.
(2) Reviews. The costs of conducting a review of a 7(a) Lender or a 7(a) Lender's loans, and related review activities ( e.g., corrective action assessments, delegated loan reviews), including any expenses that are incurred in relation to the review and such activities.
(3) Monitoring. The costs of conducting monitoring reviews of a 7(a) Lender, including any expenses that are incurred in relation to the monitoring review activities.
(4) Other lender oversight activities. The costs of additional expenses that SBA incurs in carrying out other lender oversight activities (for example, the salaries and travel expenses of SBA employees and equipment expenses that are directly related to carrying out lender oversight activities, technical assistance and analytics to support the monitoring and review program, and supervision and enforcement activity costs).
(b) Allocation. SBA will assess to 7(a) Lender(s) the costs associated with the review, examination, monitoring, or other lender oversight activity, as determined by SBA in its discretion. In general:
(1) Where the costs that SBA incurs for a review, exam, monitoring or other lender oversight activity are specific to a particular 7(a) Lender, SBA will charge that 7(a) Lender a fee for the actual costs of conducting the review, exam, monitoring or other lender oversight activity; and
(2) Where the costs that SBA incurs for the lender oversight activity are not sufficiently specific to a particular Lender, SBA will assess a fee based on each 7(a) Lender's portion of the total dollar amount of SBA guarantees in SBA's total portfolio or in the relevant portfolio segment being reviewed or examined, to cover the costs of such activity. SBA may waive the assessment of this fee for all 7(a) Lenders owing less than a threshold amount below which SBA determines that it is not cost effective to collect the fee.
(c) Billing process. For the examinations or reviews conducted under paragraphs (a)(1) and (2) of this section, SBA will bill each 7(a) Lender for the amount owed following completion of the examination, review or related activity. For monitoring conducted under paragraph (a)(3) of this section and the other lender oversight activity expenses incurred under paragraph (a)(4) of this section, SBA will bill each 7(a) Lender for the amount owed on an annual basis. SBA will state in the bill the date by which payment is due SBA and the approved payment method(s). The payment due date will be no less than 30 calendar days from the bill date.
(d) Delinquent payment and late-payment charges. Payments that are not received by the due date specified in the bill shall be considered delinquent. SBA will charge interest, and other applicable charges and penalties, on delinquent payments, as authorized by 31 U.S.C. 3717. SBA may waive or abate the collection of interest, charges and/or penalties if circumstances warrant. In addition, a 7(a) Lender's failure to pay any of the fee components described in this section, or to pay interest, charges and penalties that have been charged, may result in a decision to suspend or revoke a participant's eligibility, limit a participant's delegated authority, or other remedy available under law.
§ 120.1300   Informal enforcement actions—7(a) Lenders.
(a) Upon a determination that the grounds in § 120.1400 exist, the D/OCRM may undertake, in his/her discretion, one or more of the informal enforcement actions listed in this section and is not restricted from delegating as appropriate. SBA will consider the severity or frequency of the violation or action triggering the ground and the circumstances in determining whether and what type of informal action to take. Circumstances that may lead to SBA taking informal enforcement action rather than formal enforcement action include, for example, when problems are narrow in scope and are correctible and SBA is confident of a 7(a) Lender's Board of Directors (“Board”) and management commitment and ability to correct; where violations are less frequent or less severe but warrant enforcement; or while more fully assessing risk.
(b) Informal enforcement actions include, but are not limited to:
(1) An SBA supervisory letter. The letter may discuss serious or persistent supervisory concerns, as determined by SBA, and expected corrective action by the 7(a) Lender. Supervisory letters include, for example, Notices of Material Non-Compliance;
(2) Mandatory training. SBA may require a 7(a) Lender to complete training to address certain findings, weaknesses, and deficiencies;
(3) A commitment letter or Board resolution. SBA may require a 7(a) Lender to submit a commitment letter or Board resolution, satisfactory to SBA, signed by the 7(a) Lender's Board on behalf of the entity that may:
(i) Include specific written commitments to take corrective actions in response to the 7(a) Lender's acknowledged deficiencies;
(ii) Identify the person(s) responsible for taking the corrective action; and
(iii) Set forth the timeframe for taking the corrective action. The document may be drafted by SBA or the 7(a) Lender;
(4) Agreements. SBA may request that a 7(a) Lender enter into a written agreement with, and drafted by, SBA to address and correct identified weaknesses and/or limit or mitigate risk. The agreement may provide, for example, that a 7(a) Lender take certain actions or refrain from certain actions; and
(5) Other informal enforcement actions. Others as SBA determines appropriate on a case by case basis.
(c) A 7(a) Lender may appeal informal enforcement actions to the appropriate Federal district court or SBA's Office of Hearings and Appeals (OHA) within 20 calendar days of the date of the decision, and in the event of an OHA appeal, OHA will issue its decision in accordance with part 134 of this title. The enforcement action will remain in effect pending resolution of the appeal, if any. SBA is not precluded from taking one or more formal enforcement actions under § 120.1500, or as otherwise authorized by law, while an appeal of an informal enforcement action is pending.
§ 120.1400   Grounds for enforcement actions—SBA Lenders.
(a) Agreements. By making SBA 7(a) guaranteed loans or 504 loans, SBA Lenders automatically agree to the terms, conditions, and remedies in Loan Program Requirements, as promulgated or issued from time to time and as if fully set forth in the SBA Form 750 (Loan Guaranty Agreement), Development Company 504 Debenture, CDC Certification, Servicing Agent Agreement, or other applicable participation, guaranty, or supplemental agreement. SBA Lenders further agree that a violation of Loan Program Requirements constitutes default under their respective agreements with SBA.
(1) Additional agreements by CDCs. By obtaining approval for 504 loans after January 1, 2018, a CDC consents to the remedies in § 120.1500(e)(3) and waives in advance any right it may have to contest the validity of the appointment of a receiver. The CDC agrees that its consent to SBA's application to a Federal court of competent jurisdiction for appointment of a receiver of SBA's choosing, an injunction or other equitable relief, and the CDC's consent in advance to the court's granting of SBA's application, may be enforced upon any basis in law or equity recognized by the court. The CDC's consent does not preclude the CDC from contesting whether or not SBA has established the grounds for seeking the remedy of a receivership. A CDC's consent to receivership as a remedy does not require SBA to seek appointment of a receiver in any particular SBA enforcement action.
(2) Additional agreements by SBA Supervised Lenders (except Other Regulated SBLCs ). By making SBA 7(a) guaranteed loans after January 1, 2018, an SBA Supervised Lender (except an Other Regulated SBLC) consents to the remedies in § 120.1500(c)(3) and waives in advance any right it may have to contest the validity of the appointment of a receiver. The SBA Supervised Lender agrees that its consent to SBA's application to a Federal court of competent jurisdiction for appointment of a receiver of SBA's choosing, an injunction or other equitable relief, and the SBA Supervised Lender's consent in advance to the court's granting of SBA's application, may be enforced upon any basis in law or equity recognized by the court. The SBA Supervised Lender's consent does not preclude such Lender from contesting whether or not SBA has established the grounds for seeking the remedy of a receivership. The SBA Supervised Lender's consent to receivership as a remedy does not require SBA to seek appointment of a receiver in any particular SBA enforcement action.
(b) Scope. SBA may undertake one or more of the enforcement actions listed in §§ 120.1300 and 120.1500, or as otherwise authorized by law, if SBA determines that the grounds applicable to the enforcement action exist. Paragraphs (c) through (e) of this section list the grounds that trigger enforcement actions against each type of SBA Lender. In general, the grounds listed in paragraph (c) apply to all SBA Lenders. However, certain enforcement actions against SBA Supervised Lenders require the existence of certain grounds, as set forth in paragraphs (d) and (e). In addition, paragraph (f) of this section lists two additional grounds for taking enforcement action against CDCs that do not apply to other SBA Lenders. SBA considers the severity or frequency of a violation in determining whether to take an enforcement action and the type of enforcement action to take.
(c) Grounds in general. Except as provided in paragraphs (d) and (e) of this section, the grounds that may trigger an enforcement action against any SBA Lender (regardless of its Risk Rating) include:
(1) Failure to maintain eligibility requirements for specific SBA programs and delegated authorities, including but not limited to: 7(a), PLP, SBAExpress, 504, ALP, PCLP, the alternative loss reserve pilot program and any pilot loan program;
(2) Failure to comply materially with any requirement imposed by Loan Program Requirements;
(3) Making a material false statement or failure to disclose a material fact to SBA. (A material fact is any fact which is necessary to make a statement not misleading in light of the circumstances under which the statement was made.);
(4) Not performing underwriting, closing, disbursing, servicing, liquidation, litigation or other actions in a commercially reasonable and prudent manner for 7(a) or 504 loans, respectively, as applicable. Evidence of such performance or actions may include, but is not limited to, the SBA Lender having a repeated Less Than Acceptable Risk Rating (generally in conjunction with other evidence) or an on-site review/examination assessment which is Less Than Acceptable;
(5) Failure within the time period specified to correct an underwriting, closing, disbursing, servicing, liquidation, litigation, or reporting deficiency, or failure in any material respect to take other corrective action, after receiving notice from SBA of a deficiency and the need to take corrective action;
(6) Engaging in a pattern of uncooperative behavior or taking an action that SBA determines is detrimental to the integrity or reputation of an SBA program, that undermines management or administration of a program, or that is not consistent with standards of good conduct. Prior to issuing a notice of a proposed enforcement action or immediate suspension under § 120.1500 based upon this paragraph, SBA must send prior written notice to the SBA Lender explaining why the SBA Lender's actions were uncooperative, detrimental to the program, undermined SBA's management of the program, or were not consistent with standards of good conduct. The prior notice must also state that the SBA Lender's actions could give rise to a specified enforcement action, and provide the SBA Lender with a reasonable time to cure the deficiency before any further action is taken;
(7) Repeated failure to correct continuing deficiencies;
(8) Unauthorized disclosure of Reports, Risk Rating, or Confidential Information;
(9) Any other reason that SBA determines may increase SBA's financial risk (for example, repeated Less Than Acceptable Risk Ratings (generally in conjunction with other indicators of increased financial risk); failure to properly oversee Agent activity (“Agent” as defined in part 103 of this title); or, indictment on felony or fraud charges of an officer, key employee, or loan agent involved with SBA loans for the SBA Lender);
(10) As otherwise authorized by law;
(11) For immediate suspension of all SBA Lenders from delegated authorities—upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) or (f) of this section, as applicable, exists; and
(ii) Immediate action is needed to protect the interests of the Federal Government (such as where there is risk of immediate harm or loss, a significant program integrity concern, or clear evidence of conduct indicating a lack of business integrity); and
(12) For immediate suspension of all SBA Lenders (except SBA Supervised Lenders, which are covered under paragraph (d)(2) of this section) from the authority to participate in the SBA loan program, including the authority to make, service, liquidate, or litigate 7(a) or 504 loans—upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) or (f) of this section, as applicable, exists; and
(ii) Immediate action is needed to protect the interests of the Federal Government (such as where there is risk of immediate harm or loss, a significant program integrity concern, or clear evidence of conduct indicating a lack of business integrity).
(d) Grounds required for certain enforcement actions against SBA Supervised Lenders (except Other Regulated SBLCs) or, as applicable, Other Persons. For purposes of Subpart I, Other Person means a Management Official, attorney, accountant, appraiser, Lender Service Provider or other individual involved in the SBA Supervised Lender's operations. For the below listed SBA Supervised Lender enforcement actions, the grounds that are required to take the enforcement action are:
(1) For SBA program suspensions and revocations —
(i) False statements knowingly made in any required written submission to SBA; or
(ii) An omission of a material fact from any written submission required by SBA; or
(iii) A willful or repeated violation of SBA Loan Program Requirements; or
(iv) A willful or repeated violation of any condition imposed by SBA with respect to any application or request with SBA; or
(v) A violation of any cease and desist order of SBA.
(2) For SBA program immediate suspension —SBA may suspend an SBA Supervised Lender, effective immediately, if in addition to meeting the grounds set forth in paragraph (d)(1) of this section, the Administrator (or the Deputy Administrator, only if the Administrator is unavailable to take such action) finds extraordinary circumstances and takes such action in order to protect the financial or legal position of the United States.
(3) For cease and desist orders —
(i) A violation of SBA Loan Program Requirements; or
(ii) Where an SBA Supervised Lender or Other Person engages in or is about to engage in any acts or practices that will violate SBA Loan Program Requirements.
(4) For an emergency cease and desist order —
(i) Where grounds for cease and desist order are met,
(ii) The Administrator (or the Deputy Administrator, only if the Administrator is unavailable to take such action) finds extraordinary circumstances, and
(iii) In order to protect the financial or legal position of the United States.
(5) For transfer of Loan portfolio —
(i) Where a court has appointed a receiver; or
(ii) The SBA Supervised Lender is either not in compliance with capital requirements or is insolvent. An SBA Supervised Lender is insolvent within the meaning of this provision when all of its capital, surplus, and undivided profits are absorbed in funding losses and the remaining assets are not sufficient to pay and discharge its contracts, debts, and other obligations as they come due.
(6) For transfer of servicing activity —
(i) Where grounds for transfer of Loan portfolio are met; or
(ii) Where the SBA Supervised Lender is otherwise operating in an unsafe and unsound condition.
(7) For order to remove Management Official —where, in the opinion of the Administrator or his/her delegatee, the Management Official—
(i) Willfully and knowingly committed a substantial violation of the Act, SBA regulation, a final cease and desist order, or any agreement by the Management Official or the SBA Supervised Lender under the Act or SBA regulations, or
(ii) Willfully and knowingly committed a substantial breach of a fiduciary duty of that person as a Management Official and the violation or breach of fiduciary duty is one involving personal dishonesty on the part of such Management Official, or
(iii) The Management Official is convicted of a felony involving dishonesty or breach of trust and the conviction is no longer subject to further judicial review (excludes writ of habeas corpus).
(8) For order to suspend or prohibit participation of Management Official (interim measure pending removal)—where SBA is undertaking enforcement action of removal of a Management Official.
(9) For order to suspend or prohibit participation of Management Official due to criminal charges —where the Management Official is charged in any information, indictment or complaint authorized by a United States attorney with a felony involving dishonesty or breach of trust.
(e) Grounds required for certain enforcement actions against SBLCs and Other Regulated SBLCs —(1) Capital directive. If the AA/CA determines that an SBLC is capitally impaired or is otherwise being operated in an imprudent manner, the AA/CA may, in addition to any other action authorized by law, issue a directive to the SBLC to increase capital consistent with § 120.1500(d)(1).
(2) Civil action for termination. If an SBLC violates the Act or SBA regulations, SBA may institute a civil action to terminate SBLC rights, privileges, and the franchise under § 120.1500(d)(2).
(f) Additional grounds specific to CDCs. In addition to the grounds set forth in paragraphs (b) and (c) of this section, SBA may take enforcement action against a CDC for:
(1) Failure to receive SBA approval for at least four 504 loans during the last two consecutive fiscal years, or
(2) For PCLP CDCs, failure to establish or maintain a LLRF as required by the PCLP.
§ 120.1425   Grounds for formal enforcement actions—Intermediaries participating in the Microloan Program.
(a) Agreement. By participating in the SBA Microloan Program, Intermediaries automatically agree to the terms, conditions, and remedies in this part as if fully set forth in their participation agreement and all other agreements jointly executed by the Intermediary and SBA.
(b) Scope. SBA may undertake one or more of the formal enforcement actions listed in § 120.1540, or as otherwise authorized by law, if SBA determines that any of the grounds listed in paragraph (c) of this section exist.
(c) Grounds in general . For any Intermediary, grounds that may trigger enforcement action against the Intermediary (regardless of its Risk Rating) include:
(1) Failure to comply materially with any requirement imposed by Loan Program Requirements;
(2) Failure to meet any one of the following performance standards:
(i) Coverage of the service territory assigned by SBA, including honoring SBA's determined boundaries of neighboring intermediaries;
(ii) Fulfill reporting requirements;
(iii) Manage program funds and matching funds in a satisfactory and financially sound manner;
(iv) Communicate and file reports within six months after beginning participation in program;
(v) Maintain a currency rate of 85% or more for the Intermediary's SBA Microloan portfolio (that is, loans that are no more than 30 days late in scheduled payments);
(vi) Maintain a default rate in the Intermediary's Microloan portfolio of 15% or less of the cumulative dollars loaned under the program;
(vii) Maintain a staff trained in Microloan Program issues and Loan Program Requirements;
(viii) Maintain the financial ability to sustain the Intermediary's operations (including, but not limited to, adequate capital), as determined by SBA;
(ix) Satisfactorily provide in-house technical assistance to Microloan borrowers and prospective Microloan borrowers; or
(x) Close and fund the required number of microloans per year under § 120.716;
(3) Failure within the time period specified to correct an underwriting, closing, disbursing, servicing, liquidation, litigation, or reporting deficiency, or failure in any material respect to take other corrective action, after receiving notice from SBA of a deficiency and the need to take corrective action;
(4) Engaging in a pattern of uncooperative behavior or taking an action that SBA determines is detrimental to the integrity or reputation of the Microloan Program, that undermines management or administration of the program, or that is not consistent with standards of good conduct. Prior to issuing a notice of a proposed formal enforcement action or immediate suspension under § 120.1540 based upon the grounds discussed in this paragraph (c)(4), SBA must send prior written notice to the Intermediary explaining why the Intermediary's actions were uncooperative, detrimental to the program, undermined SBA's management of the program, or were not consistent with standards of good conduct. The prior notice must also state that the Intermediary's actions could give rise to a specified formal enforcement action, and provide the Intermediary with a reasonable time to cure the deficiency before any further action is taken;
(5) Any other reason that SBA determines may increase SBA's financial or program risk (for example, repeated Less Than Acceptable Risk Ratings (generally in conjunction with other indicators of increased risk) or indictment on felony or fraud charges of an officer, key employee, or loan agent involved with SBA programs for the Intermediary);
(6) For immediate suspension of an Intermediary—upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) of this section exists; and
(ii) Immediate action is needed to protect the interests of the Federal Government (such as where there is risk of immediate harm or loss, a significant program integrity concern, or clear evidence of conduct indicating a lack of business integrity); and
(7) As otherwise authorized by law.
§ 120.1500   Types of formal enforcement actions—SBA Lenders.
Upon a determination that the grounds set forth in § 120.1400 exist, the D/OCRM may undertake, in his/her discretion (and with the involvement of the LOC as appropriate and consistent with its assigned responsibilities), one or more of the following formal enforcement actions for each of the types of SBA Lender listed, and is not restricted from delegating as appropriate. SBA will consider the severity or frequency of the violation or action and the circumstances triggering the ground in determining whether and what type of enforcement action to take. SBA will take formal enforcement action in accordance with procedures set forth in § 120.1600. If formal enforcement action is taken under this section and the SBA Lender fails to implement required corrective action in any material respect within the required timeframe in response to the formal enforcement action, the D/OCRM may take further enforcement action, as authorized by law. SBA's decision to take a formal enforcement action will not, by itself, invalidate a guaranty previously provided by SBA.
(a) Formal enforcement actions for all SBA Lenders —(1) Imposition of portfolio guaranty dollar limit. SBA may limit the maximum dollar amount that SBA will guarantee on the SBA Lender's SBA loans or debentures.
(2) Suspension or revocation of delegated authority. SBA may suspend or revoke an SBA Lender's delegated authority (including, but not limited to, PLP, SBA Express, or PCLP delegated authorities).
(3) Suspension or revocation from SBA program. SBA may suspend or revoke an SBA Lender's authority to participate in the SBA loan program, including the authority to make, service, liquidate, or litigate 7(a) or 504 loans. Section 120.1400(d)(1) sets forth the grounds for SBA program suspension or revocation of an SBA Supervised Lender (except Other Regulated SBLCs). The grounds for SBA program suspension or revocation for all other SBA Lenders are set forth in § 120.1400(c) and, as applicable, paragraph (f) of § 120.1400.
(4) Immediate suspension. SBA may suspend, effective immediately, an SBA Lender's delegated authority or authority to participate in the SBA loan program, or the authority to make, service, liquidate, or litigate 7(a) or 504 loans. Section 120.1400(d)(2) sets forth the grounds for SBA program immediate suspension of an SBA Supervised Lender (except Other Regulated SBLCs). The grounds for SBA program immediate suspension for all other SBA Lenders and the grounds for immediate suspension of delegated authority for all SBA Lenders are set forth in § 120.1400(c)(11) and § 120.1400(c)(12).
(5) Debarment. In accordance with 2 CFR Parts 180 and 2700, SBA may take any necessary action to debar a Person, as defined in § 120.10, including but not limited to an officer, a director, a general partner, a manager, an employee, an agent or other participant in the affairs of an SBA Lender's SBA operations.
(6) Other actions available under law. SBA may take all other enforcement actions against SBA Lenders available under law.
(b) Formal enforcement actions specific to 7(a) Lenders. In addition to those formal enforcement actions applicable to all SBA Lenders, SBA may take the following actions:
(1) Secondary market suspension or revocation (other than temporary suspension and revocation under § 120.660). SBA may suspend or revoke a 7(a) Lender's authority to sell or purchase loans or certificates in the Secondary Market; or
(2) Civil monetary penalty (other than SBA Supervised Lender civil monetary penalty under § 120.465). SBA may assess a civil monetary penalty against a 7(a) Lender. The civil monetary penalty will be in an amount not to exceed the maximum published in the Federal Register from time to time, which will be $306,652 plus any increases required under law. In determining whether to assess a civil monetary penalty and, if so, in what amount, SBA may consider, for example, the following: The gravity ( e.g., severity and frequency) of the violation; the history of previous violations; the financial resources and good faith of the 7(a) Lender; and any other matters as justice may require.
(c) Formal enforcement actions specific to SBA Supervised Lenders and Other Persons (except Other Regulated SBLCs). In addition to those enforcement actions listed in paragraphs (a) and (b) of this section, SBA may take any one or more of the following enforcement actions specific to SBA Supervised Lenders and as applicable, Other Persons:
(1) Cease and desist order. SBA may issue a cease and desist order against the SBA Supervised Lender or Other Person. The Cease and Desist order may either require the SBA Supervised Lender or the Other Person to take a specific action, or to refrain from a specific action. The Cease and Desist Order may be issued as effective immediately (or as a proposal for Order). SBA may include in the cease and desist order the suspension of authority to lend.
(2) Remove Management Official. SBA may issue an order to remove a Management Official from office. SBA may suspend a Management Official from office or prohibit a Management Official from participating in management of the SBA Supervised Lender or in reviewing, approving, closing, servicing, liquidating or litigating any 7(a) loan, or any other activities of the SBA Supervised Lender while the removal proceeding is pending in order to protect an SBA Supervised Lender or the interests of SBA or the United States.
(3) Initiate request for appointment of receiver and/or other relief. The SBA may make application to any Federal court of competent jurisdiction for the court to take exclusive jurisdiction, without notice, of an SBA Supervised Lender, and SBA shall be entitled to the appointment of a receiver of SBA's choosing to hold, administer, operate, and/or liquidate the SBA Supervised Lender; and to such injunctive or other equitable relief as may be appropriate. Without limiting the foregoing and with SBA's written consent, the receiver may take possession of the portfolio of 7(a) loans and sell such loans to a third party, and/or take possession of servicing activities of 7(a) loans and sell such servicing rights to a third party. In deciding whether to seek the appointment of a receiver and in determining the scope of a receivership, SBA will consider the following factors, in its discretion:
(i) for NFRLs:
(A) the existence of fraud or false statements;
(B) the NFRL's refusal to cooperate with SBA enforcement action instructions or orders;
(C) the NFRL's insolvency (legal or equitable);
(D) the size of the NFRL's SBA loan portfolio(s) in relation to other activities of the NFRL;
(E) the dollar amount of any claims SBA may have against the NFRL;
(F) the NFRL's failure to comply materially with any requirement imposed by Loan Program Requirements; and/or
(G) the existence of other non-SBA enforcement actions against the NFRL;
(ii) for SBLCs:
(A) the existence of fraud or false statements;
(B) the SBLC's refusal to cooperate with SBA enforcement action instructions or orders;
(C) the SBLC's insolvency (legal or equitable);
(D) the dollar amount of any claims SBA may have against the SBLC; and/or
(E) the SBLC's failure to comply materially with any requirement imposed by Loan Program Requirements.
(4) Civil monetary penalties for report filing failure under § 120.465. SBA may seek civil penalties, in accordance with § 120.465, against an SBA Supervised Lender that fails to file any regular or special report by its due date as specified by regulation or SBA written directive.
(d) Formal enforcement actions specific to SBLCs. In addition to those supervisory actions listed in paragraphs (a), (b), and (c) of this section, SBA may take the following enforcement actions specific to SBLCs.
(1) Capital directive. The AA/CA may issue a capital directive upon a determination that the grounds in § 120.1400(e)(1) exist. A directive may order the SBLC to:
(i) Achieve its minimum capital requirement applicable to it by a specified date;
(ii) Adhere to a previously submitted capital restoration plan (provided under § 120.462 or § 120.1055) to achieve the applicable capital requirement;
(iii) Submit and adhere to a capital restoration plan acceptable to SBA describing the means and time schedule by which the SBLC will achieve the applicable capital requirement (The SBLC must provide its capital restoration plan within 30 days from the date of the SBA order unless SBA notifies the SBLC that the plan is to be filed within a different time period. SBA may perform an on-site examination (generally within 90 days after the restoration plan is submitted) to verify the implementation of the plan and verify that the SBLC meets minimum capital requirements.);
(iv) Refrain from taking certain actions without obtaining SBA's prior written approval (Such actions may include but are not limited to: paying any dividend; retiring any equity; maintaining a rate of growth that causes further deterioration in the capital percentage; securitizing any unguaranteed portion of its 7(a) loans; or selling participations in any of its 7(a) loans); or
(v) Undertake a combination of any of these or similar actions.
(2) Civil action for termination. SBA may institute a civil action to terminate the rights, privileges, and franchises of an SBLC.
(e) Formal enforcement actions specific to CDCs. In addition to those enforcement actions listed in paragraph (a) of this section, SBA may take any one or more of the following enforcement actions specific to CDCs:
(1) Require the CDC to transfer part or all of its existing 504 loan portfolio and/or part or all of its pending 504 loan applications to SBA, another CDC, or any other entity designated by SBA. Any such transfer may be on a temporary or permanent basis, in SBA's discretion; or
(2) Instruct the Central Servicing Agent to withhold payment of servicing, late and/or other fee(s) to the CDC.
(3) Apply to any Federal court of competent jurisdiction for the court to take exclusive jurisdiction, without notice, of the CDC, and SBA shall be entitled to the appointment of a receiver of SBA's choosing to hold, administer, operate and/or liquidate the CDC; and to such injunctive or other equitable relief as may be appropriate. SBA will limit the scope of the receivership to the CDC's assets related to the SBA loan program(s) except where the CDC's business is almost exclusively SBA-related. SBA will only seek a receivership if there is either the existence of fraud or false statements, or if the CDC has refused to cooperate with SBA enforcement action instructions or orders. Without limiting the foregoing and with SBA's consent, the receiver may take possession of the portfolio of 504 loans and/or pending 504 loan applications, including for the purpose of carrying out an enforcement order under paragraph (e)(1) of this section.
§ 120.1510   Other Regulated SBLCs.
Other Regulated SBLCs are exempt from §§ 120.465, 120.1050(b), 120.1400(d), 120.1500(c), and 120.1600(b). This exemption is not intended to preclude SBA from seeking any other remedy authorized by law or equity.