42624 Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations

3. Section 104.7 is amended by

revising the introductory text of

paragraph (b), paragraph (b)(1) and the

first sentence of paragraph (b)(2) to read

as follows:

§ 104.7 Best efforts (2 U.S.C. 432(i)).

* * * * *

(b) With regard to reporting the

identification as defined at 11 CFR

100.12 of each person whose

contribution(s) to the political

committee and its affiliated political

committees aggregate in excess of $200

in a calendar year (or in an election

cycle in the case of an authorized

committee) (pursuant to 11 CFR

104.3(a)(4)), the treasurer and the

political committee will only be deemed

to have exercised best efforts to obtain,

maintain and report the required

information if:

(1)(i) All written solicitations for

contributions include a clear request for

the contributor’s full name, mailing

address, occupation and name of

employer, and include an accurate

statement of Federal law regarding the

collection and reporting of individual

contributor identifications.

(A) The following are examples of

acceptable statements for unauthorized

committees, but are not the only

allowable statements: ‘‘Federal law

requires us to use our best efforts to

collect and report the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 in a calendar

year;’’ and ‘‘To comply with Federal

law, we must use best efforts to obtain,

maintain, and submit the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 per calendar

year.’’

(B) The following are examples of

acceptable statements for authorized

committees, but are not the only

allowable statements: ‘‘Federal law

requires us to use our best efforts to

collect and report the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 in an election

cycle;’’ and ‘‘To comply with Federal

law, we must use best efforts to obtain,

maintain, and submit the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 per election

cycle.’’

(ii) The request and statement shall

appear in a clear and conspicuous

manner on any response material

included in a solicitation. The request

and statement are not clear and

conspicuous if they are in small type in

comparison to the solicitation and

response materials, or if the printing is

difficult to read or if the placement is

easily overlooked.

(2) For each contribution received

aggregating in excess of $200 per

calendar year (or per election cycle, in

the case of an authorized committee)

which lacks required contributor

information, such as the contributor’s

full name, mailing address, occupation

or name of employer, the treasurer

makes at least one effort after the receipt

of the contribution to obtain the missing

information. * * *

* * * * *

4. Section 104.8 is amended by

revising paragraph (a) and the first

sentence of paragraph (b) to read as

follows:

§ 104.8 Uniform reporting of receipts.

(a) A reporting political committee

shall disclose the identification of each

individual who contributes an amount

in excess of $200 to the political

committee’s federal account(s). This

identification shall include the

individual’s name, mailing address,

occupation, the name of his or her

employer, if any, and the date of receipt

and amount of any such contribution. If

an individual contributor’s name is

known to have changed since an earlier

contribution reported during the

calendar year (or during the election

cycle, in the case of an authorized

committee), the exact name or address

previously used shall be noted with the

first reported contribution from that

contributor subsequent to the name

change.

(b) In each case where a contribution

received from an individual in a

reporting period is added to previously

unitemized contributions from the same

individual and the aggregate exceeds

$200 in a calendar year (or in an

election cycle, in the case of an

authorized committee) the reporting

political committee shall disclose the

identification of such individual along

with the date of receipt and amount of

any such contribution. * * *

* * * * *

5. Section 104.9 is amended by

revising paragraphs (a) and (b) to read

as follows:

§ 104.9 Uniform reporting of

disbursements.

(a) Political committees shall report

the full name and mailing address of

each person to whom an expenditure in

an aggregate amount or value in excess

of $200 within the calendar year (or

within the election cycle, in the case of

an authorized committee) is made from

the reporting political committee’s

federal account(s), together with the

date, amount and purpose of such

expenditure, in accordance with

paragraph (b) of this section. As used in

this section, purpose means a brief

statement or description as to the

reasons for the expenditure. See 11 CFR

104.3(b)(3)(i)(A).

(b) In each case when an expenditure

made to a recipient in a reporting period

is added to previously unitemized

expenditures to the same recipient and

the total exceeds $200 for the calendar

year (or for the election cycle, in the

case of an authorized committee), the

reporting political committee shall

disclose the recipient’s full name and

mailing address on the prescribed

reporting forms, together with the date,

amount and purpose of such

expenditure. As used in this section,

purpose means a brief statement or

description as to the reason for the

disbursement as defined at 11 CFR

104.3(b)(3)(i)(A).

* * * * *

Dated: July 6, 2000.

Danny L. McDonald,

Vice-Chairman, Federal Election

Commission.

[FR Doc. 00–17486 Filed 7–10–00; 8:45 am]

BILLING CODE 6715–01–U

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Business Loan Program

AGENCY: Small Business Administration

(SBA).

ACTION: Final rule.

SUMMARY: In this Final Rule a Certified

Development Company (CDC) will be

permitted to apply to have an area of

operations that goes beyond its state of

incorporation, and beyond a local

economic area in an adjacent state, into

a contiguous state to its state of

incorporation. This amendment

includes specific additional

membership, loan committee, and board

requirements. Also in the Final Rule, for

counties with a population of 100,000 or

more that have an existing CDC that is

adequately serving the county, an

application from a new or expanding

CDC will be permitted for that same

county if the existing CDC has no

objection. In addition, the Final Rule

allows a CDC to contract out

management and staff under specified

circumstances. The changes

implemented by this Final Rule seek to

enhance competition and improve the

effectiveness of the CDC program.

DATES: Effective: August 10, 2000.

Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations 42625

FOR FURTHER INFORMATION CONTACT: Gail

Hepler, 202–205–6490.

SUPPLEMENTARY INFORMATION:

1. CDC Area of Operations

The proposed amendments to

§ 120.802, § 120.810, § 120.822(b),

§ 120.823(b), § 120.835, and § 120.837 in

the Proposed Rule relate to the issue of

where a CDC may operate. Public Law

85–699 published August 21, 1958

enacted Title V of the Small Business

Investment Act of 1958 (‘‘Act’’)—Loans

to State and Local Development

Companies (‘‘Pub. L. 85–699’’). In the

Proposed Rule, SBA set forth its

understanding that Pub. L. 85–699

authorized SBA to assist development

companies that are (1) principally

composed of and controlled by persons

residing or doing business in that

community and (2) formed for the

purpose of furthering economic

development in the community. The

Proposed Rule also noted that when the

§ 503 Development Company Loan

Program was authorized in 1980, its

purpose was to provide financing

through corporations ‘‘formed by local

citizens whose primary purpose is to

improve their community’s economy.’’

(Emphasis added. Legislative History,

Pub. L. 100–590, p. 22.) Aware that this

concept of local citizens working to

develop and improve their local

economy is a fundamental aspect of

SBA’s Development Company Loan

Program (‘‘504 Program’’), SBA

attempted in the Proposed Rule to

balance this fundamental principle of

local economic development with SBA’s

goal of increasing the availability of 504

lending to small businesses across the

country. The Small Business Investment

Act, section 504, authorized the private

sale of CDC debentures to fund CDC

loans. The program is now traditionally

referred to as the 504 program.

a. Adequately Served Counties

In the Proposed Rule, SBA proposed

to allow an applicant CDC (§ 120.810) or

existing CDC (§ 120.835) to apply to

operate in a county within its State of

incorporation even if that county is

currently being ‘‘adequately served’’ (as

defined by SBA) by another CDC, if that

county has a population of 100,000 or

more and only one CDC incorporated in

that State includes that county in its

Area of Operations. SBA stated in the

Proposed Rule that, ‘‘this will give small

businesses more choices.’’ In this Final

Rule, SBA retains the conditions set

forth in the Proposed Rule and, for the

reasons set forth below, adds the

condition that the CDC that includes the

county in its Area of Operations submit

a statement of no objection.

Several commentors supported

competition among CDCs. A typical

supporting comment read: ‘‘Because we

are focused on the end customer (i.e.,

the citizens of our member

communities) we believe he will only be

aided by a higher level of competition—

whether because it makes us sharper

and more innovative, or because there is

greater exposure for the 504 program,

resulting in more loans made to more

borrowers.’’ A few commentors noted

that competition in overlapping Areas of

Operations has already been successful

in their areas: ‘‘Competition is good for

the 504 Loan Program * * *

competition stimulated activity, service

to the community and enhancement of

the 504 Loan Program.’’

On the other hand, more than threequarters of the commentors were

opposed to the Proposed Rule for

several reasons. Many commentors were

concerned that competition in the more

densely populated counties of a CDC’s

Area of Operations would affect the

CDC’s ability to do projects in more

rural counties. One commentor stated:

‘‘I am concerned that this proposed

regulation would have the opposite

effect of that intended. Allowing CDCs

to form in counties that are already

being adequately serviced would

encourage participation in those areas

that offer a high probability of success,

while leaving the ‘Rural,’ ‘Less-Growth’

areas unattended. In fact, an existing

CDC may be potentially forced to reduce

its focus from the rural areas of its

territory, to those areas attractive to a

start-up CDC * * *. The National

Association of Development Companies

(NADCO), the CDC industry trade

association, commented that ‘‘we are

deeply concerned that the Proposed

Rule will foster a high level of CDC

competition in areas of high small

business density, to the detriment of

rural areas where it might be difficult to

make and service 504 loans.’’

Another concern expressed by several

commentors was that increased

competition might burden or reduce a

small CDC’s cash flow thus hurting its

ability to cover its expenses related to

504 loans. One commentor stated: ‘‘It

takes a population base of several

hundred thousand to produce sufficient

revenue for a CDC to be self-sustaining.

What is being proposed will ultimately

weaken existing CDCs and result in

cutting services and assistance to (small

businesses) as CDCs try to cut expenses

due to less revenue.’’ Several

commenters stated that many CDCs

depend on the cashflow of the 504 loan

program to subsidize other local

economic activities, such as

participation in the microloan program

or the provision of a revolving line of

credit program. These commentors

indicated their beliefs that a CDC

approved to expand into an adequately

served county would not reinvest in the

local community. ‘‘Our concern is that

another CDC operating in our

community would not be reinvesting in

our community, but taking the fee

income generated and spending it on

marketing and salaries instead of the

businesses that are in [the county].’’

Many commentors used the term

‘‘cherry-picking’’ to describe the effect

of allowing other CDCs to compete in

the more lucrative markets: ‘‘Market

forces will lead the larger, more urban

CDCs to ‘cherry pick’ the more lucrative

projects from larger companies who

require a lower level of service and

assistance. Organizations such as ours

use the returns from the occasional large

debentures to subsidize the higher costs

of providing service to small, needier

borrowers * * * It would be extremely

damaging to the cause of competition in

the 504 loan program if the large CDCs

were ever able to invade the territory of

performing small CDCs. Many of the

small rural performing CDCs just barely

bring in enough revenue to support our

small staffs, and a ‘cherry picking’

statewide [CDC] would eventually be

able to rob many of us of the ability to

operate. The result would be to decrease

competition rather than an increase.’’

The comments made it clear to SBA

that concerns that competition will hurt

a CDC’s ability to promote economic

development in less densely populated

counties should be further considered.

The comments indicated that many

CDCs subsidize their rural economic

development efforts with the servicing

fees generated by 504 loans made in the

more densely populated counties. The

comments also indicated that this

subsidization would be frustrated by the

loss of revenue caused by increased

competition in the more densely

populated counties. In addition, CDCs

would be inspired to ‘‘cherry pick’’ or

seek counties with high small business

density to gain more fee income. The

result would likely be a general shift of

CDC resources and focus on highdensity counties at the expense of more

rural counties.

SBA remains committed to the

concept of expanding local economic

development through increased

competition in the 504 program. The

commentors raised legitimate concerns

but did not provide enough evidence or

other support for SBA to totally accept

their assessment of the negative impact

competition would have on CDC

operations. However, the negative

predictions by the commentors raised

42626 Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations

additional issues that require further

consideration as SBA seeks to increase

competition in the 504 program. For

example, it is a reasonable assertion that

the drain in resources and possible loss

of loan volume caused by competition

in counties with high small business

density could hinder a CDC’s efforts to

serve rural counties. The question is

whether, and to what degree, this really

will happen. SBA believes the best way

to respect the concerns of the

commentors while remaining

committed to increasing competition is

to approach increasing competition in

two phases. The first phase will be

implemented by this Final Rule. By this

Rule, SBA will adopt a policy allowing

an applicant or expanding CDC to apply

to serve a county with a population of

100,000 or more if:

• The county is part of the Area of

Operations of only one CDC;

• The county has not become part of

another CDC’s Area of Operations

within the past 24 months;

• The applicant CDC is incorporated

in the State where the county is located;

and

• The CDC that includes the county

in its Area of Operations submits a

statement of no objection.

SBA added in this Final Rule the

requirement that the CDC already

serving the county submit a statement of

no objection so that such CDC could

oppose competition in the area if such

competition would cause a negative

impact on the original CDC’s economic

development efforts. SBA added this

requirement because we believe there is

merit to the concerns that competition

may, in some circumstances, hinder the

original CDC’s economic development

efforts. So, at this time, SBA will give

CDCs the opportunity to draw on their

knowledge of their markets and

operations to assess whether

competition will hurt their economic

development efforts. It has been SBA’s

experience that a CDC will not object to

the introduction of competition when it

will help serve the local community in

ways that the existing CDC is not able

to do and will not be counterproductive

to the CDC’s ability to meet its local

economic objectives.

The second step that SBA will take to

increase competition in the 504 program

will be its publication of an Advanced

Notice of Proposed Rulemaking

(‘‘ANPR’’) specifically soliciting

comments on some of the concerns

regarding competition raised in

response to the Proposed Rule. This

ANPR will be published shortly and

will give SBA the opportunity to further

consider the issue of competition as

well as other 504 program issues.

b. Multi-State Expansions

When Title V of the Small Business

Investment Act of 1958—Loans to State

and Local Development Companies—

was enacted by Public Law 85–699 on

August 21, 1958, it defined a

Development Company as ‘‘an

enterprise * * * formed for the purpose

of furthering economic development of

its community and environs, and with

authority to promote and assist the

growth and development of smallbusiness concerns in the areas covered

by their operations * * * A local

development company is a corporation

chartered under any applicable State

corporation law to operate in a specified

area within a State * * * A local

development company shall be

principally composed of and controlled

by persons residing or doing business in

the locality * * *’’ (13 CFR part 108,

section 2, as of January 1, 1967).

When the § 503 Development

Company Loan Program was authorized

in 1980, its purpose was to provide

financing through corporations ‘‘formed

by local citizens whose primary purpose

is to improve their community’s

economy. They assist in the planned

economic growth of the community by

promoting and assisting the

development of small business concerns

in their area.’’ (Legislative History, Pub.

L. 100–590, p. 22) It continues, ‘‘to

qualify for this program, a development

company must be chartered in the State

where it intends to operate * * *’’ (Id.

at 23)).

Since the inception of the 504

Program, no CDC has been certified to

operate permanently in more than one

State, except for a relatively few

circumstances when the CDC’s

operations crossed state lines, but only

to the extent that the area was

determined to be a Local Economic

Area. Regulations published on August

10, 1982, permitted a CDC to operate

within two States if ‘‘(i) a State line

bisects a city, in which case the 503

company may operate city-wide or (ii)

the 503 company has obtained prior

written approval to operate within a

contiguous economic area, as

determined by SBA, which crosses a

State line.’’ Since this regulation was

published, of the approximately 270

active CDCs, only nine have applied for

and been approved by SBA to have their

permanent Areas of Operations cross

State lines to include a contiguous bisected local economic area. Currently,

the permanent Area of Operations of all

the other CDCs are within their State of

incorporation.

There still remain substantial

numbers of under-served counties. And,

a few CDCs proposed to expand their

Areas of Operations beyond their States

of incorporation and beyond contiguous

bi-sected local economic areas to

include some of these under-served

counties. To address these issues, and to

achieve the goal of stimulating 504

lending activity in underserved areas,

SBA proposed to permit out-of-state

CDCs (Multi-State CDCs) to apply to

cover such underserved areas. At the

same time, SBA designed the Proposed

Rule to ensure that Multi-State CDCs

continue the 504 Program’s statutory

intent that local citizens responsible for

assuring that the program contribute to

the local economic development in their

communities.

The many comments on this part of

the Proposed Rule generally fall into

three categories: (1) Those opposed to

Multi-State CDCs under any

circumstances; (2) those favoring MultiState CDCs, but critical of the proposed

organizational requirements; and (3)

those supporting the strict controls SBA

proposed on Multi-State CDCs which

are designed to continue the emphasis

on local involvement and influence in

the economic development of each

State. Approximately one-quarter of the

comments were in the second category

with the large majority of the comments

closely divided between the first and

third categories.

Commentors in the first category did

not support the concept of Multi-State

CDCs contained in the Proposed Rule.

These commentors strongly disagreed

with allowing CDCs to cross state lines

to serve underserved counties.

Representative comments include: ‘‘I

cannot see how permanent expansion

beyond State borders * * * can

conceivably result in increased local

involvement * * * It seems contraintuitive to me * * * ’’ and ‘‘Creating

multi-state CDCs and removing the

territorial boundaries may in the shortrun bolster the program’s production

numbers, but ultimately the overall

quality and integrity of the program will

suffer.’’ Many of these commentors

believed that the local citizens helping

their local economy principle would be

violated. One commentor stated, ‘‘* * *

the 504 program is grounded in federal

legislation which mandates a strong role

for local community involvement in the

loan making process * * * If non-local

and out of state CDCs have the ability

to make and process loans, I believe you

will lose the closeness and community

involvement and you eventually will

end up with a production line lending

program, which, I believe, is contrary to

the program’s intent.’’ Other

commentors believe that large CDCs

would develop and drive many small

Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations 42627

CDCs out of business: ‘‘* * * the

growth of large CDCs will ultimately

prove the death knell of smaller CDCs

that know their local areas well but do

not have skills or capacity to overcome

the relationships large CDCs can build

with lenders.’’ (Emphasis in the

original.) SBA understands the concerns

but, at this time, believes that the

increased program access for small

businesses, that would result from

allowing out-of-state CDCs justifies

allowing such expansions. However,

SBA will closely monitor the effect this

rule has on smaller CDCs and will

propose additional appropriate

regulatory changes, if necessary.

The second group of commentors

favored allowing CDCs to cover underserved counties outside of their States of

incorporation but believed the proposed

conditions were too restrictive. One

commentor stated: ‘‘Your proposal to

restrict the use of funds earned by a

CDC to the area in which they were

realized is impractical and will only

make expansions impossible * * * The

funds of a company are budgeted where

they are needed to produce the most

product and generate income.’’ Most of

these comments were centered on the

proposed membership and Board

requirements. A representative

comment is the following: ‘‘We suggest

* * * the membership requirement be

modified to reflect a total membership

proportional with the CDC’s population

served in each of its areas of

operations.’’ Another commentor stated

that it opposed the requirement for a

‘‘CDC to expand its Board of Directors

substantially if the CDC is authorized to

expand into a limited number of

counties in a neighboring state.’’

SBA seriously considered requiring

proportional representation for both

CDC membership and Board

membership but ultimately reasoned

that a Multi-State CDC should meet the

same minimum local presence

requirements in each State as any other

CDC incorporated in that State. The

current Board and membership

requirements in each State are minimum

requirements for all CDCs in the State

irrespective of the size of their Area of

Operations. Thus, adopting a

‘‘proportional’’ standard for Multi-State

CDCs would mean that a Multi-State

CDC with the minimum number of

members would need fewer members in

the State to satisfy SBA requirements

than a new CDC applying to cover the

same area in that same State. To avoid

these kinds of outcomes, SBA

concluded that a Multi-State CDC

should be required to meet the same

membership and Board requirements a

new CDC would need to meet if it

applied to cover the under-served

county or counties in the State.

In considering these comments,

though, SBA has reconsidered the

requirement for equal representation on

the Board for each state in which the

CDC is approved to operate by SBA. A

Multi-State CDC must meet the

minimum requirement of having a

Board of Directors comprised of at least

three of the four membership groups

(government organizations responsible

for economic development in the Area

of Operations and acceptable to SBA;

financial institutions that provide

commercial long-term fixed asset

financing in the Area of Operations;

community organizations dedicated to

economic development in the Area of

Operations; and businesses in the Area

of Operations) for each State in which

it operates. However, the Final Rule will

not require that the Board composition

also be equally divided by the number

of States in which the Multi-State CDC

operates. SBA was persuaded that

maintaining equal representation on the

Board for each state could be

impractical and overly burdensome as

Directors’ vacancies were created as a

result of resignations or other reasons.

Commentors in this group also

criticized other restrictions on MultiState CDCs found in the Proposed Rule.

A representative comment was the

following: ‘‘(The commentor) disagrees

with the proposed regulation of not

counting Multi-State CDC loan

production when SBA is considering

either a new CDC certification or an

expansion by an existing CDC

[incorporated in the state]. In order to

prepare for production in a new market,

a Multi-State CDC would be required to

make a substantial commitment of

personnel and capital. Allowing another

CDC to be approved while a Multi-State

CDC is developing a new territory

would serve as a deterrent for expansion

of services in under-served areas across

state lines.’’ SBA considered these

comments and was persuaded that if

SBA required the same membership,

Board membership, and financial

investment that it requires of a CDC

incorporated in the state, then the

Multi-State CDC should receive the

same protection of its area as any CDC

incorporated in the State. In the final

rule SBA has modified the Proposed

Rule to treat Multi-State CDCs the same

as other CDCs in regards to counting

loans to determine whether an area is

adequately served and also to protect

the area from expansion by another

applicant CDC for a period of twentyfour months.

Commentors in the last category were

generally opposed conceptually to

Multi-State expansions but also

recognized the failure of CDCs

incorporated in the States where the

under-served counties were located to

provide adequate access to the 504

Program in these under-served areas.

One commentor stated: ‘‘There are a few

cases where entire States are

substantially under-served by 504. It is

my opinion that in these States local,

regional and statewide initiatives have

failed to invest sufficient resources

needed to insure the operation of a

successful program. This is not the

responsibility of SBA nor is it SBA’s

fault.’’ While reluctant to accept the

concept of Multi-State CDCs, they

support the organizational restrictions

in the Proposed Rule. A commentor

stated that ‘‘Overall, I believe the

Agency has done an excellent job on the

proposed rules for multi-state CDCs, and

if anything, did not go far enough.’’

Another commented: ‘‘If it’s determined

that a multi-state CDC is a necessity

* * * the safeguards in the Proposed

Rule are carefully drawn and we would

support them.’’ Another commentor

agreed with SBA’s requirement that a

Multi-State CDC ‘‘must abide by the

same organizational rules, membership

requirements, Board of Directors

makeup, and uses of income. A CDC

cannot truly serve an area of operations

remote from the territory without local

representation.’’ Another expressed his

concerns as follows: ‘‘Our experience

regarding multi-state CDCs

demonstrates a need for better

accountability, which could occur

through local memberships, directors

and loan review committees.’’

Another set of comments in this

category suggested a modification to the

Proposed Regulations by recommending

that the under-served counties that the

Multi-State CDC could apply for had to

be in a state that was contiguous to the

Multi-State CDC’s State of

incorporation. The following are

examples of comments that favored the

addition of the concept of ‘‘contiguous’’

to the Area of Operations covered by

Multi-State CDCs. One stated, ‘‘I would

strongly encourage you to add

‘contiguous’ to any application being

considered for expansion * * * I think

to remove contiguous totally takes our

economic development identity, that is

unique to the 504 program, and throws

it in the trash. Any CDC that applies to

cross state lines * * * in a noncontiguous basis, in almost every

instance, is not concerned with

economic development, they are

concerned with money.’’ Another

stated, ‘‘CDCs need to operate in a

contiguous area * * * Each market area

42628 Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations

requires a CDC to develop an

understanding of the types of

businesses, commercial lenders, etc. in

that area. If a CDC’s area is not

contiguous then the CDC will try to

standardize their lending process for all

loans in all types of lending

environments.’’

SBA was persuaded by the rationale

expressed in these comments and has

decided to add to the Final Rule the

requirement that any Multi-State

expansion be into a ‘‘contiguous’’ state

in order to further ensure the local

focus. The change is also based, in part,

on SBA’s decision not to require MultiState CDCs to have an equal number of

Board Members in each state in which

it operates. As a result of this change, it

will now be possible for a Multi-State

CDC to have a majority of Board

Members from its State of incorporation

control the out-of-state activities of the

CDC. SBA believes this change makes it

more important for SBA to monitor

carefully how Multi-State CDC local

activities are shaped by local members.

Given this concern, SBA reasons that

limiting Multi-State CDC expansions to

states contiguous to its State of

incorporation will serve several goals.

First, the temporary CDC expansions

discussed in the Proposed Rule that

engendered the Multi-State CDC

concept were all into contiguous states

to the expanding CDC’s State of

incorporation. Second, it will limit the

number of expansions, thus making it

more likely that SBA will be able to

carefully monitor all Multi-State CDC

expansions. Third, the closer physical

proximity of the home office to the outof-state operations will make it more

likely that members will have some

familiarity with the markets in each

state covered by the CDC and will

participate in scheduled meetings, thus

facilitating the development of local

strategies appropriate for each

community the CDC covers. This will

help ensure that corporate policy does

not favor the CDC’s Area of Operations

in its State of incorporation over the

Multi-State areas in the contiguous

states. Thus, when the Executive

Director or full Board vote on matters,

their understanding of all markets the

CDC covers will be stronger as a result.

However, in order to give more

specialized consideration to the issue of

whether CDCs should be allowed to

expand into non-contiguous states, SBA

will include questions related to this

topic in the ANPR that it intends to

publish shortly. SBA also intends to use

the ANPR process to solicit opinions

regarding whether CDCs that are

approved to operate across state lines as

Multi-State CDCs should then also be

eligible to expand into contiguous local

economic development areas under the

regulations regarding those expansions.

c. Other

SBA initially proposed to limit the

eligibility of counties to be included in

an applicant CDC’s or expanding CDC’s

Area of Operations to counties that had

not become part of an Area of

Operations of another CDC within the

last 24 months. This proposed

regulation was designed by SBA to

permit a CDC to benefit from the upfront

costs of establishing itself in a county.

All comments were in favor of the new

restriction. However, a few of the

comments suggested that the timeframe

of the restriction should be increased to

36 months. A representative comment

states: ‘‘After a new or expanding CDC

is allowed to enter a county, the

proposed regulation provides that

another application will not be

approved for 2 years. In our opinion, a

CDC given a new county should be

allowed 3 years before another CDC is

allowed to operate in the county. The

proposed 2 year period is insufficient.

Generally, it takes 18 to 24 months just

to establish the 504 program in a new

market.’’ SBA considered these

comments but was not persuaded that

the 24-month timeframe, which did not

exist as a regulation previously, is not

adequate.

SBA received several comments on

SBA’s Proposed Regulation that deleted

the timeframe for the AA/FA to make

his or her final decision on applications

for a new CDC or an existing CDC to

expand its Area of Operations

requesting that the 504 Program retain a

specific for such decisions. SBA

understands the desire to have an

identified timeframe and intends to use

reasonable efforts to issue timely

decisions. However, SBA anticipates

that the Final Rule will significantly

increase the volume and complexity of

the applications and may involve many

new policy considerations. Given these

factors and SBA’s limited staff, SBA

believes that establishing a specific

timeframe would not be feasible or

desirable.

2. CDC Organization and Operational

Requirements

The proposed amendments to

§ 120.820, § 120.822, § 120.823,

§ 120.824, and § 120.825 in the

Proposed Rule relate to CDC

organization and operational

requirements. SBA received many

comments and suggestions on the

proposed changes covering CDC

membership, Boards of Directors, and

professional management and staff.

In this Final Rule SBA adopts the

policies concerning a CDC’s Board of

Directors as set forth in the Proposed

Rule, with one modification. In light of

the comments received on the Proposed

Rule and several other factors, as

discussed below, SBA has decided to

amend the Proposed Rule to allow a

CDC Manager to serve on its Board of

Directors.

In the Proposed Rule, SBA prohibited

all CDC staff, including the CDC

Manager, from serving on the CDC’s

Board. SBA proposed this because we

were concerned about the apparent

possible loss of Board objectivity and

independence if a Board were

comprised of a number of CDC

employees. SBA was concerned that a

Board comprised of such members

would lack the detached objectivity

necessary to evaluate properly the

performance of the CDC. However, as

addressed below, SBA has amended the

Final Rule to allow the CDC Manager, as

the only CDC staff member, to

participate as a Board Member. SBA

believes that this approach will allow us

to account for the concerns expressed by

commentors while not impacting a

Board’s ability to operate

independently.

In response to the Proposed Rule,

SBA received several comments

supporting the prohibition against CDC

staff and management serving on its

Board. However, more than two-thirds

of the comments indicated that

requiring CDCs to remove CDC

Managers from their Boards would

disrupt unnecessarily CDC operations.

Commenters stated that CDC Managers

typically manage the delivery of many

small business assistance programs,

including the 504 loan program, making

it impractical, and therefore disruptive,

to prohibit a CDC Manager from serving

on a Board which oversees the full

compliment of a CDC’s economic

development programs. SBA is

persuaded by these comments and now

better understands how disruptive it

could be to prohibit a CDC Manager

from serving on the CDC’s Board.

In addition, the comments suggested

that allowing only one individual

employed by the CDC, the CDC

Manager, to serve on the Board would

not affect a Board’s objectivity and

independence. SBA now agrees with

this position. Currently, for each Board

vote, SBA regulations require a quorum

of 5 Directors. If only one of those

Directors is an employee of the CDC,

then it is unlikely that a Board’s

objectivity and independence would be

compromised. The authority of all the

other Directors to vote on, and their

responsibility to monitor, CDC

Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations 42629

operations will help assure that each

Board decision is independent and

objective.

SBA also notes that there are other

protections in place that will help

assure independent action by the Board

even when a CDC Manager serves on it.

First, each Board Member has a general

fiduciary duty of care and good faith to

the CDC. This duty applies to the CDC

Manager if the Manager sits on the

Board. Secondly, with the Final Rule

SBA requires that each Board have a

member, other than the CDC Manager,

who has commercial loan experience.

This will assure that the Directors who

are not employees of the CDC will have

the requisite expertise to objectively and

independently evaluate loan decisions.

Thirdly, with this Final Rule SBA

prohibits a Board Member from being a

contractor with the CDC. SBA has

encountered situations where CDC

Managers who serve as Directors have

recommended that the CDC contract

with them for certain services. SBA

believes that such a recommendation

could impact a Board’s objectivity and

independence. Therefore, when the CDC

Manager is a contractor, the manager

will not be permitted to serve on the

CDC’s Board.

In light of all of the above, in this

Final Rule, SBA has decided to uphold

the prohibition against CDC staff serving

as Board Members, but has decided to

permit the CDC Manager to serve on the

Board, provided that the CDC Manager

is not a contractor, or an associate of a

contractor, of the CDC. SBA believes

that this approach will allow CDCs to

operate most efficiently and

appropriately to manage the delivery of

all of the CDC’s economic assistance

programs. In addition, SBA believes that

having only one member of the Board

employed by the CDC will not adversely

impact the Board’s objectivity and

independence. Moreover, the other

protections contained in the Final Rule

(e.g., the prohibition against contractors

serving as Board Members) and the

general fiduciary duties of Board

Members will further protect the

objectivity and independence of the

Board.

As a result of some comments, SBA is

clarifying the Proposed Rule regarding a

CDC’s Loan Committees. The Proposed

Rule established requirements for CDC

Loan Committees to ensure that those

CDCs that operated with Loan

Committees were also in compliance

with the current regulations that require

a vote by a quorum of the CDC’s Board

on every 504 loan approval or servicing

action. Some comments indicated

confusion as to what was meant by a

Loan Committee. One commentor stated

that ‘‘We have a group of 30 Members

of our Board of Directors that meet semiannually. [Eleven] of those Board

Members then meet as needed (once or

twice a month) to approve loans and

take servicing and collection actions,

etc. These Loan Committee Members are

elected by the full Board and are made

up of the four required representative

groups.’’ What this commentor

describes meets the current regulatory

requirements for CDC Board loan

approval and servicing actions. In the

Proposed Rule, SBA intended to deal

only with Loan Committees composed

of non-Board Members whose actions

must be ratified by a quorum of the

CDC’s Board in order to comply with

the current regulations.

A few comments expressed concerns

that the proposed required composition

of the Loan Committee would be

redundant to the requirements of the

Board membership. One commentor

stated that he did not ‘‘understand the

need for the Board to ratify the actions

of the Loan Committee if the Loan

Committee structure meets the make-up

requirements of the 3 groups, has a

quorum of at least 5, (and) has a lender

at the meeting * * *’’ SBA was

persuaded by the comments of the need

to clarify the definition of Loan

Committee by adding ‘‘non-Board

Members’’ to the definition in the Final

Rule. Since the Board must ratify the

decisions of the Loan Committee, SBA

agrees that some of the requirements in

the Proposed Rule may be eliminated.

The final rule eliminates the

requirement that the Loan Committee

members represent three of the four

membership groups. SBA believes that

regulations governing Loan Committees

are especially important for Multi-State

CDCs because such regulations help

ensure local involvement with CDC

loan-making decisions. Since the

requirements for the Board of Directors

for Multi-State CDCs have been

modified in the Final Rule, the role of

Loan Committees in each State for a

Multi-State CDC will have increased

importance to assure the local influence

over 504 loan decisions and to minimize

concerns about the Multi-State CDC

concept expressed.

In the Proposed Rule, SBA clarified

under what circumstances a CDC may

contract out its management and staffing

functions. Some of the comments

received indicated confusion regarding

what was meant by contracts. The

opening paragraph of the Proposed Rule

states: ‘‘CDCs may obtain, under written

contract, marketing, packaging,

processing, closing, or liquidation

services provided by qualified

individuals and entities who live or do

business in the CDC’s Area of

Operations.’’ This explanation was

apparently not clear because a few

commentors raised concerns about the

requirement that SBA approve contracts

entered into by a CDC for space,

equipment, etc. One commentor stated:

‘‘This type of micro-management is

neither necessary nor within the spirit

of SBA oversight.’’ SBA agrees that this

would indeed be micro-managing. The

Final Rule adds language to clarify that

contracts for other than staffing or

management do not have to be reviewed

and approved by SBA. In the Final Rule,

SBA also is adding the word ‘‘servicing’’

since that was inadvertently omitted in

the list of staff functions that may be

contracted out. In the Preamble to the

Proposed Rule, SBA stated that ‘‘No

contractor or Associate of a contractor

may be a voting or non-voting member

of the CDC’s Board or Loan Committee.’’

However, SBA also inadvertently

omitted the phrase ‘‘or non-voting’’ from

§ 120.824(e) of the Proposed Rule. SBA

has corrected this omission by adding

the phrase ‘‘or non-voting’’ to

§ 120.824(f) of this Final Rule.

Many commentors were in favor of

the Proposed Rule regarding a CDC’s

staff requirements. One commentor

states, ‘‘The proposed regulation gives

further emphasis on full-time CDC

management and on the manager being

an employee, not a contractor. We

heartily endorse this amendment and

look forward to the enforcement of this

regulation in the field.’’ The following

comment is representative of several

CDCs’ concerns about contracting: ‘‘I

believe it is very important that the CDC

become independent of any affiliate

* * * providing financial and

management support as soon as deemed

economically feasible by SBA upon its

contract review as required every two

years. This would avoid the possibility

of the affiliate * * * rolling up its fee

charges when the CDC starts to produce

an income beyond the cost of the

current contract. This could seriously

inhibit the growth of the CDC and its

services provided. I know this has

happened in the past and is still

(occurring).’’

Several commentors were in support

of the Proposed Rule with a

modification. A typical comment

follows: ‘‘Our organization contracts

with a local, one county, non-profit,

economic development corporation.

Because they have four employees, they

can easily obtain health insurance, etc.

for employees. We do not believe

insurance companies will provide

health insurance for a company with

one employee. If they do, then the costs

for the insurance will be higher.’’

42630 Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations

Another commentor is more specific:

‘‘The staff [of the non-profit affiliate] is

required to maintain individual daily

logs, in hours, for each revenue center

(SBA, EDA, USDA, and Indirect) that is

being benefited to prevent overcharging

any loan program. One of EDA’s audit

contentions was their funds

supplemented the SBA 504 Loan

Program. Subsequently, each program

has its own balance sheet and operating

statement and pays its fair share of the

cost of the lending organization.

Compliance is assured by an annual

certified audit and agency review * * *

We respond to the loan requests without

regard for the specific loan program.’’

SBA is persuaded by these comments

and has modified the Final Rule to

eliminate the requirement that the nonprofit affiliate that is contributing staff

to the CDC must be financially

subsidizing the CDC’s operations. SBA

was originally concerned that the nonprofit affiliate could overcharge the CDC

for the contract staff. SBA is persuaded

by the comments that SBA’s review of

such contracts will minimize such risk.

SBA notes that, in its experience, nonprofit affiliates have no history of

overcharging CDCs for staff. SBA

reasons that non-profit affiliates have

less incentive to overcharge than profitmaking entities which occasionally have

been found by SBA to charge staff costs

that may be inappropriate. Finally,

SBA’s current policy already requires

SBA to pre-approve all CDC contracts

for staff and management as well as

review the contracts annually. At this

time, SBA believes its continued review

that its oversight responsibility make of

staff and management contracts is

appropriate to minimize the possibility

of abuse. We intend, however, to further

address this issue in the Agency’s ANPR

to be published soon.

Some of the comments were

concerned with SBA’s role in preapproving and reviewing all

management and staff contracts. SBA

considered these comments but did not

modify the Proposed Rule regarding

SBA oversight responsibilities. SBA is

the regulatory agency for CDCs and, as

such, is responsible for overseeing and

reviewing many aspects of a CDC’s

operations. When a CDC contracts out

its staff and management requirements,

SBA must review such contracts to

satisfy its CDC oversight

responsibilities. Otherwise, SBA would

fail in its responsibility to review how

a CDC is satisfying its most fundamental

responsibilities to borrowers as required

by SBA regulations.

Although, as mentioned previously,

several commentors, were strongly in

favor of contracts having a limited term,

other commentors were concerned that

the proposed restrictions would

increase the cost of contracted services

as well as limit the choice of

contractors. A representative comment

was the following: ‘‘The time

constraint—2 years—being the

maximum length of a contract is far too

short of a period of time. It is frequently

normal and customary business practice

to negotiate contract for services that

exceed two years. We would urge SBA

to avoid needless contract length

regulation that could lead to higher

costs and lower quality contract services

for CDCs.’’ SBA considered these

comments and has modified the

Proposed Rule to remove the time

constraint initially proposed. SBA

believes that other requirements in the

Final Rule, such as the requirement that

SBA review the contracts annually and

the requirement that the contract clearly

identify procedures satisfactory to SBA

which permit the CDC to terminate the

contract prior to its expiration date, are

sufficient to monitor contractual

relationships. SBA will continue to

review the matter and intends to readdress this issue in the ANPR.

A few commentors wanted to

continue to contract with for-profit

affiliates that receive income from the

CDC that exceeds the fees for actual

services performed. SBA considered

these comments but was not persuaded

that the benefit to a CDC from such

arrangements outweigh concerns about

shifting 504 income to other entities. As

a commentor that was concerned about

the possible impact of aggressive

contracting out explained: ‘‘There are

very profound factors which drive

generally for-profit packagers and

similar service providers to attempt, if

you will, to take control of CDCs * * *

the income potential is enormous in

such a takeover, and SBA very properly

guards against that * * * I would

suggest that on this issue, fees for * * *

services be limited to fees for services

actually performed, for example hourly

services. And that no rights to * * *

income be permitted beyond the

contracting term * * * The purpose

* * * is to provide self sufficiency, the

ability of the CDC to stand on its two

feet. It’s very easy in these relationships

for the financial strength of the CDC to

be drained in such a way that would

make it, for all purposes, perpetually

dependent on our contracting

relationship.’’ These comments mirror

SBA’s concerns. SBA believes that its

Final Rule strikes an appropriate

balance by continuing to allow CDCs to

contract out for some services, when

such strategy is efficient and costeffective while assuring that such

contracting out is appropriately

monitored by SBA. SBA wants to ensure

that CDCs are given every opportunity

to become independent and selfsufficient.

As indicated throughout this

preamble, working with the CDC

industry and its trade association, SBA

intends to continue its consideration of

a number of issues affecting CDC

program operations. In addition to the

issues already cited, in the ANPR that

the Agency intends to publish shortly,

SBA will seek comments regarding

whether and under what circumstances

CDCs should be required to engage in or

support economic development

activities other than the 504 program;

whether and under what circumstances

CDCs should be allowed to participate

in profit-making activities; and whether

SBA should amend the existing

standard for determining that an area is

adequately served by the 504 program,

among others.

3. A Section by Section Description of

the Changes to the Proposed Rule

Section 120.802 Definitions. The

definition of Multi-State CDC was

modified to limit the States into which

a CDC can apply to operate in as a

Multi-State CDC to those States

contiguous to the applicant CDC’s State

of incorporation.

Section 120.810 Applications for

Certification as a CDC. The Final Rule

modifies subparagraph (a) to reflect

SBA’s decision, based on the comments

received, to allow a CDC to expand its

Area of Operations into a county with

a population of 100,000 or more that is

already adequately served by only one

existing CDC only when that CDC does

not oppose the application. Also,

subparagraph (a) was modified to allow

loans made by a Multi-State CDC to be

used when determining if a county is

adequately served. Finally,

subparagraph (a) was modified to

prohibit applications to cover a county

if the county has become part of a MultiState CDC’s Area of Operations within

the last 24 months. This gives any CDC

24 months to fully establish its

operations in a new county before

another CDC can apply to operate in it.

This change was made so that a MultiState CDC’s out-of-state operations

would not be treated differently from

the local operations of any other CDC.

In the Proposed Rule, the 24-month

grace period only applied when the

county was part of a CDC’s Area of

Operations within its State of

incorporation.

Section 120.820 CDC non-profit

status. No changes from the Proposed

Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations 42631

Rule. The requirement that the nonprofit corporation be in good standing

refers to its being in good standing with

the State in which it is incorporated.

Section 120.822 CDC Membership. No

changes from Proposed Rule.

Section 120.823 CDC Board of

Directors. The Final Rule modifies the

Proposed Rule to permit the CDC

Manager to be a member of the CDC’s

Board of Directors, but specifies that the

requirement that ‘‘one Board Member

with commercial loan experience’’ be

satisfied by a Board Member other than

the CDC manager. The Final Rule

continues to prohibit other CDC staff

members from being on the Board of

Directors. The Proposed Rule also was

reworded to require that a Multi-State

CDC meet the Board representation

requirements for each State, rather than

requiring it to have separate Boards for

each State or to have proportional Board

representation as discussed above.

In addition, the Final Rule removes

the requirement that Loan Committee

members represent three of the four

membership groups. This change was

made because the Board already has

representation from at least three of the

four membership groups and a quorum

of Board Members must approve,

through a Board resolution (SBA Form

1528), its CDC’s application for SBA’s

guarantee of each Debenture the CDC

issues to fund one of its 504 loans prior

to the sale of that Debenture. Requiring

Loan Committee members to live or

work in the State where the project they

are voting on is located assures that

local citizens will be part of the

approval process for each loan made in

their community. The Final Rule

clarifies that this regulation only applies

to a Loan Committee comprised of nonBoard Members. The phrase ‘‘* * * no

appearance of a conflict of interest’’ is

changed to ‘‘no actual or apparent

conflict of interest’’ throughout to

emphasize the fact that actual conflicts

of interest are prohibited and not just

apparent conflicts. The Final Rule also

clarifies that Multi-State CDCs are

required to have Loan Committees in

each State in which the Multi-State CDC

operates. As stated above, this will

assure local citizen participation in the

loan approval process for each loan

made in their community.

Section 120.824 Professional

management and staff. The Final Rule

corrects a technical error and adds

‘‘servicing’’ back into the list of services

a CDC may obtain under contract. It also

splits subparagraph (a) into two sections

((a)(1) and (a)(2)) for ease of reading.

The Final Rule removes the phrase ‘‘that

is financially subsidizing the CDC’s

operations’’ from 120.824(a) thus

removing the condition that a non-profit

affiliate of the CDC financially subsidize

it before the CDC can apply for the

waiver set forth in the section.

Paragraphs (c) through (e) were

expanded to (c) through (f) and were

broken down into smaller paragraphs

and subparagraphs for ease of reading.

The phrase ‘‘or non-voting’’ was added

to (f).

Section 120.825 Financial ability to

operate. No change from the Proposed

Rule.

Section 120.835 Application to

expand an Area of Operations. The

Final Rule reorders the section so that

requests from CDCs to expand into

counties within their State of

incorporation or into a Local Economic

Area are covered in section 120.835(a),

requests from CDCs to expand into

Multi-State Areas are covered in Section

120.835(b), and the general

requirements for both are covered in

120.835(c).

The Final Rule modifies the Proposed

Rule to reflect SBA’s decision, based on

the comments it received, to accept a

CDC’s application for expansion into a

county with a population of 100,000 or

more that is already being adequately

served by only one existing CDC only if

the original CDC does not oppose the

application. The Proposed Rule was

modified to allow loans made by a

Multi-State CDC to be used when

determining if a county is adequately

served. The Proposed Rule was

modified to prohibit CDC applications

for a county if the county has become

part of a Multi-State’s Area of

Operations within the last 24 months.

(See discussion of changes to the

Proposed Rule pertaining to § 120.810

above.)

The Final Rule removes the

requirement for equal representation of

each State on the Boards of Multi-State

CDCs because SBA believes meeting the

minimum Board requirements for each

State is enough to assure proper local

participation.

Section 120.837 SBA decision on

application for a new CDC or for an

existing CDC to expand Area of

Operations. The Final Rule removes the

parentheses from around the list of SBA

programs conferring some special status,

and changes ‘‘based solely on its

activity’’ to ‘‘based solely on its activity

and performance’’ to clarify the concept.

The Final Rule also clarifies that any

special status that a CDC’s has earned

such as ALP or PCLP only applies in the

State or States in which that status was

earned.

Compliance With Executive Orders

13132, 12988, and 12866, the

Regulatory Flexibility Act (5 U.S.C.

601–612), and the Paperwork

Reduction Act (44 U.S.C., Chapter 35)

The Office of Management and Budget

reviewed this rule as a ‘‘significant’’

regulatory action under Executive Order

12866.

SBA has determined that this Final

Rule will not have a significant

economic impact on a substantial

number of small entities within the

meaning of the Regulatory Flexibility

Act, 5 U.S.C. 601–612. Currently, out of

approximately 24 million small

businesses in the United States, about

4,000 receive 504 loans annually. As

described in the preamble, through this

regulation, SBA hopes to increase the

number of 504 loans made to small

businesses. Even if SBA were to assume

a generous result of a 20 percent

increase in loans, it would only result

in an annual increase of 800 loans per

year. SBA does not consider this a

significant impact on a substantial

number of small entities. Other aspects

of this rule clarify the management and

structural requirements for CDCs. These

aspects would have no economic impact

on small entities, as they merely alter

CDC requirements.

SBA has determined that this Final

Rule does not impose any additional

reporting or recordkeeping requirements

under the Paperwork Reduction Act, 44

U.S.C., Chapter 35.

For purposes of Executive Order

12988, SBA certifies that this Final Rule

is drafted, to the extent practicable, to

accord with the standards set forth in

section 3 of that Order.

For purposes of Executive Order

13132, SBA has determined that this

Final Rule has no federalism

implications.

List of Subjects in 13 CFR Part 120

Loan Programs—business, small

business.

For the reasons set forth above, SBA

amends 13 CFR part 120 as follows:

PART 120—BUSINESS LOANS

1. The authority citation for part 120

is revised to read as follows:

Authority: 15 U.S.C. 634 (b)(6), 636(a) and

(h), 696(3), and 697(a)(2).

2. Amend § 120.802 to revise the

definition of Area of Operations and add

definitions of Local Economic Area and

Multi-State CDC in alphabetical order to

read as follows:

§ 120.802 Definitions.

* * * * *

42632 Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations

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.

* * * * *

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, shares

a border with the CDC’s existing Area of

Operations (or applicant’s proposed

Area of Operations) in 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) within 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.

* * * * *

3. Revise § 120.810 to read as follows:

§ 120.810 Applications for certification as

a CDC.

Applicants for certification as a CDC

must apply to the SBA District Office

serving the area in which the applicant

has or proposes to locate its

headquarters.

(a) An SBA District Office may accept

an application for a county only if:

(1) There is no CDC that includes the

county in its Area of Operations;

(2) Any CDCs that include the county

in their Areas of Operations have not

averaged together at least one 504 loan

approval per 100,000 population per

year averaged over the 24 months prior

to SBA receiving a complete application

from the applicant; and the county has

not become part of another CDC’s Area

of Operations within the prior 24

months; or

(3) The county is part of the Area of

Operations of only one CDC; the county

has a population of 100,000 or more; the

county has not become part of an Area

of Operations within the prior 24

months of another CDC; the applicant is

incorporated in the State where the

county is located; and the CDC that

includes the county in its Area of

Operations submits a statement of no

objection to the application.

(b) An applicant whose application

has been accepted must then

demonstrate that it satisfies the

certification and operating criteria in

§§ 120.820 through 120.829 and the

need for 504 services in the Area Of

Operations (if there is already a CDC in

the Area of Operations, the applicant

must justify the need for another and

present a plan to avoid duplication or

overlap). Applications must also

include an operating budget approved

by the applicant’s Board of Directors,

and a plan to meet CDC operating

requirements (without specializing in a

particular industry). An applicant’s

proposed Area of Operations may

include Local Economic Areas. An

applicant may not apply to cover an

area as a Multi-State CDC. The AA/FA

shall make the certification decision.

4. Revise § 120.820 to read as follows:

§ 120.820 CDC non-profit status.

A CDC must be a non-profit

corporation in good standing. (For-profit

CDCs certified by SBA prior to January

1, 1987 may retain their certifications.)

An SBIC may not become a CDC.

5. Revise § 120.822 to read as follows:

§ 120.822 CDC membership.

(a) A CDC must have at least 25

members (or stockholders for for-profit

CDCs approved prior to January 1,

1987). The CDC membership must meet

annually. No person or entity may own

or control more than 10 percent of the

CDC’s voting membership (or stock).

Members must be representative of and

provide evidence of active support in

the Area of Operations. Members must

be from each of the following groups:

(1) Government organizations

responsible for economic development

in the Area of Operations and

acceptable to SBA;

(2) Financial institutions that provide

commercial long term fixed asset

financing in the Area of Operations;

(3) Community organizations

dedicated to economic development in

the Area of Operations such as

chambers of commerce, foundations,

trade associations, colleges, or

universities; and

(4) Businesses in the Area of

Operations.

(b) A CDC that is incorporated in one

State and is operating as a Multi-State

CDC in another State must meet the

membership requirements for each

State.

6. Revise § 120.823 to read as follows:

§ 120.823 CDC Board of Directors.

The CDC must have a Board of

Directors chosen from the membership

by the members, and representing at

least three of the four membership

groups. No single group shall control.

No person who is a member of a CDC’s

staff may be a voting member of the

Board except for the CDC manager. The

Board Members must be responsible

officials of the organizations they

represent and at least one member other

than the CDC manager must possess

commercial lending experience. The

Board must meet at least quarterly and

shall be responsible for CDC staff

decisions and actions. A quorum shall

require at least 5 Directors authorized to

vote. When the Board votes on SBA loan

approval or servicing actions, at least

one Board Member with commercial

loan experience acceptable to SBA,

other than the CDC manager, must be

present and vote. There must be no

actual or apparent conflict of interest

with respect to any actions of the Board.

(a) The Board may establish a Loan

Committee of non-Board Members that

reports to the Board. Loan Committee

members must include at least one

member with commercial lending

experience acceptable to SBA. All

members of the Loan Committee must

live or work in the Area of Operations

of the State where the 504 project they

are voting on is located unless the

project falls under one of the exceptions

listed in Sec. 120.839, Case-by-case

extensions. No CDC staff may serve on

a Loan Committee. A quorum must have

at least five committee members

authorized to vote. The CDC’s Board

must ratify the actions of any Loan

Committee. There must be no actual or

apparent conflict of interest with respect

to any actions of the Loan Committee.

(b) If the CDC is incorporated in one

State and is approved as a Multi-State

CDC to operate in another State, the

CDC must meet the Board requirements

for each State and must have a Loan

Committee for each State.

7. Revise § 120.824 to read as follows:

§ 120.824 Professional management and

staff.

A CDC must have full-time

professional management, including an

Executive Director (or the equivalent)

managing daily operations. It must also

have a full-time professional staff

qualified by training and experience to

market the 504 Program, package and

process loan applications, close loans,

service, and, if authorized by SBA,

liquidate the loan portfolio, and sustain

a sufficient level of service and activity

in the Area of Operations. CDCs may

obtain, under written contract,

marketing, packaging, processing,

closing, servicing or liquidation services

provided by qualified individuals and

entities who live or do business in the

CDC’s Area of Operations under the

following circumstances:

(a) The CDC has at least one salaried

professional employee that is employed

Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations 42633

directly (not contracted) full-time to

manage the CDC. A CDC may petition

SBA to waive the requirement of at least

one full-time manager if:

(1) The CDC is rural and has

insufficient loan volume to justify its

own management, and another CDC

located in the same general area will

provide the management; or

(2) The management of a CDC is to be

contributed by a non-profit affiliate of

the CDC that has the economic

development of the CDC’s Area of

Operations as one of its principal

activities. In the latter case, the

management contributed by the affiliate

may work on and operate other

economic development programs of the

affiliate, but must be available to 504

customers during regular business

hours.

(b) SBA must pre-approve contracts

the CDC makes for managing, marketing,

packaging, processing, closing,

servicing, or liquidation functions.

(CDCs may contract for legal and

accounting services without SBA

approval, except for legal services in

connection with loan liquidation or

litigation.)

(c) Contracts must clearly identify

terms and conditions satisfactory to

SBA that permit the CDC to terminate

the contract prior to its expiration date

on a reasonable basis.

(d) The CDC must provide copies of

these contracts to SBA for review

annually.

(e) If a CDC’s Board believes that it is

in the best interest of the CDC to

contract for a management, marketing,

packaging, processing, closing, servicing

or liquidation function, the CDC’s Board

must explain its reasoning to SBA. The

CDC’s Board must demonstrate to SBA

that:

(1) The compensation under the

contract is only from the CDC,

reasonable and customary for similar

services in the Area of Operations, and

is only for actual services performed;

(2) The full term of the contract

(including options) is reasonable; and

(3) The contract does not evidence

any actual or apparent conflict of

interest or self-dealing on the part of any

of the CDC’s officers, management, and

staff, including members of the Board

and any Loan Committee.

(f) No contractor (under this section)

or Associate of a contractor may be a

voting or non-voting member of the

CDC’s Board.

8. Revise § 120.825 to read as follows:

§ 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.

9. Revise § 120.835 to read as follows:

§ 120.835 Application to expand an Area of

Operations.

An existing, active CDC applying to

expand its Area of Operations must be

operating in conformance with all

existing SBA regulations, policies, and

performance benchmarks and be well

qualified to serve the proposed area. A

CDC seeking to expand its Area of

Operations must apply in writing to the

SBA District Office where the CDC is

headquartered, unless it is applying to

be a Multi-State CDC. In that case, the

CDC must apply to the SBA District

Office that services the area where the

Multi-State CDC intends to locate its

principal office for that State.

(a) An SBA District Office may accept

a CDC’s application to expand its Area

of Operations into a county within its

State of incorporation, or in a Local

Economic Area only if:

(1) There is no CDC that includes the

county in its Area of Operations; or

(2) Any CDCs that include the county

in their Areas of Operations have not

averaged together at least one 504 loan

approval per 100,000 population per

year averaged over the 24 months prior

to SBA receiving a complete application

from the applicant CDC; and the county

has not become part of an Area of

Operations of another CDC within the

prior 24 months; or

(3) The county is part of the Area of

Operations of only one CDC; the county

has a population of 100,000 or more; the

county has not become part of an Area

of Operations within the prior 24

months of another CDC; the applicant is

incorporated in the State where the

county is located; and the CDC that

includes the county in its Area of

Operations submits a statement of no

objection to the application.

(b) An SBA District Office may accept

a CDC’s application to expand and

service an area as a Multi-State CDC

only if:

(1) There is no CDC that includes the

county in its Area of Operations, or the

CDCs that include the county in their

Areas of Operations have not averaged

together at least one 504 loan approval

per 100,000 population per year

averaged over the previous 24 months

prior to SBA receiving a complete

application from the applicant CDC; and

the county has not become part of an

Area of Operations of another CDC

within the last 24 months; and

(2) The State it seeks to expand into

is contiguous to the State of the CDC’s

incorporation; and

(3) The requirements in Section

120.822, Membership, are separately

met for the Area of Operations within

the CDC’s State of incorporation and for

each State in which it operates or seeks

to operate as a Multi-State CDC; and

(4) The requirements in Section

120.823, Board of Directors, are

separately met for the State of

incorporation and each additional State

in which it operates or seeks to operate

as a Multi-State CDC; and

(5) The CDC has a Loan committee

meeting the requirements of

§ 120.823(b).

(c) An applicant whose application

for expansion has been accepted must

demonstrate to the satisfaction of SBA

that it satisfies all of the certification

and operating criteria in §§ 120.820

through 120.829. It must demonstrate

that it has the ability to provide full

service to small businesses in the

requested area including processing,

closing, servicing, and, if authorized,

liquidating 504 loans. It must also

demonstrate the need for 504 services in

the Area of Operations and present a

plan for servicing the area. If there is

already one or more CDCs in the

requested Area of Operations, the

applicant must justify the need for

another.

10. Revise § 120.837 to read as

follows:

§ 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

42634 Federal Register / Vol. 65, No. 133 / Tuesday, July 11, 2000 / Rules and Regulations

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 AA/FA, who will

make the final decision. The AA/FA

may consider any information

submitted or available related to the

applicant and the application.

(b) If a CDC is approved to operate as

a Multi-State CDC, any unilateral

authority that a CDC has in its State of

incorporation under any SBA program,

including Accredited Lender’s Program

(ALP), Premier Certified Lenders

Program (PCLP), or Expedited Closing

Process (Priority CDC), does not carry

over into a State in which it is approved

to operate as a Multi-State CDC. The

CDC must earn the status in each State

based solely on its activity and

performance in that State.

Dated: June 28, 2000.

Aida Alvarez,

Administrator.

[FR Doc. 00–16842 Filed 7–10–00; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Ch. I

[T.D. 00–44]

Country of Origin Marking Rules for

Textiles and Textile Products

Advanced in Value, Improved in

Condition, or Assembled Abroad

AGENCY: U.S. Customs Service,

Department of the Treasury.

ACTION: Final interpretive rule.

SUMMARY: This notice advises the public

that Customs will no longer apply 19

CFR 12.130(c) for purposes of country of

origin marking of textiles and textile

products, and that Chapter 98,

Subchapter II, U.S. Note 2(a),

Harmonized Tariff Schedule of the

United States (HTSUS), does not apply

for country of origin marking purposes.

EFFECTIVE DATE: October 10, 2000.

FOR FURTHER INFORMATION CONTACT:

Monika Brenner, Attorney, Special

Classification and Marking Branch,

Office of Regulations and Rulings (202–

927–1254).

SUPPLEMENTARY INFORMATION:

Background

In T.D. 85–38, 50 FR 8710 (March 5,

1985), Customs adopted as a final rule

an interim amendment to the Customs

Regulations, consisting of the addition

of a new section 12.130 (19 CFR 12.130)

to establish criteria to be used in

determining the country of origin of

imported textiles and textile products

for purposes of multilateral and bilateral

textile agreements entered into by the

United States pursuant to section 204,

Agricultural Act of 1956, as amended. In

T.D. 85–38, Customs stated that section

12.130 is applicable to merchandise for

all purposes, including duty and

marking. A similar statement was made

in T.D. 90–17, 55 FR 7303 (March 1,

1990).

Paragraph (c)(1) of section 12.130

provides in part as follows:

* * * In order to have * * * a single

country of origin for a textile or textile

product, notwithstanding paragraph (b),

merchandise which falls within the purview

of Chapter 98, Subchapter II, Note 2,

Harmonized Tariff Schedule of the United

States, may not, upon its return to the U.S.,

be considered a product of the U.S.

Paragraph (c)(2) of section 12.130

accords essentially the same treatment

to products of insular possessions.

Chapter 98, Subchapter II, U.S. Note

2(a), HTSUS, (Note 2(a)), provides in

pertinent part as follows:

* * * Any product of the United States

which is returned after having been advanced

in value or improved in condition abroad by

any process of manufacture or other means,

or any imported article which has been

assembled abroad in whole or in part of

products of the United States, shall be treated

for the purposes of this Act as a foreign

article.

Subsequently, in connection with the

development of the final NAFTA

Marking Rules, Customs concluded that

Note 2(a) should not apply for general

country of origin purposes, including

marking. 60 FR 22312, 22318 (May 5,

1995). Accordingly, in order to clarify

the applicability of this position for

marking purposes, on June 15, 1998,

Customs published a notice of proposed

interpretation (hereinafter ‘‘proposed

interpretation’’) in the Federal Register

(63 FR 32697) to the effect that section

12.130(c) of the Customs Regulations

should not control for purposes of

determining the country of origin

marking of textile and textile products,

and that Note 2(a) does not apply for

country of origin marking purposes. The

notice solicited public comments on the

proposal, and the public comment

period was extended to December 18,

1998.

Discussion of Comments

A total of 7 entities submitted

comments in response to the notice.

Although all of the commenters were

generally supportive of the proposed

interpretation, two were opposed to the

proposal as it pertains to textiles whose

origin is determined by where the fabric

is formed. The specific points made by

the commenters are discussed below.

Comment: Several comments were

received on particular operations that

should or should not be allowed abroad

in order for a U.S.-origin textile or

textile product to remain of U.S. origin.

One commenter strongly supports the

proposed interpretation since minor

operations performed on U.S. garments

abroad should not force a change in

origin solely because of 19 CFR

12.130(c). This commenter stated that

imported articles that undergo a similar

process in the United States do not

undergo a change in origin in the United

States. Another commenter supports the

proposed interpretation as it would

permit apparel produced in the United

States that is exported for minor

finishing operations such as silk

screening, embroidery, stone washing,

etc., to better compete against foreign

competition.

Another commenter states that

textiles and textile products made in the

United States and sent abroad to be

advanced in value or improved in

condition should be considered

products of the United States for

marking purposes provided they: (a)

‘‘Do not undergo a change of tariff

heading (sic) at the eight digit level; (b)

do not otherwise undergo a substantial

transformation; and (c) undergo no

assembly operation while abroad.’’ The

commenter states that if decorative

components such as epaulets, patches,

flaps, etc. are added to a U.S.-origin

article while abroad, the article should

still be able to be marked as a product

of the United States. Other foreign

operations that should be allowed

without the U.S.-made article losing its

origin are suggested to be washing,

printing, painting, garment dyeing, and

embroidery. The commenter also states

that value-added criteria should not be

considered in determining how articles

shall be marked.

Customs Response: The textile rules

of origin of section 334 of the Uruguay

Round Agreements Act (URAA)

(codified at 19 U.S.C. 3592), as

implemented by section 102.21 of the

Customs Regulations, are in most cases

determinative regarding the country of

origin marking of a U.S. textile or textile

product that is processed abroad.

Therefore, the origin rules provided for