Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Rules and Regulations 18349 

restriction resulted in the smaller price 

decline estimate of $1.37 per pound. 

The use of volume controls allows the 

industry to fully supply spearmint oil 

markets while avoiding the negative 

consequences of over-supplying these 

markets. The use of volume controls is 

believed to have little or no effect on 

consumer prices of products containing 

spearmint oil and will not result in 

fewer retail sales of such products. 

Based on projections available at the 

meeting, the Committee considered 

alternatives to each of the increases. The 

Committee not only considered leaving 

the salable quantity and allotment 

percentage unchanged, but also looked 

at various increases. The Committee 

reached each of its recommendations to 

increase the salable quantity and 

allotment percentage for Scotch and 

Native spearmint oil after careful 

consideration of all available 

information, and believes that the levels 

recommended will achieve the 

objectives sought. Without the 

increases, the Committee believes the 

industry would not be able to meet 

market needs. 

This rule will not impose any 

additional reporting or recordkeeping 

requirements on either small or large 

spearmint oil handlers. As with all 

Federal marketing order programs, 

reports and forms are periodically 

reviewed to reduce information 

requirements and duplication by 

industry and public sector agencies. In 

addition, USDA has not identified any 

relevant Federal rules that duplicate, 

overlap or conflict with this rule. 

The AMS is committed to complying 

with the E-Government Act, to promote 

the use of the Internet and other 

information technologies to provide 

increased opportunities for citizen 

access to Government information and 

services, and for other purposes. 

The Committee’s meeting was widely 

publicized throughout the spearmint oil 

industry and all interested persons were 

invited to attend the meeting and 

participate in Committee deliberations. 

Like all Committee meetings, the 

February 21, 2007, meeting was a public 

meeting and all entities, both large and 

small, were able to express their views 

on this issue. Finally, interested persons 

are invited to submit information on the 

regulatory and informational impacts of 

this action on small businesses. 

A small business guide on complying 

with fruit, vegetable, and specialty crop 

marketing agreements and orders may 

be viewed at: http://www.ams.usda.gov/ 

fv/moab.html. Any questions about the 

compliance guide should be sent to Jay 

Guerber at the previously mentioned 

address in the FOR FURTHER INFORMATION

CONTACT section. 

This rule invites comments on 

changes to the salable quantities and 

allotment percentages for Scotch and 

Native spearmint oil for the 2006–2007 

marketing year. Any comments received 

will be considered prior to finalization 

of this rule. 

After consideration of all relevant 

material presented, including the 

Committee’s recommendation, and 

other information, it is found that this 

interim final rule, as hereinafter set 

forth, will tend to effectuate the 

declared policy of the Act. 

Pursuant to 5 U.S.C. 553, it is also 

found and determined upon good cause 

that it is impracticable, unnecessary, 

and contrary to the public interest to 

give preliminary notice prior to putting 

this rule into effect and that good cause 

exists for not postponing the effective 

date of this rule until 30 days after 

publication in the Federal Register 

because: (1) This rule increases the 

quantity of Scotch and Native spearmint 

oil that may be marketed during the 

marketing year which ends on May 31, 

2007; (2) the current quantity of Scotch 

and Native spearmint oil may be 

inadequate to meet demand for the 

2006–2007 marketing year, thus making 

the additional oil available as soon as is 

practicable will be beneficial to both 

handlers and producers; (3) the 

Committee recommended these changes 

at a public meeting and interested 

parties had an opportunity to provide 

input; and (4) this rule provides a 60- 

day comment period and any comments 

received will be considered prior to 

finalization of this rule. 

List of Subjects in 7 CFR Part 985 

Marketing agreements, Oils and fats, 

Reporting and recordkeeping 

requirements, Spearmint oil. 

■ For the reasons set forth in the 

preamble, 7 CFR part 985 is amended as 

follows: 

PART 985—MARKETING ORDER 

REGULATING THE HANDLING OF 

SPEARMINT OIL PRODUCED IN THE 

FAR WEST 

■ 1. The authority citation for 7 CFR 

part 985 continues to read as follows: 

Authority: 7 U.S.C. 601–674. 

■ 2. In § 985.225, paragraph (a) and (b) 

are revised to read as follows: 

[Note: This section will not appear in the 

annual Code of Federal Regulations.] 

§ 985.225 Salable quantities and allotment 

percentages—2006–2007 marketing year. 

* * * * * 

(a) Class 1 (Scotch) oil—a salable 

quantity of 2,984,817 pounds and an 

allotment percentage of 153 percent. 

(b) Class 3 (Native) oil—a salable 

quantity of 1,205,208 pounds and an 

allotment percentage of 55 percent. 

Dated: April 9, 2007. 

Lloyd C. Day, 

Administrator, Agricultural Marketing 

Service. 

[FR Doc. 07–1831 Filed 4–10–07; 1:10 pm] 

BILLING CODE 3410–02–P 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 120 

RIN 3245–AE83 

Liquidation and Debt Collection 

Activities 

AGENCY: U.S. Small Business 

Administration (SBA or Agency). 

ACTION: Final rule. 

SUMMARY: This final rule amends the 

regulations pertaining to guaranteed 

loan and debenture liquidation and 

litigation found in rules governing the 

7(a) Guaranteed Loan program and the 

Certified Development Company 

program. It codifies statutory language 

contained in the Small Business 

Investment Act, and revises the 

Agency’s guidance on the proper 

liquidation and litigation of defaulted 

SBA guaranteed loans and debentures. 

These rules will give program 

participants authority to liquidate small 

business loans in a more timely fashion, 

and creates a process for identifying 

loans and debentures that could be 

disposed of in an asset sale conducted 

or overseen by SBA. 

DATES: This rule is effective May 14, 

2007. 

FOR FURTHER INFORMATION CONTACT: 

James W. Hammersley, Director, Loan 

Programs Division, Office of Financial 

Assistance, (202) 205–7505, or by e-mail 

at james.hammersley@sba.gov. 

SUPPLEMENTARY INFORMATION: On 

November 3, 2005, SBA published 

proposed rules to revise and update 

regulations on liquidating and litigating 

SBA 7(a) and 504 loans (70 FR 66800, 

November 3, 2005). The initial period 

for public comment ended on January 6, 

2006, but was reopened for additional 

comments on January 25, 2006. The 

extended comment period ended on 

February 24, 2006. 

Comment Summary 

In total, SBA received 138 responses 

to the proposed regulations. Of these, 


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133 were submitted by SBA lender 

participants (‘‘Lenders’’) or Certified 

Development Company (‘‘CDC’’) 

principals, two of the comments were 

submitted by Lender and CDC trade 

association representatives, two were 

submitted by third-party service 

providers, and one was submitted by the 

Chairman of the House Committee for 

Small Business. 

One hundred eleven of the 138 

respondents were generally opposed to 

portions of the proposed regulations. 

Lenders were virtually unanimous in 

expressing their objection to SBA 

requiring them to complete the 

liquidation of all collateral securing a 

defaulted SBA loan before requesting 

SBA’s purchase of its guaranteed 

portion. Lenders and CDCs also objected 

to the proposed rule provision under 

which Lenders and CDCs would have 

deemed to have given their consent, for 

loans made on or after the effective date 

that later go into default, to sell the 

defaulted loans in an asset sale. CDC 

commenters generally did not object to 

the principles behind having CDCs 

liquidate defaulted loans, but believed 

the rules lacked sufficient detail on their 

implementation for the lending 

community. The most prevalent 

comment focused on the need to 

compensate CDCs that perform 

liquidation and litigation activities. 

Section-by-Section Analysis of 

Comments 

Five general comments were received 

in relation to the proposed definition of 

an Authorized CDC Liquidator to be 

included in § 120.10. One comment 

expressed a view that the definition as 

written is too restrictive and that the 

liquidation function should be a 

fundamental requirement for all CDC 

participants. SBA has decided to retain 

the definition as proposed to provide 

CDCs and SBA with the flexibility to 

obtain necessary expertise in 

liquidations. 

Seven comments were submitted 

opposing the proposed definition in 

§ 120.10 for Loan Program 

Requirements. The comments centered 

on concerns regarding program 

compliance and potential denial of an 

SBA guarantee resulting from 

interpretations of outdated standard 

operating procedures (‘‘SOPs’’), policy 

notices, and other loan documentation 

forms provided by SBA. Another 

commenter stated that including SOPs, 

Notices and Forms in the definition 

raises these items for enforcement 

purposes to a status equivalent to 

regulations without granting 

participants adequate notice and the 

right to submit comments. A third 

comment challenges the enforceability 

of Agency SOPs and notices in legal 

actions before a court of law, with the 

lender remaining unconvinced that 

lender compliance with respect to 

dynamic changes in SBA procedures or 

policy would be enforceable. A final 

commenter felt the proposed definitions 

could be another way to reinforce that 

Lenders should rely solely on written 

instruction and not expect direct 

assistance from SBA representatives. 

SBA acknowledges the dynamic 

nature of SOPs, Agency Notices and 

other policy and procedural guidelines. 

However, SBA’s proposed definition is 

not designed to create conditions for 

releasing itself of the obligation to 

purchase its guaranteed portion of 7(a) 

loans. The definition was drafted to 

build awareness of all the related 

material the Agency provides to 

participants in SBA’s loan programs. 

SOPs and Agency Notices are released 

by SBA to aid lenders in understanding 

current policy, procedures, and 

processes. These documents can be 

issued only after internal Agency 

clearance, including reviews by offices 

engaged in measuring Agency risk and 

compliance with Congressional intent. 

Forms and other documents are also 

subject to periodic Office of 

Management and Budget (‘‘OMB’’) 

review to measure regulatory burden 

and the impact on small businesses. 

These reviews ensure that SBA is 

reasonable in its program delivery. SBA 

also believes that by incorporating these 

additional elements in the definition, it 

will prompt more attention by program 

participants to stay abreast of changing 

program requirements, including those 

brought about through the Agency’s 

periodic reassessment of its loan 

programs. 

In addition, this definition merely 

codifies current law and practice in a 

more clearly stated form. CDCs are 

already held to the substance of this 

definition. Section 120.826, which was 

enacted through notice and comment 

rulemaking in 2003, states that CDCs 

‘‘must operate in accordance with all 

504 program requirements imposed by 

statute, regulation, SOPs, policy and 

procedural notices, loan authorizations, 

debentures, and agreements between the 

CDC and SBA.’’

Lenders are also already held to the 

substance of this definition. Lenders 

sign a Loan Guarantee Agreement which 

requires a lender to comply with SBA’s 

‘‘rules and regulations.’’ Section 

120.524(a)(1) states that SBA may deny 

liability under a 7(a) loan if lender has 

failed to comply materially with ‘‘any of 

the provisions of these regulations, the 

Loan Guarantee Agreement, or the 

Authorization.’’ The National 7(a) Loan 

Authorization Boilerplate (paragraph E) 

states that SBA’s guarantee on each 7(a) 

loan is contingent upon the lender’s 

compliance with current SOPs. 

It is for these reasons that the 

proposed rule is therefore adopted as 

written. 

Proposed § 120.180 revised the 

current § 120.180 to clarify that Loan 

Program Requirements in effect when a 

Lender or CDC undertook a specific 

action with respect to a given 7(a) or 504 

loan will govern that action. The 

proposed rule makes use of the new 

term Loan Program Requirements in 

order to better specify the rules which 

govern an SBA loan financing 

transaction. No comments were received 

in reference to this rule, and thus the 

rule is adopted as final. 

Proposed new § 120.181 clarifies that 

Lenders or CDCs and their contractors 

are independent contractors and that 

SBA is not responsible for their actions. 

Two comments in support and ten 

comments in opposition to this 

proposed regulation were received. 

Support was general in nature, with no 

specific reasons cited. Comments in 

opposition to the proposed regulation 

noted a CDC’s past inability to represent 

SBA in legal proceedings, SBA legal 

staff coordination issues, and also raised 

the issue of the availability of liability 

insurance for firms engaged in 

liquidation and litigation activity. The 

matter of legal representation of the 

SBA’s interest in CDC litigation is 

granted by Congress in § 510(c)(1)(B) of 

the Small Business Investment Act. 

Pursuant to the statute, CDCs are to 

litigate any matter related to the 

performance of liquidation and 

foreclosure functions in a reasonable 

and sound manner according to 

commercially accepted practices 

pursuant to a litigation plan approved in 

advance by SBA. The concern about 

coordination with SBA legal staff would 

be resolved through SBA’s review and 

action on the liquidation and litigation 

plan provided by the CDC pursuant to 

revised § 120.540. The Agency is not 

aware of any lack of availability of 

liability insurance for CDCs since this 

has not been a problem with Lenders 

participating in the 7(a) program. The 

new rule is thus adopted as proposed. 

Proposed new § 120.197 imposes a 

notification requirement to the SBA 

Office of Inspector General by all 

Lenders, CDCs, Borrowers and others 

when instances of fraud may have 

occurred. Twenty comments were 

received on this proposed regulation, 

three in support and 17 in opposition. 

One commenter who opposed the 

regulation stated that it appears to 


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extend beyond the scope and intent of 

this regulatory action, and suggested it 

be treated as a separate matter. Another 

opposing commenter echoed the 

sentiments of many in identifying this 

notification requirement as another 

Suspicious Activity Reporting System 

(‘‘SARS’’) requirement already required 

of federal depository institutions. A 

commenter qualified his support of the 

proposal, insisting that this requirement 

be enforced upon bank and non-bank 

lenders alike. A fourth comment 

opposed to the proposal focused on the 

Agency’s pursuit of lenders unaware of 

a fraudulent action and whether the 

Lender, absent factual evidence, should 

have timely reported suspected fraud. 

SBA has provided similar guidance in 

the past to Lenders, CDCs, and SBA 

personnel in program operating 

procedures. These guidelines were 

useful when SBA underwrote much of 

the 7(a) and 504 loan portfolio. With 

current loan activity, however, 

predominantly delivered through 

delegated authority processes such as 

the Preferred Lender Program (‘‘PLP’’), 

the Preferred Certified Lender Program 

(‘‘PCLP’’), and SBAExpress, the element 

of ensuring program integrity and a 

level of accountability shifts to the 

program participants. This new rule 

formalizes the reporting requirement 

into regulation for program participants. 

§ 120.197 is retained as proposed. 

Minor revisions to § 120.440 received 

no substantive comments and are 

therefore revised as proposed. 

SBA received two comments in 

support of the revisions proposed for 

§ 120.453. The proposed rule amends 

the heading and the existing regulation 

on PLP lender servicing, and directs the 

reader to revised subpart E for general 

instruction on SBA loan servicing 

responsibilities. SBA is adopting the 

revisions as proposed. 

In the proposed rule, § 120.500 along 

with §§ 120.510–120.513 were to be 

deleted. Additionally, a revision to the 

heading preceding this section was to be 

revised. Section 120.500 was a general 

introductory paragraph regarding 

general loan administration policies 

applicable to both loan servicing and 

loan liquidation. No comments were 

received and the section is deleted as 

proposed. No comments were received 

regarding the name change in the 

heading for Subpart E. The heading for 

this Subpart is now changed to read 

Servicing and Liquidation, and is 

adopted as proposed. 

Section 120.510 pertains to the 

servicing of SBA direct loans and 

immediate participation loans under the 

7(a) program. SBA no longer makes 

direct or immediate participation loans 

and received no comments on its 

proposed deletion. SBA deletes this 

section as proposed. 

Section 120.511 identifies the Lender 

as the entity responsible for servicing 

SBA guaranteed loans, holding Loan 

Instruments, and accepting borrower 

payments of principal and interest. 

These responsibilities have been revised 

and incorporated into standards for loan 

servicing for Lenders in new § 120.536. 

No comments were received regarding 

this proposed deletion. The existing 

regulation is therefore deleted. 

Existing § 120.512 describes Lender 

responsibilities for servicing and 

liquidating an SBA loan in the 7(a) 

program once SBA has purchased its 

guaranteed interest. This regulation 

requires Lenders with loans for which 

SBA has purchased the guaranteed 

portion to submit liquidation plans on 

each loan to SBA for approval. The 

regulation also provides SBA with the 

discretionary authority to service or 

liquidate these loans and to have 

Lenders assign to SBA the related Loan 

Instruments. Lender liquidation 

responsibilities for all SBA loans have 

been reformatted as standards set forth 

in new § 120.535. The requirement for 

submission of liquidation plans for 7(a) 

guaranteed loans has been eliminated 

except for loans processed as CLP loans, 

which, by statute, still require the 

submission of liquidation plans to SBA. 

Finally, discretionary authority for SBA 

to service and liquidate loans where it 

has purchased the guaranteed portion 

has been incorporated into new 

§ 120.535(d). No comments were 

received, thus in recognition of the 

revisions, SBA is deleting the existing 

regulation in § 120.512. 

Current § 120.513 outlines servicing 

actions requiring SBA’s prior written 

consent. The proposed rule amends 

these requirements and promulgates the 

revised regulations under new 

§ 120.536. SBA received no comments 

and is therefore deleting the existing 

regulation. 

In § 120.520, SBA proposed to amend 

the heading for the section; reuse the 

existing subsection, and add two new 

subsections. Section 120.520(a) detailed 

SBA’s proposal to require Lenders in the 

7(a) program to liquidate all collateral 

securing a defaulted SBA guaranteed 

loan prior to requesting SBA purchase 

of its guaranteed portion. The 

requirement to liquidate collateral first 

would only apply to loans made on or 

after May 14, 2007, with loans made 

prior to the date subject to SBA 

guarantee purchase provisions in place 

at the time the loan was approved. SBA 

received 62 comment letters opposing 

this proposal as written. The primary 

objection centered on the adverse 

financial effects imposed on Lenders 

arising from delaying guarantee 

purchase until all collateral recoveries 

have been exhausted. One commenter 

said Lenders will be forced to carry the 

SBA portion as a non-performing asset, 

and that this will require greater 

regulatory capital reserves. Another 

commenter stated that it would be 

detrimental to a potential borrower (and 

the local economy) for SBA guaranteed 

loans not to be made not because of the 

lack of a government backed guarantee, 

but because of the time and cost that it 

takes to claim the guarantee. 

SBA has considered the arguments 

presented by the commenters and seeks 

a reasonable alternative that improves 

the Agency’s ability to manage its 

portfolio without hampering the 

Lenders’ ability to participate in the 7(a) 

program. SBA notes the high volume of 

loan activity generated by its Lenders 

over the last five years and seeks to 

effectively manage the increased volume 

with the Agency’s limited program 

resources. In modifying processes and 

procedures, SBA is adapting to the 

changing environment for small 

business lending and allowing lenders 

to perform more lending functions on 

SBA’s behalf. Nonetheless, streamlined 

delivery methods and SBA’s greater 

reliance on its lending partners has not 

lessened the Agency’s attention to its 

fiscal management responsibilities for 

its loan programs and to the public. 

In recognition of the adverse financial 

impact that could be experienced by 

Lenders, SBA has decided to allow 

Lenders to request purchase without the 

full disposition of all related loan 

collateral. Since comments objecting to 

a full liquidation prior to SBA purchase 

cited the work effort and legal 

restrictions associated with real 

property collateral disposition, SBA will 

allow real property to be liquidated 

subsequent to purchase, but will still 

require all chattels (business personal 

property) to be liquidated prior to 

purchase. To ensure consistent 

interpretation with existing regulations, 

SBA will also allow Lenders to request 

purchase on a defaulted loan when the 

small business borrower files for 

bankruptcy protection and a period of at 

least 60 days has elapsed since the last 

full installment payment. SBA believes 

that a nine month period following 

purchase, after which Lenders will be 

deemed to have consented to SBA’s sale 

of a purchased loan pursuant to new 

§ 120.546, will generally provide 

Lenders with a reasonable period of 

time for addressing the activity needed 

to liquidate most remaining collateral in 

an orderly manner. Also, Lenders will 


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continue to have the option to delay 

submitting a purchase request if they 

desire to liquidate real estate collateral 

prior to an SBA loan sale. Section 

120.520(a) is revised to incorporate 

these changes resulting from the 

comments received. 

Proposed new § 120.520(b) codified 

existing SBA policy regarding 

documentation requirements sufficient 

for SBA to determine if purchase of the 

guarantee is warranted. One commenter 

objected to the rule stating that the 

determination of what is sufficient for 

SBA is somewhat vague, and that the 

regulation should direct the Lender to 

particular Agency procedures or 

instruction guides. SBA noted that the 

proposed rule referred to new § 120.524 

as SBA’s justification for determining if 

purchase is warranted and that this 

regulation included the Lenders’

requirement to comply materially with 

any Loan Program Requirements 

including statutes, regulations, SOPs, 

SBA notices and applicable forms. SBA 

believes this level of instruction is 

sufficient for program participants. The 

regulation is therefore adopted as 

proposed. 

New § 120.520(c) clarifies SBA policy 

that a Lender’s failure to perform all 

necessary servicing and liquidation 

actions subsequent to SBA’s purchase of 

the guaranteed portion of a loan from 

the secondary market may lead to 

initiation of action to recover money 

SBA paid to the Registered Holder. 

Thirty-five comments were received all 

opposing the proposed regulation. Some 

felt the action of Lenders to purchase 

the guaranteed portion of their loans 

from the secondary market would 

threaten the true sale nature of other 

guaranteed portions sold to Registered 

Holders. SBA believes this premise to be 

inaccurate inasmuch as SBA lenders 

have always had the option to purchase 

defaulted loans. SBA does not pressure 

lenders to purchase loans nor is it 

necessary for a lender to purchase loans 

to protect its reputation in the industry. 

SBA believes the comments mask the 

real issue of SBA’s ability to seek out 

documentation in a post-purchase 

review, and the remedies available to 

the Agency if such documentation is not 

provided by Lenders that have already 

received payment of the guaranteed 

portion. 

The regulation is a codification of a 

long standing policy where SBA has 

sought repayment from Lenders that did 

not properly process, close, and service 

loans sold in the secondary market. This 

regulation sets out the requirement that 

a Lender provide a loan status report as 

well as documentation that SBA deems 

necessary to make a determination that 

the loan was processed, closed, and 

serviced in compliance with SBA rules 

and regulations. 

Therefore, we conclude that 

codification of this long-standing policy 

will have no effect on the true sale 

nature of secondary market transactions. 

Lenders have always been required to 

provide documentation needed by the 

SBA to justify the purchase. As 

indicated, this rule merely codifies 

existing Lender responsibilities to assist 

SBA in providing the documentation 

requested by SBA to affirm that its 

purchase of the guaranteed portion was 

based on the Lender’s compliance with 

program requirements. To reinforce 

SBA’s need to provide timely 

submission of documents, the rule alerts 

Lenders that SBA will consider the 

Lender’s actions in conjunction with 

their continued participation in the 

Secondary Market. SBA retains its rights 

to suspend or revoke Secondary Market 

participation if it feels the Lender is not 

in full compliance with this regulation. 

Accordingly, SBA has added a sentence 

to point out the importance of postpurchase document submission and the 

rule is otherwise adopted as proposed. 

No substantive comments were 

received regarding new rule 

§ 120.520(d) relating to SBA’s retention 

of rights of recovery in connection with 

the new rule. The rule is adopted as 

proposed. 

Revised § 120.522(b)(1) seeks to limit 

SBA’s obligation to pay accrued interest 

on loans requested for guarantee 

purchase. This limit applies to loans 

made on or after October 1, 2006, and 

will limit interest purchased to be no 

more than 120 days. SBA received 42 

comments opposing the proposed rule. 

Commenters stated that the time limit 

would unnecessarily force ill-advised 

liquidations instead of accommodating 

workouts with borrowers. SBA 

encourages its Lenders to continue to 

work with SBA borrowers through 

periods of temporary difficulty and to 

provide short-term deferments or other 

assistance in appropriate situations. 

However, this limitation on interest to 

be paid is intended to help streamline 

and standardize SBA’s purchase review 

process for the benefit of its participant 

Lenders, and already is a part of 

program requirements for SBAExpress 

loans. For other types of loans under 

existing regulations, a Lender may 

receive payment from SBA for more 

than 120 days interest only if the Lender 

submits a complete purchase request to 

SBA within 120 days of the earliest 

uncured payment default. Lenders that 

have submitted complete purchase 

packages within 120 days of default 

have historically involved a small 

percentage of loans. Determinations as 

to what may constitute complete 

purchase requests in specific situations 

have unnecessarily delayed overall 

purchase processing to the detriment of 

Lenders as a whole. Accordingly, SBA 

is adopting the 120 day interest 

limitation as set forth in the proposed 

regulation, and is deleting existing 

§ 120.522(d) as proposed. 

Revised § 120.524(a)(1) amends the 

current provision in the regulations and 

codifies SBA policy that when a Lender 

is not in material compliance with the 

Loan Program Requirements as defined 

in § 120.10, SBA at its discretion may be 

released from liability under a loan 

guarantee. Seventeen comments were 

received in opposition to this proposed 

revision. One commenter said that this 

rule would discourage Lenders from 

taking collateral that is difficult to 

perfect, and that a denial of liability by 

the Agency for lender noncompliance 

absent a verifiable loss would decrease 

program participation. Another 

comment stated that wide gaps in 

interpretation will harm the liquidation 

process and that this proposed rule 

removes any rational flexibility. 

Another commenter felt the rule as 

drafted is far too broad and is not fair 

to the participants. SBA has thoroughly 

considered the comments, but has 

decided to retain the rule with no 

changes. The rule does nothing more 

than incorporate the new definition of 

Loan Program Requirements and 

thereby clarifies the intent of the 

existing regulation while making clear 

to Lenders what sources of authority 

will be applied. The view that SBA 

would look to use this revision to avail 

itself of its right to deny liability is 

strikingly narrow and inconsistent with 

the approach to guarantee purchases 

applied by the Agency. SBA continually 

strives for uniformity in its purchase 

processes, employing supervisory and 

legal reviews, and quality assurance 

assessments in the Agency’s purchase 

centers. These factors have reduced the 

number of complaints received from 

Lenders regarding varied interpretations 

of SBA liquidation and guarantee 

purchase policy. SBA does not 

anticipate a significant change in the 

number of denials of liability annually 

as a result of this rule. The rule thus is 

retained as proposed. 

Revised § 120.524(a)(8) proposed 

extending the time within which a 

Lender can request guarantee purchase 

to 180 days following the maturity date 

on the SBA loan, or the end of all 

liquidation and debt collection 

activities. SBA received one comment in 

support of this proposal and is adopting 

the rule as proposed. 


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SBA received no comments on 

proposed § 120.524(b) and (d) and is 

adopting them as proposed. 

Proposed rule § 120.535 outlined the 

standards for the servicing and 

liquidation of SBA loans. Fewer than six 

comments were received for each 

subparagraph, all in opposition to some 

section of the rule. One commenter 

objected to the unilateral authority of 

the SBA to take over servicing and 

liquidation from a Lender; however, this 

authority exists already in the current 

regulations and also in the SBA Form 

750, Loan Guarantee Agreement. Upon 

consideration of the comments 

provided, SBA adopts the rule as 

proposed with an additional sentence at 

the end of each subparagraph 

emphasizing that the standard applies to 

all Lenders and CDCs irrespective of 

whether or not they normally manage a 

non-SBA portfolio. 

There were no substantial comments 

received in reference to proposed new 

§ 120.536 and the rule is adopted as 

proposed. 

The Proposed rule re-designated 

§1A120.540 as § 120.545 and added a 

new § 120.540 devoted to SBA loan 

liquidation. Amended § 120.540(a) 

described SBA’s oversight 

responsibilities for monitoring efforts by 

Lenders and Authorized CDCs to 

dispose of collateral. No comments were 

received opposing the rule by which 

SBA seeks to clarify Lender liquidation 

reporting responsibilities. By statute, all 

SBA loans made through the CLP 

delivery process by Lenders authorized 

to make CLP loans require liquidation 

plans to be submitted to SBA for 

defaulted loans. This requirement is 

different from the liquidation wrap-up 

report required of all Lenders for their 

completed SBA defaulted loan 

recoveries. The rule therefore is adopted 

as proposed. 

Proposed § 120.540(b) specified the 

requirement for submission of written 

liquidation plans for prior SBA 

approval. As proposed, all Authorized 

CDC Liquidators, and Lenders that have 

made an SBA loan under the CLP 

delivery method, are required to submit 

a written liquidation plan to SBA for 

prior approval. Twelve comments were 

received in opposition to this proposed 

rule. The focus of the commenters’

objections centered on PLP lender 

liquidation activities and the need for 

SBA to exempt the PLP lender from this 

rule. The rule, however, pertains to 

loans approved under the CLP delivery 

method irrespective of the lender’s 

designation. As mentioned above, CLP 

loan liquidations require the statutory 

submission of a liquidation plan for 

prior written approval. SBA is unable to 

change this practice without a change in 

legislation. SBA retains the text of the 

rule as proposed. 

Proposed § 120.540(c) provided 

guidance on litigation involving SBA 

loans. Eighteen comments were received 

on this proposed rule, one in support 

and 17 in opposition. Comments in 

opposition tended to focus on the 

number of legal matters contained in the 

definition of Non-Routine litigation and 

its limit on costs and expenses of 

$10,000. Commenters acknowledged 

SBA’s proposal to increase the dollar 

amount of legal fees considered to be for 

Routine Litigation, however, some 

comments sought an even higher 

threshold amount. SBA has reviewed 

the comments, but has retained the rule 

as proposed. It has been the Agency’s 

experience that most legal matters in 

excess of $10,000 are in fact, nonroutine and rarely involve actions that 

are not in dispute. 

No substantive comments were 

received regarding amended 

§ 120.540(d) regarding SBA’s ability to 

take over debt collection litigation of a 

7(a) or 504 loan and thus the regulation 

is adopted as written. 

In amended § 120.540(e), SBA 

provided a process for Lenders and 

CDCs to amend previous liquidation 

and litigation plans. One comment 

opposed this proposed amendment 

stating that the litigation rules and 

procedures as revised by the proposal 

will continue to increase the need for 

SBA to review and approve litigation 

plans on a repeated basis during the 

course of a matter [which] will cause 

significant delays. SBA agrees with the 

suggestion that the revised regulations 

are likely to increase the work involving 

liquidation and litigation. SBA’s 

experience, however, has been that in 

many non-routine litigation cases, the 

increase in fees was not cost effective to 

the Agency when compared with actual 

recoveries. This proposed rule therefore 

is necessary to protect the Agency and 

preserve taxpayer funds arising from 

liquidation recoveries. The rule is 

adopted with no changes. 

No comments were received regarding 

amended §§ 120.540(f) and (g). 

Amended § 120.540(f) provided SBA 

with a waiver of requirements in 

amended paragraphs (b),(c) and (e) of 

this section in cases requiring 

immediate actions and decisions. New 

§ 120.540(g) provided an appeals 

process for Lenders with CLP loans and 

for Authorized CDC Liquidators when 

they disagreed with a decision by SBA 

regarding a proposed liquidation plan. 

The rules are retained as proposed. 

New § 120.541(a) provided timelines 

for SBA approval of liquidation and 

litigation plans submitted by Lenders 

and CDCs. This section also states the 

timelines for actions specified in new 

§ 120.536(b)(5) and § 120.536(b)(6) 

which are established by statute with 

respect to CDCs. These timelines differ 

from the ten day timeline found in new 

§ 120.541(c) which is mandated by 

§ 7(a)(19) of the Small Business Act. 

SBA is making minor technical 

corrections to the cross-references stated 

in the proposed rules. One commenter 

objected to the proposed new rule citing 

the potential impact on recoveries that 

may result from CDCs waiting for a 15- 

day approval from SBA, and the 

potential for these approval periods to 

be extended indefinitely. The 

commenter is encouraged to review 

statutory requirements placed on SBA if 

it is unable to respond within 15 

business days. § 510(c)(2)(E) of the 

Small Business Investment Act requires 

SBA to provide a written notice of no 

decision stating the reasons for the 

SBA’s inability to act on the plan or 

request, along with an estimate of the 

additional time needed by SBA to act on 

the plan or request, and the nature of 

any additional information or 

documentation impeding the SBA from 

acting on the plan or request. Also, SBA 

reporting requirements to Congress as 

mandated in § 510(e)(2)(E) create a 

quality control check on SBA’s progress 

in reaching an expedient decision to 

Lenders and CDCs. Thus, the rule is 

adopted as proposed. 

New § 120.542 regulated the payment 

of legal fees and other expenses in 

conjunction with defaulted SBA loans. 

Thiry-four comments were received 

regarding this new rule, one in support 

and 33 in opposition. Twenty-eight of 

the 33 comments submitted in 

opposition are from CDC principals, or 

the industry’s trade association 

representative. In the proposed rule, 

SBA had specifically requested 

comments from CDCs on this issue. 

Commenters objected to CDCs assuming 

risk and responsibilities for liquidation 

and litigation activity, yet not being 

adequately compensated for their 

additional involvement. One commenter 

could not understand why a CDC would 

request these new responsibilities under 

the proposed compensation scenario. 

Another commenter recommended that 

SBA define by task the items that it 

believes should be routine and under 

the $5,000 cap. A third commenter felt 

that in applying § 120.542(a)(2) of the 

proposed rule, conflicts may occur on 

whether SBA specifically directed CDCs 

to take action which could lead to a 

violation under proposed rule § 120.542 

(b)(2). A fourth commenter felt that SBA 


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should compensate CDCs for the 

additional expenses associated with 

locating and selecting liability insurance 

protection for the work it will assume 

on SBA’s behalf. 

SBA has evaluated the comments 

provided and agrees that some form of 

compensation is warranted for requiring 

a CDC to incorporate the liquidation 

function into its CDC’s practice. 

Commenters supported the position 

taken by the CDC trade association that 

involves compensation as a percentage 

of proceeds received from recoveries 

subject to a cap of $25,000. Having fees 

derived from recoveries and not from 

the unpaid principal balance on a loan 

is responsive to SBA’s policy objective 

that liquidation fees paid to CDCs 

should be based on work performed in 

the recovery process. The suggestion of 

a monetary cap, while noteworthy in 

concept, would be counterproductive in 

practice. Authorized CDC liquidators 

could limit their liquidation activities to 

the $25,000 threshold, and would lose 

incentive to seek recoveries beyond this 

discrete limit. With much of a 

liquidator’s upfront time and effort 

incurred irrespective of the loan size, 

SBA sees a real benefit to maximizing 

recoveries for Authorized CDC 

liquidators as well as the SBA. The 

Agency, however, recognizes a time 

element to liquidation in which, as time 

goes on, the additional recovery 

potential is overshadowed by a decrease 

in the value of the underlying asset. In 

an effort to retain a real incentive to 

liquidators while limiting the practice of 

avoiding final disposition of a collateral 

asset, SBA has agreed to allow 

Authorized CDC liquidators to use net 

recoveries on the defaulted CDC 

debenture as a base unit for computing 

a fee for liquidation activity. SBA 

initially will allow a percentage of net 

recoveries not to exceed 10%, with the 

fee dropping by at least 50% after the 

first $25,000 in fee income is realized. 

SBA will evaluate these fee percentages 

from time to time, and provide notice of 

a change in permissible fee percentages 

when appropriate through notice 

published in the Federal Register. SBA 

would also look for all liquidation 

activity to be completed within nine 

months of SBA’s purchase of the CDC 

debenture. This would amount to eleven 

months after the date of default, and 

would conform to similar timetables for 

Lenders liquidating real property in the 

7(a) program. 

To accomplish this change, SBA has 

inserted a new § 120.542(c). SBA has redesignated proposed § 120.542(c) and 

§ 120.542(d) as § 120.542(d) and 

§ 120.542(e) and implements the section 

as proposed. The new § 120.542(c) 

would provide CDCs with guidance on 

the form of compensation acceptable to 

SBA for CDC loan liquidation activity. 

This would not include SBA 

compensating the CDC for liability 

insurance coverage. SBA views that 

element as a normal cost of doing 

business and provides no similar relief 

to Lenders in the 7(a) program. 

The issue of legal fee compensation 

for work performed by Authorized CDC 

Liquidators on behalf of the Agency 

involves several factors. SBA welcomes 

the use of qualified counsel to address 

legal matters affecting the Agency’s 

ultimate recovery. SBA is not, however, 

in a position to provide Authorized CDC 

Liquidators with unbridled authority to 

incur substantial legal fees. SBA needs 

to be able to weigh prospective recovery 

options against the costs of securing 

those recoveries and only approve those 

actions which best serve the needs of 

the Agency. Since SBA purchases the 

full amount of the defaulted CDC 

debenture, SBA is the sole financial 

beneficiary of the recovery efforts. 

Consequently SBA is unwilling to 

modify the proposed rules regarding 

payment by SBA of legal fees, and 

adopts §§ 120.542(a) and (b) as 

proposed. 

New § 120.546 proposed conditions 

under which SBA would have the 

opportunity to include defaulted SBA 

loans in an asset sale process. SBA 

received one comment in support and 

31 comments in opposition to the 

proposed rule. Commenters objected to 

new § 120.546(b)(1)(i) which provides 

for implied consent to an asset sale if 

Lenders request SBA to purchase the 

guaranteed portion of a loan directly 

from the Registered Holder in a 

secondary market transaction. The 

option to purchase a loan from the 

secondary market investor, which exists 

already, would be the only way for a 

Lender to avoid this outcome. Many 

small Lenders objected to this option, 

noting that the capital needed to 

purchase the guaranteed portion from 

the secondary market is comprised of 

funds that otherwise would have been 

available for additional small business 

lending. These same Lenders added that 

the increased level of non-performing 

assets would have detrimental capital 

consequences and would serve as the 

impetus for leaving the program. Other 

commenters stated that forced asset 

sales inevitably cause lenders to 

participate with a third party, not the 

SBA, and greatly reduces flexibility in 

reaching a workout with a small 

business. Comments also focused on 

whether these purchases from the 

secondary market jeopardize the 

accounting of these transactions as true 

sales, and if Lenders would have to 

retain the guaranteed portion of the loan 

on their books even if sold in a 

secondary market transaction. 

SBA has evaluated the comments and 

has modified its proposal in this final 

rule with respect to 7(a) loans sold on 

the Secondary Market. SBA recognizes 

the possibility that under some 

circumstances recoveries from sales of 

collateral and foreclosure proceedings 

arranged prior to SBA’s purchase of the 

loan from the Registered Holder might 

be higher than recoveries from a sale of 

that loan in an asset sale. In the final 

rule, SBA retains the provision that 

deems the Lender to have consented to 

an asset sale for loans approved on or 

after the effective date of this regulation 

for which the Lender subsequently sells 

the guraranteed portions in the 

secondary market that later default and 

are purchased by SBA from the 

Registered Holder. SBA, however, adds 

a new subparagraph which gives 

Lenders the option, regardless of the fact 

that they already are deemed to have 

consented to the asset sale, to request 

SBA withhold the loan from such a sale 

based on a pending sale of collateral or 

the existence of an existing foreclosure 

proceeding. The Lender will have 15 

business days from the date of SBA’s 

purchase to submit such a request. 

Liquidation actions contemplated but 

not underway at the time of SBA’s 

purchase will not be sufficient 

justification for withholding a loan from 

inclusion in an asset sale. SBA will 

consider the Lender’s request and, in 

SBA’s sole discretion, SBA may provide 

the Lender with limited additional time 

to complete loan restructuring and/or 

liquidation activities. 

SBA also revises § 120.546(b)(1) by 

adding two additional subparagraphs 

one to include defaulted SBA loans 

where SBA has purchased its 

guaranteed portion from the Lender and 

nine months have elapsed from the date 

of SBA’s purchase, and the other to give 

Lenders the option of giving written 

consent to an asset sale for those 

Lenders that determine this form of 

asset disposition to be in their best 

interest. 

Regardless of the circumstances 

leading up to an asset sale, the Lender 

is not released from its obligations to 

continue to properly service and 

liquidate the loan up to the point the 

loan is transferred in an asset sale. A 

new subparagraph (b)(4) has been added 

to the final rule to this effect. Finally, 

Lenders that wish to pursue additional 

recovery on loans after the nine-month 

period subsequent to purchase always 

have the option to repay the guaranty 

purchase amount disbursed by SBA, 


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and release SBA from further 

participation in the loan. 

New § 120.546(c)(1) extends similar 

guidance on the sale of defaulted PCLP 

Loans. Since SBA purchases the full 

amount of the defaulted debenture, the 

rule does not require PCLP CDC 

consent. Thirteen comments were 

received, all in opposition to the 

regulation. One commenter stated that 

since PCLP CDCs have reserves 

established for loan losses, they should 

have some say in the decision to initiate 

an asset sale on a defaulted CDC loan. 

SBA’s loss exposure in a defaulted CDC 

debenture is larger than that of the PCLP 

CDC. Therefore, the Agency believes it 

is in the SBA’s best interest to take 

control of the disposition of the 

defaulted asset. In those instances 

where a PCLP CDC can demonstrate to 

SBA’s satisfaction that an asset sale 

should be withheld in favor of an 

imminent liquidation event, SBA may 

further examine its avenues for 

recovery. Notwithstanding these 

circumstances, SBA will determine the 

course of disposition for the defaulted 

debenture. The regulation is therefore 

adopted without change. 

New § 120.546(c)(2) grants SBA, upon 

its purchase of a Debenture, and in its 

sole discretion, the right to sell the 

defaulted SBA loan in an asset sale. 

Thirteen comments objecting to this 

proposed rule were received. The 

comments centered on the perceived 

loss of a local presence to coordinate an 

orderly liquidation of the loan and the 

diminution of value that would result 

from an SBA asset sale. However, SBA 

may solicit from the CDC that originated 

a particular loan the CDC’s views 

concerning how to best maximize 

recovery from the loan with regard to 

the timing of including that loan in an 

asset sale. SBA will retain the provision 

in the final rule granting the Agency the 

authority, in its sole discretion, to sell 

a defaulted 504 loan in an asset sale. 

Amended § 120.826 revises the basic 

requirements for operating a CDC to 

include, if authorized by SBA, 

liquidating and litigating 504 loans. 

SBA received one comment in support 

of the regulation and nine opposed to 

the proposal. Those opposed to the 

proposed revision cite a lack of 

preparedness, training and source of 

income for CDCs to perform these 

functions. One commenter felt that the 

agency must issue more specific Loan 

Program Requirements for CDCs before 

attempting to mandate that CDCs adhere 

to what are now somewhat general 

standards. Another stated that since 

there are published guidelines for 

liquidation, SBA should provide CDCs 

with a litigation plan format for use in 

submitting such plans. A small CDC 

acknowledged that it does not have the 

staff, expertise or funds to properly 

maintain litigation and liquidation 

functions, stating that if the CDC were 

to be forced to pay for the liquidation 

procedure out of pocket without 

compensation from the SBA, it would 

cause serious hardship for the CDC. 

Much of the revised text in the 

regulation incorporates the Loan 

Program Requirements definition 

discussed above and the authorization 

of CDC liquidators. Commenters are 

concerned that some of the identified 

source documents are outdated and may 

lead to inadvertent confusion with CDCs 

attempting to assume liquidation and 

litigation activities. SBA is well aware 

of the need for CDC training and will 

work with the industry to develop 

comprehensive course materials to 

provide a baseline competency level. 

SBA legal staff likewise will assist in the 

development of training materials and 

reporting requirements to SBA. This 

support will help those CDCs that 

recognize the importance of their 

contribution to this exercise and give 

each CDC an opportunity to comply 

with this regulation. As noted above in 

the discussion of § 120.546, SBA has 

revised the rule to allow for 

compensation in some instances. In all 

other respects, SBA will retain the 

regulation as proposed. 

Revised §§ 120.841, 120.845, and 

120.846 were revised to make minor 

changes to incorporate the use of the 

Loan Program Requirements definition 

in the qualification for ALP and PCLP 

status. No substantive comments were 

received and the regulations are adopted 

as proposed. 

Amended § 120.848 revised 

subparagraphs (a) and (f) to incorporate 

the use of the Loan Program 

Requirements definition and to crossreference this regulation with the 

servicing regulations now contained in 

Subpart E. With just two comments 

received among the 138 respondents 

over the expanded 60 day review 

period, SBA adopts the regulation as 

proposed. 

Section 120.854(a)(2) was amended in 

the proposed rule to identify material 

non-compliance with any Loan Program 

Requirement as grounds for enforcement 

action against a CDC. SBA received a 

number of general comments opposing 

this regulation on the grounds that the 

statement is too vague, open to 

interpretation, and needs clarification. 

The revised paragraph proposed is only 

a technical change in the wording of 

what is already established as the 

determinants for enforcement actions 

against a CDC. Thus, the regulation is 

adopted as proposed. 

Amended § 120.970(a) was a minor 

revision proposed to incorporate the use 

of the Loan Program Requirements in 

the general subparagraph and to crossreference this regulation with servicing 

regulations now contained in Subpart E. 

SBA received no substantive comments 

on this revision and adopts the text in 

the final rule. 

New § 120.975 identified the CDC 

entities that are eligible to become 

Authorized CDC Liquidators. Section 

120.975(a) covered those requirements 

for PCLP CDCs to be designated 

Authorized CDC Liquidators. Five 

comments were received in opposition 

to the proposed regulation, two were 

received in support. One commenter 

objecting to the proposed regulation 

stated that there is no rationale for 

requiring them to handle non-PCLP 

liquidation cases just because they are 

involved in the PCLP program. Another 

commenter said that all CDCs, not just 

PCLP CDCs, should be engaged in 504 

loan liquidation and litigation either 

directly with qualified staff, or by 

agreement with a qualified third-party 

provider acceptable to SBA. Those 

commenters in support of the proposal 

have the existing capability to perform 

the functions and simply request that 

the compensation be reflective of the 

effort involved in the exercise. 

In proposing the regulation, SBA 

adhered to the provisions of 

§ 510(b)(1)(ii) of the Small Business 

Investment Act (‘‘the SBI Act’’). That 

statute specifies that all PCLP CDCs 

operating under § 508 of the SBI Act be 

deemed eligible, subject to having 

experienced staff or using an approved 

contractor. The statute does not limit 

PCLP CDCs to liquidating and litigating 

only PCLP loans. The regulation 

conditions PCLP CDCs’ authority to 

liquidate and litigate their non-PCLP 

loans by requiring the entity to meet one 

of two operational criteria. SBA believes 

most, if not all PCLP CDCs, would meet 

one of these two criteria and would be 

required to use their delegated authority 

to liquidate and handle debt collection 

litigation. Given the diversity of opinion 

on this proposal, and the decreased SBA 

staff devoted to 504 loan liquidation and 

litigation activity, SBA has decided to 

retain § 120.975(a) as proposed in the 

final rule. 

New § 120.975(b) provided guidance 

on all other CDCs becoming Authorized 

CDC Liquidators. Eight comments were 

filed on this subparagraph, two in 

support and six in opposition to the 

regulation. Some of those objecting to 

the proposal stressed the limited 

resources they have for fulfilling this 


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function and the hardship it will likely 

cause. Others felt no need to promulgate 

separate qualification requirements 

because they support having all CDCs as 

Authorized CDC Liquidators. Once 

again, the criteria followed the language 

of the SBI Act, and thus are retained as 

proposed. SBA recognizes the concerns 

expressed by smaller CDCs and will 

work closely with industry leaders to 

ensure that training resources are 

available and to identify qualified thirdparty providers for those unable to staff 

these functions internally. 

New § 120.975(c) added a legal 

counsel qualification requirement to 

ensure that SBA is aware of the parties 

engaged in debt collection litigation on 

behalf of the Agency. No meaningful 

comments were received regarding this 

requirement and the regulation is 

adopted as proposed. 

New § 120.975(d) established the 

process for CDCs to make application 

for authority to liquidate and litigate. No 

substantive comments were received on 

this subparagraph and the regulation is 

adopted as proposed. 

Compliance With Executive Orders 

12866, 12988, and 13132, the Regulatory 

Flexibility Act (5 U.S.C. 601–612), and 

the Paperwork Reduction Act (44 

U.S.C., Ch. 35). 

Executive Order 12866 

The Office of Management and Budget 

has determined that this rule constitutes 

a ‘‘significant regulatory action’’ under 

Executive Order 12866 thus requiring 

Regulatory Impact Analysis, as set forth 

below. 

A. Regulatory Objective of the Final 

Rule 

The objective of the final rule is to 

clarify and make uniform SBA’s existing 

regulations governing lenders 

participating in the 7(a) business loan 

program (Lenders) and Certified 

Development Companies (CDCs) that are 

performing loan servicing, liquidation 

and debt collection litigation. Parts of 

the rule have been drafted in response 

to a statutory directive arising from Pub. 

L. 106–554. Other parts of the final rule 

have been written as a codification of 

both longstanding Agency policy, and 

new direction in the area of liquidation 

and debt collection. The final rule will 

promote better understanding of Agency 

requirements by Lenders and CDCs, and 

improve oversight and management by 

SBA of Lender and CDC liquidation and 

debt collection litigation. 

B. Baseline Costs of Existing Regulatory 

Framework 

SBA 7(a) loan programs presently 

require Lenders to submit liquidation 

plans for most defaulted loans, except 

for those made pursuant to the 

SBAExpress program. SBA estimates 

that these requirements currently result 

in the submission of about 4,000 

liquidation plans per year. The 

approximate time needed for lenders to 

complete a liquidation plan is two hours 

at an average cost of $30 per hour, 

resulting in a total annual cost to 

Lenders of $240,000. 

Presently, CDCs that are authorized to 

perform liquidation activities on 504 

loans submit about 100 liquidation 

plans per year. The approximate time 

needed for CDCs to complete a 

liquidation plan is two hours at an 

average cost of $30 per hour, resulting 

in a total annual cost to CDCs of $6,000. 

SBA’s 7(a) loan programs also 

presently require Lenders to submit 

litigation plans to SBA for approval. 

Lenders currently submit to SBA 

approximately 3,000 litigation plans per 

year. Preparation of each plan takes 

about one hour, at an average cost of 

$150 per hour for private counsel time, 

for a total annual cost to Lenders of 

$450,000. SBA reimburses Lenders for 

their share of reasonable, customary and 

necessary attorney fees, including those 

incurred for the preparation of litigation 

plans. CDCs submit to SBA only a small 

number of litigation plans presently, 

because SBA currently handles most 

litigation involving 504 loans. 

SBA takes an average of one hour to 

review and respond to each liquidation 

and litigation plan submitted by 

Lenders and CDCs. This equates to 

4,000 hours for Lender liquidation plans 

at an average cost of $30 per hour, for 

a total of $120,000. For review of CDC 

liquidation plans by SBA, 100 hours is 

required at an average cost of $30 per 

hour, for a total of $3,000. For Lender 

litigation plans, 3,000 hours of SBA 

review time is required at an average 

cost of $30 per hour, for a total of 

$90,000. SBA processes approximately 

54,000 servicing and liquidation actions 

per year for Lenders and CDCs. The 

average action takes one-half hour for 

SBA to process, for a total of 27,000 

hours processing time. At $30 per hour, 

this equates to a total cost to SBA of 

$810,000. Therefore, the total 

administrative cost to SBA under the 

current regulatory framework for these 

activities is approximately $1,023,000. 

C. Potential Benefits and Costs of the 

Final Rule 

1. Potential Benefits and Costs to 

Lenders 

The rule would provide benefits for 

Lenders because it reduces the costs 

associated with submitting liquidation 

plans to SBA for review and approval. 

The only subprogram unaffected by the 

final rule would be for those loans 

approved under the Certified Lenders 

Program which by statute require the 

submission of a liquidation plan to SBA. 

Submission of liquidation plans is 

currently required for most lending 

programs by SBA procedures and 

regulations. SBA estimates that ending 

this requirement will enable Lenders to 

eliminate the preparation and 

submission to SBA of at least 4,000 

liquidation plans a year. The 

approximate time to complete and 

submit a plan to SBA is about two hours 

at an average cost of $30 per hour. 

Consequently, eliminating the 

requirement to submit liquidation plans 

will save Lenders about $240,000 per 

year. 

Other benefits for Lenders would 

result from the proposal to raise the 

dollar threshold for non-routine 

litigation (for which submission to SBA 

for pre-approval is required) from 

$5,000 to $10,000. With the higher 

dollar threshold, Lenders would be 

required to submit fewer litigation plans 

to SBA. The Agency anticipates that 

approximately 500 fewer plans annually 

would be required to be submitted to 

the Agency as a result of this change. 

Because preparation of each plan takes 

about one hour at an average cost of 

$150 per hour, SBA estimates that the 

enactment of the final rule would result 

in a cost savings of $75,000. 

Finally, the final rule would reduce 

the operational costs associated with 

preparing requests for loan servicing 

and liquidation actions taken by 

Lenders that require prior SBA 

approval. These changes would simplify 

and reduce the costs of loan servicing 

and liquidation processes for Lenders. 

SBA does not know of any specific 

costs that would be imposed on Lenders 

as a result of this rule except for the loss 

of income that would result from the 

limitation of interest on guarantees 

purchased by SBA to 120 days. It has, 

however, been SBA’s experience in 

tracking the receipt of completed 

guarantee purchase request filings that 

such a limitation would affect only a 

small percentage (estimated at around 

10%) of SBA guaranty purchases. In 

review of the comments to the proposed 

rule, Lenders objected to this limitation, 

viewing it as an encroachment on a 

source of income. SBA would like to 

note that current accounting practices 

generally limit the accrual of interest on 

defaulted loans to 90 days, and that after 

that date the loan would be placed in 

non-accrual status. This loss expressed 

by Lenders in their comments to the 

proposed rule relates to SBA bringing its 


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program provisions into greater 

conformance with more traditional 

banking practices. 

In the proposed rule, SBA sought 

comment on any monetized quantitative 

or qualitative costs of Lenders’

compliance with the rule. One comment 

filed by the Chairman of the House 

Small Business committee felt the 

proposed rule did not properly detail 

the indirect effects of the rule on small 

businesses. The thrust of the comment 

centered on the adverse impact the rule 

would have on small lenders and CDCs, 

and consequently local small business 

concerns. The committee Chairman felt 

the increased administrative burden 

resulting from these proposed changes 

to existing regulations would drive 

Lenders and CDCs from the program 

thus contracting the available sources of 

small business capital. According to the 

comment, this second order level of 

analysis must be performed lest the 

Congress initiate legislation to enjoin 

the regulations from taking effect. 

SBA wishes to thank the Chairman for 

providing comment to the proposed 

rule, and would like to outline its 

response. In his comment letter, the 

Chairman identified the proposed rule 

as a modification of the existing 

regulatory structure that has proven 

successful in implementing the Small 

Business Act and the Small Business 

Investment Act. As it is, the final rule 

pertaining to CDC liquidation and debt 

collection activity performed by 

qualified CDCs is consistent with the 

statutory requirements mandated by 

§ 510 of the Small Business Investment 

Act. In the preamble to the proposed 

rule, SBA explained the basis for the 

lengthy delay in fulfilling the legal 

mandate to promulgate regulations 

consistent with the statute. This final 

rule fulfills the Agency’s responsibility 

to Congress under the Act. CDCs will 

retain the option to conduct their own 

liquidation and debt collection activity 

or to utilize a services of another CDC. 

The final rule also devises a form of 

compensation that offsets the additional 

operational costs associated with 

implementation of a liquidation 

function. 

SBA acknowledges the Chairman’s 

comments regarding the adverse impact 

the proposed rules could have on small 

7(a) lenders that would be required to 

liquidate all collateral before seeking 

SBA purchase of the guarantee. SBA has 

decided to modify the final rule to 

require only the liquidation of business 

personal property (chattels) prior to 

seeking purchase. If a Lender only has 

business real property pledged against 

the SBA loan, the Lender can seek either 

a request for guarantee purchase or may 

elect to liquidate the property first. This 

option is presently available in the 

existing regulations cited in the 

comments as being successful in 

implementing the Small Business Act 

and the Small Business Investment Act. 

2. Potential Benefits and Costs to CDCs 

As provided by statute, this final rule 

would enable qualified CDCs to seek 

authority to perform liquidation and 

debt collection litigation, and by doing 

so, qualified CDCs would be 

determining that the benefits of 

conducting their own recovery on 

defaulted loans would outweigh any 

burdens associated with the preparation 

and submission to SBA of liquidation 

and litigation plans as set forth in the 

final rule. Such benefits would include 

the ability to pursue quicker 

liquidations and possibly achieve higher 

recoveries as a result. 

SBA expects that CDCs would incur 

some additional costs as a result of this 

rule. SBA anticipates that CDCs would 

be required to submit to the Agency for 

approval about 300 liquidation plans 

per year, an increase of 200 from the 

approximately 100 liquidation plans 

CDCs currently submit annually. SBA 

estimates that the average time for 

completion of each plan would consist 

of two hours at an average cost of $30 

per hour. Therefore, the annual cost of 

submitting the plans under the final rule 

would be $18,000 per year, for an 

overall cost increase of $12,000 from the 

$6,000 annual cost under the current 

regulatory framework. CDCs that receive 

delegated liquidation authority under 

the final rule would also incur added 

costs through acquiring resources and 

creating the necessary internal 

structures to engage in liquidation and 

litigation activities. SBA had sought 

comments from the public on any other 

monetized, quantitative or qualitative 

costs of CDCs’ compliance with this rule 

and has decided on a compensation 

structure detailed below. 

3. Potential Benefits and Costs for SBA 

and the Federal Government 

The final rule would benefit SBA 

because it would eliminate the need for 

most Lenders to submit liquidation 

plans to SBA (the exception is for 

Lenders under the Certified Lenders 

Program, which are required to submit 

liquidation plans by statute; the number 

of liquidation plans submitted by such 

Lenders currently is minimal, and SBA 

expects even further reduction under 

the rule). SBA estimates that ending this 

requirement would eliminate the need 

for SBA to review about 4,000 

liquidation plans a year. The 

approximate time required for SBA to 

review a liquidation plan is one hour at 

an average cost of $30 per hour. 

Consequently, there would be a cost 

savings to SBA of $120,000 per year. 

Another benefit for SBA would result 

from the proposal to raise the dollar 

threshold for non-routine litigation (for 

which submission to SBA for preapproval is required) from $5,000 to 

$10,000. SBA anticipates that 

approximately 500 fewer plans annually 

would be required to be submitted to 

the Agency as a result of this change. 

Because review of each plan takes about 

one hour at an average cost of $30 per 

hour, SBA estimates that the final rule 

would result in a cost savings of 

$15,000. In addition, SBA would not be 

required to reimburse Lenders for the 

Agency’s proportionate share of the 

costs incurred by Lenders in connection 

with the preparation of these litigation 

plans, resulting in a further savings of 

approximately $50,000. 

Although under the final rule SBA 

would be required to review liquidation 

plans submitted by qualified CDCs 

(estimated at 300 liquidation plans per 

year), this would not represent a 

significant increase in SBA 

administrative costs because currently 

SBA reviews approximately 100 such 

plans per year as well as provides 

assistance to CDCs on the preparation of 

such plans. 

The final rule would also reduce SBA 

administrative costs associated with 

oversight of the Agency’s business loan 

assistance programs by delegating 

greater servicing and liquidation 

responsibilities to Lenders and CDCs, 

and reducing their need to seek the 

prior approval of SBA for their proposed 

recovery activities and for various 

specific liquidation actions. This would 

decrease the amount of time required for 

SBA personnel to manage these 

programs. It is estimated that reviews of 

at least 30% (16,200) of the 

approximately 54,000 servicing and 

liquidation actions SBA currently 

processes annually would be 

eliminated. This would save an average 

of one-half hour processing time per 

action for a total time savings of 8,100 

hours at $30 per hour, or $243,000. 

In addition to increasing consistency 

among SBA’s loan programs and 

creating more uniformity in processing 

guaranty purchase requests, the final 

rule would save taxpayer dollars by 

limiting payment of interest on 

purchased loans to 120 days, except for 

loans where the guaranteed portion has 

been sold in the Secondary Market. This 

change would not be a burden on 

Lenders because Lenders typically place 

loans on interest non-accrual after 90 

days of delinquency and SBA already 


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limits interest purchased to 120 days in 

the fastest growing program 

(SBAExpress). However, it is estimated 

that such a limitation in the proposed 

rule would affect only a small 

percentage (estimated at around 10%) of 

future SBA guaranty purchases. 

Finally, the proposed rule would 

facilitate SBA’s transformation initiative 

by enabling the sale of groups of 7(a) 

and 504 loans in asset sales. To this end, 

the rule provides that Lenders which do 

not purchase the guaranteed portion of 

a defaulted 7(a) loan from a Registered 

Holder in the Secondary Market and 

have SBA purchase the guaranteed 

portion will have provided their consent 

for SBA to include the loan in an asset 

sale. This may turn out to be the most 

cost-effective approach for Lenders, 

particularly those with limited capital 

or operational resources to complete the 

liquidation exercise. Asset sales would 

also be available to CDCs, including 

those operating with limited funding 

since a sale may be the most expedient 

approach to disposing of defaulted 

loans. 

Costs imposed on SBA as a result of 

the rule would include personnel and 

administrative costs associated with 

implementing appeals processes to 

which Lenders and Authorized CDC 

Liquidators may be entitled under the 

final rule when they disagree with a 

decision by an SBA field office or 

servicing center regarding a liquidation 

or litigation plan, when they disagree 

with an SBA determination to deny 

reimbursement of liquidation or 

litigation fees or costs, or when SBA 

denies applications from non-PCLP 

CDCs requesting authority to handle 

liquidation and debt collection 

litigation. 

D. Final Rule Is the Best Available 

Means To Reach the Regulatory 

Objective 

This final rule is SBA’s best available 

means for achieving its regulatory 

objective of clarifying and making 

uniform existing SBA regulations and 

policy, which currently only partially 

address liquidation and debt collection 

litigation and vary across Agency 

lending programs. 

With respect to CDCs that are eligible 

for and request liquidations and debt 

collection authority from SBA, the rule 

merely implements § 307(b) of Pub. L. 

106–554, which requires SBA to 

promulgate regulations to carry out 

§ 510 of the SBI Act, 15 U.S.C. 697g, 

regarding CDC liquidation and debt 

collection litigation authority. SBA 

considers those statutory provisions 

applicable to CDCs to be mandatory, 

and SBA has not identified any 

reasonable alternative to this proposed 

rule implementing the statutory 

mandate. 

Executive Order 12988 

This final action meets applicable 

standards set forth in §§ 3(a) and 3(b)(2) 

of Executive Order 12988, Civil Justice 

Reform, to minimize litigation, 

eliminate ambiguity, and reduce 

burden. In particular, the regulations 

provide for rights of appeal to Lenders 

and CDCs in the event they are 

aggrieved by an Agency decision, 

thereby limiting the possibility of 

litigation by these entities. The final 

action does not have retroactive or 

preemptive effect. 

Executive Order 13132 

This final rule will not have 

substantial direct effects on the States, 

on the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Therefore, for the 

purposes of Executive Order 13132, 

SBA has determined that the rule has no 

federalism implications warranting 

preparation of a federalism assessment. 

The Regulatory Flexibility Act, 5 U.S.C. 

601 et seq. 

This rule directly affects only those 

CDCs that are eligible for and that 

request, authority from SBA to conduct 

liquidation and debt collection 

litigation, along with an unknown 

number of small lending institutions. 

SBA assumes, therefore, that this final 

rule may have an impact on a 

substantial number of small entities. 

However, the rule merely implements 

statutory mandates and, further, SBA 

has determined that the impact on 

entities affected by the rule will not be 

significant for the reasons set forth 

below. 

The final rule would enable qualified 

CDCs to seek authority to perform 

liquidation and debt collection 

litigation, and by doing so, qualified 

CDCs would be determining that the 

benefits of conducting their own 

recovery on defaulted loans would 

outweigh any burdens associated with 

the preparation and submission to SBA 

of liquidation and litigation plans as set 

forth in these regulations. Such benefits 

include the ability to pursue 

liquidations more quickly and 

potentially achieve higher loan 

recoveries. In the loan liquidation pilot 

program established by the Small 

Business Programs Improvement Act of 

1996, CDCs that conducted their own 

liquidation achieved a slightly higher 

overall recovery rate than did SBA in 

the comparison group of cases handled 

directly by the Agency. 

Subject to the new provisions 

contained in § 120.542, SBA would also 

be reimbursing CDCs for their 

reasonable, customary and necessary 

expense disbursements related to 

liquidation activities on particular 

loans, which would include title reports 

and title insurance on real estate 

collateral; appraisals; costs for the care 

and preservation of collateral; fees for 

lien recordings, filings and lien 

searches; and fees for legal services 

provided by outside counsel in litigating 

on a particular loan account. 

SBA anticipates that approximately 

80 of the 270 SBA-approved Certified 

Development Companies will apply to 

become Authorized CDC Liquidators. 

CDCs participating in the Premier 

Certified Lenders Program (PCLP) 

would not be required to seek authority 

to conduct liquidation and debt 

collection litigation on their PCLP loans 

since they are already required to do so 

by statute and regulation. PCLPs, 

however, will be required to liquidate 

and litigate their non-PCLP loans by this 

rule if they are notified by SBA that they 

meet either of the requirements to be an 

Authorized CDC Liquidator in order to 

have one consistent standard for all 

their loans. 

CDCs are expected, by statute, to 

submit liquidation plans to the Agency 

for prior written approval. It is also 

assumed that all CDCs would qualify as 

a small CDC based on SBA size 

standards for non-depository, credit 

intermediaries. Based on the level of 

current CDC liquidation activity, SBA 

estimates receiving an industry total of 

300 liquidation plans per year compared 

with a portfolio of over 33,400 

outstanding CDC debentures for $11.9 

billion as of September 30, 2005. SBA 

estimates that the average time for 

completion of each plan will necessitate 

two hours at an average cost of $30 per 

hour, which is based on a mid-level 

professional salary level of $60,000 per 

year. Therefore, the total annual cost to 

the CDC industry for all plans submitted 

would be $18,000 per year. Using a 1 

percent default rate on $11.9 billion in 

debentures outstanding (300 

liquidations divided by 33,400 

debentures times $11.9 billion 

outstanding) results in an estimated 

liquidation portfolio of $119 million. 

With their debentures representing no 

more than five percent of the 

outstanding CDC debenture portfolio at 

fiscal year end, small CDCs would be no 

more likely to assume the industry 

expense burden than larger CDCs. The 

additional costs from enacting the final 

rule could be recaptured in liquidation 


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recoveries equivalent to just 2.0% of the 

estimated debenture balance in default. 

Based on this assessment, SBA 

concludes that this final rule will not 

have a significant impact on small 

CDCs. 

The rule would also not impose a 

significant economic impact on small 

lending institutions in the 7(a) program 

for similar reasons. SBA size standards 

for small banks, savings institutions and 

credit unions is up to $165 million in 

total assets. A current review of the 

outstanding 7(a) loans finds over 95% of 

the SBA portfolio held by 400 of 5,200 

registered lender participants, each of 

them larger in size than the stated size 

standard for small depository lending 

institutions. Most liquidations will be 

undertaken by the more active lenders 

whose total assets or average annual 

receipts far exceed the size standard for 

credit intermediaries. Consequently, 

this group will also incur the majority 

of liquidation expenses associated with 

collateral dispositions, leaving small 

lending institutions marginally 

impacted by this final rule. Small 

lenders that decide to sell the 

guaranteed portion of an SBA loan in 

the secondary market could actually 

benefit from the savings associated with 

the use of an asset sales mechanism. 

This benefit is derived from the 

availability of an asset disposition 

alternative that may be less costly for 

small lenders than the effort and 

expenses involved in planning, 

preparing and implementing a loan 

liquidation exercise. The low level of 

loan activity from small lenders may 

have a marginal overall effect on the 

program, but for individual small 

lenders the savings may be meaningful. 

SBA recognizes that not all small 

lenders will opt for implied consent and 

will purchase the guaranteed interest 

from the secondary market. This 

purchase exercise, and the related cost 

of liquidating the SBA loan could 

increase the marginal costs of operating 

in the program; however, until SBA has 

more definitive data on which of the 

two options small lenders actually 

select, the impact on small lenders is 

indeterminate. SBA will monitor small 

lender liquidation activity for the next 

2 years following enactment of the final 

rule and will re-examine its burden 

analysis on small lenders at that time to 

determine if changes are necessary. 

SBA’s assessment of the impact on 

small lenders filing a written request to 

have SBA to refrain from selling the 

unguaranteed portion of a defaulted 

loan in an asset sale is referenced in the 

discussion of the Paperwork Reduction 

Act detailed below. 

Lenders would also realize a cost 

savings associated with eliminating the 

need to submit liquidation plans to SBA 

(except for Lenders under the Certified 

Lenders Program which are required to 

submit liquidation plans by statute), 

which is currently required by SBA 

procedures and regulations. SBA 

estimates that ending this requirement 

will enable Lenders to eliminate the 

preparation and submission to SBA of at 

least 4,000 liquidation plans a year. The 

approximate time to complete and 

submit these plans to SBA is about two 

hours at an average cost of $30 per hour. 

The average cost is based on a mid-level 

professional salary level of $60,000 per 

year. Consequently, eliminating the 

requirement to submit liquidation plans 

will save Lenders about $240,000 per 

year. The rule also reduces the number 

of loan servicing and liquidation actions 

taken by Lenders that require prior SBA 

approval as compared with existing 

SBA requirements, and makes the 

remaining prior approval requirements 

similar among the various SBA loan 

programs, thereby simplifying the loan 

servicing and liquidation process for 

SBA participating Lenders. In addition, 

as pointed out above, small lending 

institutions will be required to submit 

fewer litigation plans since the 

proposed rule raises the dollar threshold 

for Non-Routine Litigation from $5,000 

to $10,000. SBA anticipates that 

approximately 500 fewer plans will be 

required to be submitted to the Agency 

as a result of this change. Since 

preparation of each plan takes about one 

hour at an average cost of $150 per hour, 

which is based on a nationwide estimate 

of the billing level for attorneys 

qualified to perform this type of work, 

SBA estimates that the final rule will 

result in a cost savings of $75,000. 

In addition, this regulation merely 

codifies the existing SBA practice of 

requiring the submission of liquidation 

and litigation plans by Lenders and 

CDCs, but reduces any burden from this 

requirement as to litigation plans by 

raising the dollar threshold for NonRoutine Litigation from $5,000 to 

$10,000, as noted above. Further, the 

performance standards for 7(a) and 504 

loan servicing and liquidation contained 

in these regulations merely codify 

existing SBA policy as set forth in SOPs 

and currently existing lending 

standards. In addition, it is a prudent 

lending practice for Lenders to prepare 

plans prior to undertaking liquidation 

and debt collection litigation. Therefore, 

this rule does not impose any new or 

unnecessary requirements on these 

small entities. 

It is for these aforementioned reasons 

that SBA certifies that this final rule 

will not have a significant economic 

impact on a substantial number of small 

entities. 

The Paperwork Reduction Act 

SBA has determined that this rule 

imposed additional reporting or 

recordkeeping requirements under the 

Paperwork Reduction Act, 44 U.S.C. Ch. 

35; (1) Application for Liquidation 

Authority; (2) the Liquidation Plan; (3) 

the Litigation Plan; and (4) Request for 

Emergency Waiver. SBA received 

twenty comments objecting to the 

estimates used by SBA in its Paperwork 

Reduction Act analysis pertaining to 

authorizing CDCs to liquidate and 

litigate, and preparing liquidation and 

litigation plans acceptable to SBA. In 

complying with the Paperwork 

Reduction Act, SBA is obligated to 

address the estimated time taken by the 

public to complete the forms 

recommended for use. The information 

requested by SBA is maintained by 

Lenders in the normal course of their 

daily liquidation activity. SBA is 

requesting the Lenders disclose what 

they would readily have available in 

operating a liquidation function of a 

commercial lending practice. SBA is 

cognizant of the preparation work 

involved in a liquidation report filing, 

but does not view the form filing as 

taking more than 2 hours of work by a 

mid-level professional. 

When evaluating the burden 

associated with filing litigation plans, 

SBA looks only to those instances when 

loan recovery through litigation is 

probable. SBA is also considering only 

those contemplated legal actions as nonroutine in nature. When this level of 

filtering is applied to an estimate of the 

annual number of initial liquidations 

filed with SBA, the total cost estimate 

of $450,000 per year is reasonable. 

The final rule provides Lenders with 

a limited opportunity to request SBA 

refrain from including the unguaranteed 

portion of an SBA loan with the SBApurchased guaranteed portion in an 

asset sale conducted or overseen by 

SBA. This written notice would include 

an explanation supporting the Lender’s 

request and would take the form of a 

simple letter. SBA has determined that 

this level of effort does not give rise to 

a cost analysis under the Paperwork 

Reduction Act. 

Thus, based on its review of these 

proposed liquidation activities, SBA 

maintains that its estimates used in 

determining the costs of additional 

reporting or recordkeeping requirements 

under the Paperwork Reduction Act are 

accurate. SBA therefore makes no 

changes to the information collections 

in this final rule. In addition, SBA has 


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submitted these information collections 

to OMB for review and will publish a 

notice in the Federal Register 

announcing the results of the review. 

List of Subjects in 13 CFR Part 120 

Loan programs—business, Reporting 

and recordkeeping requirements, Small 

businesses. 

■ 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), 697(a)(2), and 697(g). 

■ 2. Amend § 120.10 by adding the 

definitions of ‘‘Authorized CDC 

Liquidator’’ and ‘‘Loan Program 

Requirements’’, and by adding a 

sentence to the end of the definition of 

‘‘SOPs’’ as follows: 

§ 120.10 Definitions. 

* * * * * 

Authorized CDC Liquidator is a CDC 

in good standing with authority under 

the Act and SBA regulations to conduct 

liquidation and certain debt collection 

litigation in connection with 504 loans, 

as authorized by § 120.975. 

* * * * * 

Loan Program Requirements are 

requirements imposed upon Lenders or 

CDCs by statute, SBA regulations, any 

agreement the Lender or CDC has 

executed with SBA, SBA SOPs, official 

SBA notices and forms applicable to the 

7(a) and 504 loan programs, and loan 

authorizations, as such requirements are 

issued and revised by SBA from time to 

time. For CDCs, this term also includes 

requirements imposed by Debentures, as 

that term is defined in § 120.802. 

* * * * * 

SOPs * * * SOPs are publicly 

available on SBA’s Web site at http:// 

www.sba.gov in the online library. 

Subpart A—Policies Applying to All 

Business Loans 

■ 3. Amend the undesignated center 

heading immediately preceding 

§ 120.180 to read as follows: 

Applicability and Enforceability of 

Loan Program Requirements 

■ 4. Revise § 120.180 to read as follows: 

§ 120.180 Lender and CDC compliance 

with Loan Program Requirements. 

Lenders must comply and maintain 

familiarity with Loan Program 

Requirements for the 7(a) program, as 

such requirements are revised from time 

to time. CDCs must comply and 

maintain familiarity with Loan Program 

Requirements for the 504 program, as 

such requirements are revised from time 

to time. Loan Program Requirements in 

effect at the time that a Lender or CDC 

takes an action in connection with a 

particular loan govern that specific 

action. For example, although loan 

closing requirements in effect when a 

Lender or CDC closes a loan will govern 

the closing actions, a Lender or CDC’s 

liquidation actions on the same loan are 

subject to the liquidation requirements 

in effect at the time that a liquidation 

action is taken. 

■ 5. Add § 120.181 to read as follows: 

§ 120.181 Status of Lenders and CDCs. 

Lenders, CDCs and their contractors 

are independent contractors that are 

responsible for their own actions with 

respect to a 7(a) or 504 loan. SBA has 

no responsibility or liability for any 

claim by a borrower, guarantor or other 

party alleging injury as a result of any 

allegedly wrongful action taken by a 

Lender, CDC or an employee, agent, or 

contractor of a Lender or CDC. 

■ 6. Revise the undesignated center 

heading immediately preceding 

§ 120.195 to read as follows: 

Reporting 

■ 7. Add § 120.197 to read as follows: 

§ 120.197 Notifying SBA’s Office of 

Inspector General of suspected fraud. 

Lenders, CDCs, Borrowers, and others 

must notify the SBA Office of Inspector 

General of any information which 

indicates that fraud may have occurred 

in connection with a 7(a) or 504 loan. 

Send the notification to the Assistant 

Inspector General for Investigations, 

Office of Inspector General, U.S. Small 

Business Administration, 409 3rd Street, 

SW., Washington, DC 20416. 

Subpart D—Lenders 

■ 8. Amend § 120.440 by revising the 

section heading and the first sentence to 

read as follows: 

§ 120.440 The Certified Lenders Program. 

Under the Certified Lenders Program 

(CLP), designated Lenders process and 

close 7(a) loans and service and 

liquidate such loans in accordance with 

subpart E of this part. * * * 

■ 9. Revise § 120.453 to read as follows: 

§ 120.453 Responsibilities of PLP Lenders 

for servicing and liquidating 7(a) loans. 

Servicing and Liquidation 

responsibilities for PLP Lenders are set 

forth in subpart E of this part. 

■ 10a. Revise the heading of subpart E 

to read as follows: 

Subpart E—Servicing, Liquidation and 

Debt Collection Litigation of 7(a) and 

504 Loans 

■ 10b. Remove § 120.500 and §§ 120.510 

through § 120.513, and the undesignated 

center heading immediately preceding 

§ 120.510 entitled ‘‘Servicing’’. 

■ 11. Revise § 120.520 to read as 

follows: 

§ 120.520 Purchase of 7(a) loan 

guarantees. 

(a) When SBA will purchase—(1) For 

loans approved on or after May 14, 

2007. A Lender may demand in writing 

that SBA honor its guarantee if the 

Borrower is in default on any 

installment for more than 60 calendar 

days (or less if SBA agrees) and the 

default has not been cured, provided all 

business personal property securing the 

defaulted SBA loan has been liquidated. 

A Lender may also submit a request for 

purchase of a defaulted 7(a) loan when 

a Borrower files for federal bankruptcy 

once a period of at least 60 days has 

elapsed since the last full installment 

payment. If a Borrower cures a default 

before a Lender requests purchase by 

SBA, the Lender’s right to request 

purchase on that default lapses. SBA 

considers liquidation of business 

personal property collateral to be 

completed when a Lender has 

exhausted all prudent and commercially 

reasonable efforts to collect upon these 

assets. In addition, SBA, in its sole 

discretion, may purchase the guaranteed 

portion of a loan at any time whether in 

default or not, with or without the 

request from a Lender. 

(2) For loans approved before May 14, 

2007. The regulations applicable to the 

time that a Lender may make demand 

for purchase that were in effect 

immediately prior to this date will 

govern such loans. 

(b) Documentation for purchase. SBA 

will not purchase its guaranteed portion 

of a loan from a Lender unless the 

Lender has submitted to SBA 

documentation that SBA deems 

sufficient to allow SBA to determine 

whether purchase of the guarantee is 

warranted under § 120.524. 

(c) Purchase of loans sold in 

Secondary Market. When the Lender has 

sold the guaranteed portion of a loan in 

the Secondary Market, under subpart F 

of this part, Lenders must perform all 

necessary servicing and liquidation 

actions for such loan even after SBA has 

purchased the guaranteed portion of 

such loan from a Registered Holder (as 

that term is defined in § 120.600(i)). In 

the event that SBA purchases its 

guaranteed portion of such a loan from 

the Registered Holder, Lenders must 


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provide SBA with a loan status report 

within 15 business days of such 

purchase. This report should include 

but not be limited to, a status report on 

the borrower and current condition of 

the collateral, plans for any type of loan 

workout or loan restructuring, existing 

liquidation activities including the sale 

of loan collateral, or the status of 

ongoing foreclosure proceedings. The 

report should accompany requested 

documentation that SBA deems 

sufficient to be able to review the 

Lender’s administration of the loan 

under § 120.524. A Lender’s failure to 

provide sufficient documentation may 

constitute a material failure to comply 

with SBA requirements under 

§ 120.524(a)(1), and may lead to 

initiation of an action for recovery from 

the Lender of all or some of the moneys 

SBA paid to a Registered Holder on a 

guarantee. SBA will also evaluate the 

Lender’s continued participation in the 

Secondary Market and may restrict 

further sale of guaranteed portions into 

the Secondary Market until SBA 

determines that the Lender has provided 

sufficient documentation for purchases. 

(d) No waiver of SBA’s rights. 

Purchase by SBA of the guaranteed 

portion of a loan, or of a portion of 

SBA’s guarantee of a loan, either 

through a negotiated agreement with a 

Lender or otherwise, does not waive any 

of SBA’s rights to recover from the 

responsible Lender any money paid on 

the guarantee based upon the 

occurrence of any of the events set forth 

in § 120.524(a) in connection with that 

loan. 

■ 12. Amend § 120.522 by revising the 

section heading and paragraph (b), and 

removing paragraph (d), to read as 

follows: 

§ 120.522 Payment of accrued interest to 

the Lender or Registered Holder when SBA 

purchases the guaranteed portion. 

* * * * * 

(b) Payment to Lender—(1) For loans 

approved on or after May 14, 2007. SBA 

will pay up to a maximum of 120 days 

interest to a Lender at the time of 

guarantee purchase. 

(2) For loans approved before May 14, 

2007. The regulations applicable to the 

amount of interest that SBA will pay to 

a Lender upon loan default that were in 

effect immediately prior to this date will 

govern such loans. 

* * * * * 

■ 13. Amend § 120.524 by revising 

paragraphs (a)(1), (a)(8), and (b) through 

(d) to read as follows: 

§ 120.524 When is SBA released from 

liability on its guarantee on loans? 

(a) * * * 

(1) The Lender has failed to comply 

materially with any Loan Program 

Requirement for 7(a) loans. 

* * * * * 

(8) The Lender has failed to request 

that SBA purchase a guarantee within 

180 days after maturity of the loan. 

However, if the Lender is conducting 

liquidation or debt collection litigation 

in connection with a loan that has 

matured, SBA will be released from its 

guarantee only if the Lender fails to 

request that SBA purchase the guarantee 

within 180 days after the completion of 

the liquidation or debt collection 

litigation; 

* * * * * 

(b) If SBA determines, at any time, 

that any of the events set forth in 

paragraph (a) of this section occurred in 

connection with that loan, SBA is 

entitled to recover any moneys paid on 

the guarantee plus interest from the 

Lender responsible for those events. 

(c) If the Lender’s loan documentation 

or other information indicates that one 

or more of the events in paragraph (a) 

of this section occurred, SBA may 

undertake such investigation as it deems 

necessary to determine whether to 

honor or deny the guarantee, and may 

withhold a decision on whether to 

honor the guarantee until the 

completion of such investigation. 

(d) Any information provided to SBA 

by a Lender or other party will not 

prejudice, or be construed as effecting 

any waiver of, SBA’s right to deny 

liability for a guarantee if one or more 

of the events listed in paragraph (a) of 

this section occur. 

* * * * * 

■ 14. Remove the undesignated center 

heading immediately preceding 

§ 120.530. 

■ 15. Add the following new § 120.535 

through § 120.536 to read as follows: 

§ 120.535 Standards for Lender and CDC 

loan servicing, loan liquidation and debt 

collection litigation. 

(a) Service using prudent lending 

standards. Lenders and CDCs must 

service 7(a) and 504 loans in their 

portfolio no less diligently than their 

non-SBA portfolio, and in a 

commercially reasonable manner, 

consistent with prudent lending 

standards, and in accordance with Loan 

Program Requirements. Those Lenders 

and CDCs that do not maintain a nonSBA loan portfolio must adhere to the 

same prudent lending standards for loan 

servicing followed by commercial 

lenders on loans without a government 

guarantee. 

(b) Liquidate using prudent lending 

standards. Lenders and Authorized CDC 

Liquidators must liquidate and conduct 

debt collection litigation for 7(a) and 

504 loans in their portfolio no less 

diligently than for their non-SBA 

portfolio, and in a prompt, cost-effective 

and commercially reasonable manner, 

consistent with prudent lending 

standards, and in accordance with Loan 

Program Requirements and with any 

SBA approval of either a liquidation or 

litigation plan or any amendment of 

such a plan. Lenders and CDCs that do 

not maintain a non-SBA loan portfolio 

must adhere to the same prudent 

lending standards followed by 

commercial lenders that liquidate loans 

without a government guarantee. They 

are also to operate in accordance with 

Loan Program Requirements and with 

any SBA approval of either a liquidation 

or litigation plan or any amendment of 

such a plan. 

(c) Absence of actual or apparent 

conflict of interest. A CDC must not take 

any action in the liquidation or debt 

collection litigation of a 504 loan that 

would result in an actual or apparent 

conflict of interest between the CDC (or 

any employee of the CDC) and any 

Third Party Lender, associate of a Third 

Party Lender, or any person 

participating in a liquidation, 

foreclosure or loss mitigation action. 

(d) SBA rights to take over servicing 

or liquidation. SBA may, in its sole 

discretion, undertake the servicing, 

liquidation and/or litigation of any 7(a) 

or 504 loan. If SBA elects to service, 

liquidate and/or litigate a loan, it will 

notify the relevant Lender or CDC in 

writing, and, upon receiving such 

notice, the Lender or CDC must assign 

the Loan Instruments to SBA and 

provide any needed assistance to allow 

SBA to service, liquidate and/or litigate 

the loan. SBA will notify the Borrower 

of the change in servicing. SBA may use 

contractors to perform these actions. 

§ 120.536 Servicing and liquidation actions 

that require the prior written consent of 

SBA. 

(a) Actions by Lenders and CDCs. 

Except as otherwise provided in a 

Supplemental Guarantee Agreement 

with a Lender or an Agreement with a 

CDC, SBA must give its prior written 

consent before a Lender or CDC takes 

any of the following actions: 

(1) Increases the principal amount of 

a loan above that authorized by SBA at 

loan origination. 

(2) Confers a Preference on the Lender 

or CDC or engages in an activity that 

creates a conflict of interest. 

(3) Compromises the principal 

balance of a loan. 

(4) Takes title to any property in the 

name of SBA. 


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(5) Takes title to environmentally 

contaminated property, or takes over 

operation and control of a business that 

handles hazardous substances or 

hazardous wastes. 

(6) Transfers, sells or pledges more 

than 90% of a loan. 

(7) Takes any action for which prior 

written consent is required by a Loan 

Program Requirement. 

(b) Actions by CDCs only (other than 

PCLP CDCs). SBA must give its prior 

written consent before a CDC, other than 

a PCLP CDC, takes any of the following 

actions with respect to a 504 loan: 

(1) Alters substantially the terms or 

conditions of any Loan Instrument. 

(2) Releases collateral having a 

cumulative market value in excess of 10 

percent of the Debenture amount or 

$10,000, whichever is less. 

(3) Accelerates the maturity of the 

note. 

(4) Compromises or releases any claim 

against any Borrower or obligor, or 

against any guarantor, standby creditor, 

or any other person that is contingently 

liable for moneys owed on the loan. 

(5) Purchases or pays off any 

indebtedness secured by the property 

that serves as collateral for a defaulted 

504 loan, such as payment of the debt(s) 

owed to a lien holder or lien holders 

with priority over the lien securing the 

loan. 

(6) Accepts a workout plan to 

restructure the material terms and 

conditions of a loan that is in default or 

liquidation. 

(7) Takes any action for which prior 

written consent is required by a Loan 

Program Requirement. 

(c) Documentation requirements. For 

all servicing/liquidation actions not 

requiring SBA’s prior written consent, 

Lenders and CDCs must document the 

justifications for their decisions and 

retain these and supporting documents 

in their file for future SBA review to 

determine if the actions taken by the 

Lender or CDC were prudent, 

commercially reasonable, and complied 

with all Loan Program Requirements. 

■ 16. Remove the undesignated center 

heading before § 120.540 entitled 

‘‘Liquidation of Collateral.’’

§ 120.540 [Redesignated as § 120.545] 

■ 17. Redesignate § 120.540 as 

§ 120.545, and remove paragraph (f) 

from newly designated § 120.545. 

■ 18. Add new § 120.540 through 

§ 120.542 to read as follows: 

§ 120.540 Liquidation and litigation plans. 

(a) SBA oversight. SBA may monitor 

or review liquidation through the 

review of liquidation plans which all 

Authorized CDC Liquidators and certain 

Lenders must submit to SBA for 

approval prior to undertaking 

liquidation, and through liquidation 

wrap-up reports which Lenders must 

submit to SBA at the completion of 

liquidation. SBA will monitor debt 

collection litigation, such as judicial 

foreclosures, bankruptcy proceedings 

and other state and federal insolvency 

proceedings, through the review of 

litigation plans, as set forth in this 

section. 

(b) Liquidation plan. An Authorized 

CDC Liquidator and a Lender for a loan 

made under its authority as a CLP 

Lender must, prior to undertaking any 

liquidation, submit a written proposed 

liquidation plan to SBA and receive 

SBA’s written approval of that plan. 

(c) Litigation plan. An Authorized 

CDC Liquidator and a Lender must 

obtain SBA’s prior approval of a 

litigation plan before proceeding with 

any Non-Routine Litigation, as defined 

in paragraph (c)(1) of this section. SBA’s 

prior approval is not required for 

Routine Litigation, as defined in 

paragraph (c)(2) of this section. 

(1) Non-Routine Litigation includes: 

(i) All litigation where factual or legal 

issues are in dispute and require 

resolution through adjudication; 

(ii) Any litigation where legal fees are 

estimated to exceed $10,000; 

(iii) Any litigation involving a loan 

where a Lender or Authorized CDC 

Liquidator has an actual or potential 

conflict of interest with SBA; and 

(iv) Any litigation involving a 7(a) or 

504 loan where the Lender or CDC has 

made a separate loan to the same 

borrower which is not a 7(a) or 504 loan. 

(2) Routine Litigation means 

uncontested litigation, such as nonadversarial matters in bankruptcy and 

undisputed foreclosure actions, having 

estimated legal fees not exceeding 

$10,000. 

(d) Decision by SBA to take over 

litigation. If a Lender or Authorized 

CDC Liquidator is conducting, or 

proposes to conduct, debt collection 

litigation on a 7(a) loan or 504 loan, 

SBA may take over the litigation if SBA 

determines that the outcome of the 

litigation could adversely affect SBA’s 

administration of the loan program or 

that the Government is entitled to legal 

remedies that are not available to the 

Lender or Authorized CDC Liquidator. 

Examples of cases that could adversely 

affect SBA’s administration of a loan 

program include, but are not limited to, 

situations where SBA determines that: 

(1) The litigation involves important 

governmental policy or program issues. 

(2) The case is potentially of great 

precedential value or there is a risk of 

adverse precedent to the Government. 

(3) The Lender or Authorized CDC 

Liquidator has an actual or potential 

conflict of interest with SBA. 

(4) The legal fees of the Lender or 

Authorized CDC Liquidator’s outside 

counsel are unnecessary, unreasonable 

or not customary in the locality. 

(e) Amendments to a liquidation or 

litigation plan. Lenders and Authorized 

CDC Liquidators must submit an 

amended liquidation or litigation plan 

to address any material changes arising 

during the course of the liquidation or 

litigation that were not addressed in the 

original plan or an amended plan. 

Lenders and Authorized CDC 

Liquidators must obtain SBA’s written 

approval of the amended plan prior to 

taking any further liquidation or 

litigation action. Examples of such 

material changes that would require the 

approval of an amended plan include, 

but are not limited to: 

(1) Changes arising during the course 

of Routine Litigation that transform the 

litigation into Non-Routine Litigation, 

such as when the debtor contests a 

foreclosure or when the actual legal fees 

incurred exceed $10,000. 

(2) If SBA has approved a litigation 

plan where anticipated legal fees exceed 

$10,000, or has approved an amended 

plan, and thereafter the anticipated or 

actual legal fees increase by more than 

15 percent. 

(3) If SBA has approved a liquidation 

plan, or an amended plan, and 

thereafter the anticipated or actual costs 

of conducting the liquidation increase 

by more than 15 percent. 

(f) Limited waiver of need for a written 

liquidation or litigation plan. SBA may, 

in its discretion, and upon request by a 

Lender or Authorized CDC Liquidator, 

waive the requirements of paragraphs 

(b), (c) or (e) of this section, if one of the 

following extraordinary circumstances 

warrant such a waiver: the need for 

expeditious action to avoid the potential 

risk of loss on the loan or dissipation of 

collateral exists; an immediate response 

is required to litigation by a borrower, 

guarantor or third party; or another 

urgent reason arises. The Lender or 

Authorized CDC Liquidator must obtain 

SBA’s written consent to such waiver 

before undertaking the Emergency 

action, if at all practicable. SBA’s waiver 

will apply only to the specific action(s) 

which the Lender or Authorized CDC 

Liquidator has identified to SBA as 

being necessary to address the 

Emergency. The Lender or Authorized 

CDC Liquidator must, as soon after the 

Emergency as is practicable, submit a 

written liquidation or litigation plan to 

SBA or, if appropriate, a written 

amended plan, and may not take further 

liquidation or litigation action without 


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written approval of such plan or 

amendment by SBA. 

(g) Appeals. A Lender for loans made 

under its authority as a CLP Lender or 

an Authorized CDC Liquidator that 

disagrees with an SBA office’s decision 

pertaining to an original or amended 

liquidation plan, other than such 

portions of the plan that address 

litigation matters, may submit a written 

appeal to the AA/FA within 30 days of 

the decision. The AA/FA or designee 

will make the final Agency decision in 

consultation with the Associate General 

Counsel for Litigation. A Lender or 

Authorized CDC Liquidator that 

disagrees with an SBA office’s decision 

pertaining to an original or amended 

litigation plan, or the portion of a 

liquidation plan addressing litigation 

matters, may submit a written appeal to 

the Associate General Counsel for 

Litigation within 30 days of the 

decision. The Associate General 

Counsel for Litigation will make the 

final Agency decision in consultation 

with the AA/FA. 

§ 120.541 Time for approval by SBA. 

(a) Except as set forth in paragraph (c) 

of this section, in responding to a 

request for approval under 

§§ 120.540(b), 120.540(c), 120.536(b)(5) 

or 120.536(b)(6), SBA will approve or 

deny the request within 15 business 

days of the date when SBA receives the 

request. If SBA is unable to approve or 

deny the request within this 15-day 

period, SBA will provide a written 

notice of no decision to the Lender or 

Authorized CDC Liquidator, stating the 

reason for SBA’s inability to act; an 

estimate of the additional time required 

to act on the plan or request; and, if SBA 

deems appropriate, requesting 

additional information. 

(b) Except as set forth in paragraph (c) 

of this section, unless SBA gives its 

written consent to a proposed 

liquidation or litigation plan, or a 

proposed amendment of a plan, or any 

of the actions set forth in § 120.536(b)(5) 

or § 120.536(b)(6), SBA will not be 

deemed to have approved the proposed 

action. 

(c) If a Lender seeks to perform 

liquidation on a loan made under its 

authority as a CLP Lender by submitting 

a liquidation plan to SBA for approval, 

SBA will approve or deny such plan 

within ten business days. If SBA fails to 

approve or deny the plan within ten 

business days, SBA will be deemed to 

have approved such plan. 

§ 120.542 Payment by SBA of legal fees 

and other expenses. 

(a) Legal fees SBA will not pay. (1) 

SBA will not pay legal fees or other 

costs that a Lender or Authorized CDC 

Liquidator incurs: 

(i) In asserting a claim, cross claim, 

counterclaim, or third-party claim 

against SBA or in defense of an action 

brought by SBA, unless payment of such 

fees or costs is otherwise required by 

federal law. 

(ii) In connection with actions of a 

Lender or Authorized CDC Liquidator’s 

outside counsel for performing nonlegal liquidation services, unless 

authorized by SBA prior to the action. 

(iii) In taking actions which solely 

benefit a Lender or Authorized CDC 

Liquidator and which do not benefit 

SBA, as determined by SBA. 

(2) SBA will not pay legal fees or 

other costs a Lender or CDC incurs in 

the defense of, or pay for any settlement 

or adverse judgment resulting from, a 

suit, counterclaim or other claim by a 

borrower, guarantor, or other party that 

seeks damages based upon a claim that 

the Lender or CDC breached any duty or 

engaged in any wrongful actions, unless 

SBA expressly directed the Lender or 

CDC to undertake the allegedly 

wrongful action that is the subject of the 

suit, counterclaim or other claim. 

(b) Legal fees SBA may decline to pay. 

In addition to any right or authority 

SBA may have under law or contract, 

SBA may, in its discretion, decline to 

pay a Lender or Authorized CDC 

Liquidator for all, or a portion, of legal 

fees and/or other costs incurred in 

connection with the liquidation and/or 

litigation of a 7(a) loan or 504 loan 

under any of the following 

circumstances: 

(1) SBA determines that the Lender or 

Authorized CDC Liquidator failed to 

perform liquidation or litigation 

promptly and in accordance with 

commercially reasonable standards, in a 

prudent manner, or in accordance with 

any Loan Program Requirement or SBA 

approvals of either a liquidation or 

litigation plan or any amendment of 

such a plan. 

(2) A Lender or Authorized CDC 

Liquidator fails to obtain prior written 

approval from SBA for any liquidation 

or litigation plan, or for any amended 

liquidation or litigation plan, or for any 

action set forth in § 120.536, when such 

approval is required by these 

regulations or a Loan Program 

Requirement. 

(3) If SBA has not specifically 

approved fees or costs identified in an 

original or amended liquidation or 

litigation plan under § 120.540, and 

SBA determines that such fees or costs 

are not reasonable, customary or 

necessary in the locality in question. In 

such cases, SBA will pay only such fees 

as it deems are necessary, customary 

and reasonable in the locality in 

question. 

(c) Fees for liquidation actions 

performed by Authorized CDC 

Liquidators. Subject to paragraph (d) of 

this section, SBA will compensate 

Authorized CDC Liquidators for their 

liquidation actions on 504 loans, 

whether such actions are performed by 

the CDC or the CDC’s contractor 

retained in accordance with 

§ 120.975(a)(2) or (b)(2)(ii). The 

compensation fee will be a percentage 

(to be published in the Federal Register 

from time to time, but not to exceed 

10%) of the net recovery proceeds 

realized from the sale of collateral or 

other liquidation actions on an 

individual loan, up to a fee of $25,000 

for such loan, and a lower percentage 

(also to be published in the Federal 

Register from time to time, but not to 

exceed 5%) of the realized net recovery 

proceeds above such amounts. The 

compensation fee limits set forth in this 

paragraph (c) do not include reasonable, 

customary and necessary administrative 

costs related to liquidation activities on 

such loan that are incurred in 

accordance with the liquidation plan, or 

amendments thereto, approved by SBA 

pursuant to § 120.540(b). The 

Authorized CDC Liquidator may 

compensate its contractor up to the 

amount it receives from SBA. All 

requests for compensation fees must be 

received by SBA within nine months 

from the date of SBA’s purchase of the 

defaulted debenture. Fee requests not 

received within such timeframe will be 

automatically rejected. 

(d) Appeals—liquidation costs. A 

Lender or Authorized CDC Liquidator 

that disagrees with a decision by an 

SBA office to decline to reimburse all, 

or a portion, of the fees and/or costs 

incurred in conducting liquidation may 

appeal this decision in writing to the 

AA/FA within 30 days of the decision. 

The decision of the AA/FA or designee 

will be made in consultation with the 

Associate General Counsel for 

Litigation, and will be the final Agency 

decision. 

(e) Appeals—litigation costs. A 

Lender or Authorized CDC Liquidator 

that disagrees with a decision by SBA to 

decline to reimburse all, or a portion, of 

the legal fees and/or costs incurred in 

conducting debt collection litigation 

may appeal this decision in writing to 

the Associate General Counsel for 

Litigation within 30 days of the 

decision. The decision of the Associate 

General Counsel for Litigation will be 

made in consultation with the AA/FA, 

and will be the final Agency decision. 


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■ 19. Add a new § 120.546 to read as 

follows: 

§ 120.546 Loan asset sales. 

(a) General. Loan asset sales are 

governed by § 120.545(b)(4) and by this 

section. 

(b) 7(a) loans—(1) For loans approved 

on or after May 14, 2007. The Lender 

will be deemed to have consented to 

SBA’s sale of the loan (guaranteed and 

unguaranteed portions) in an asset sale 

conducted or overseen by SBA upon the 

occurrence any of the following: 

(i) SBA’s purchase of the guaranteed 

portion of the loan from the Registered 

Holder for a loan where the guaranteed 

portion has been sold in the Secondary 

Market pursuant to subpart F of this part 

and after default, the Lender has not 

exercised its option to purchase such 

guaranteed portion; or 

(ii) SBA’s purchase of the guaranteed 

portion from the Lender, provided 

however, that if SBA purchased the 

guaranteed portion pursuant to 

§ 120.520(a)(1) prior to the Lender’s 

completion of liquidation for the loan, 

then SBA will not sell such loan in an 

asset sale until nine months from the 

date of SBA’s purchase; or 

(iii) SBA receives written consent 

from the Lender. 

(2) For loans identified in paragraph 

(b)(1)(i) of this section, the Lender may 

request that SBA withhold the loan from 

an asset sale if the Lender submits a 

written request to SBA within 15 

business days of SBA’s purchase of the 

guaranteed portion of the loan from the 

Registered Holder and if such request 

addresses the issues described in this 

subparagraph. The Lender’s written 

request must advise SBA of the status of 

the loan, the Lender’s plans for workout 

and/or liquidation, including and 

pending sale of loan collateral or 

foreclosure proceedings arranged prior 

to SBA’s purchase that already are 

underway, and the Lender’s estimated 

schedule for restructuring the loan or 

liquidating the collateral. SBA will 

consider the Lender’s request and, based 

on the circumstances, SBA in its sole 

discretion may elect to defer including 

the loan in an asset sale in order to 

provide the Lender additional time to 

complete the planned restructuring and/ 

or liquidation actions. 

(3) For loans approved before May 14, 

2007. SBA must obtain written consent 

from the Lender for the sale of such 

loans in an asset sale. 

(4) After SBA has purchased the 

guaranteed portion of a loan from the 

Registered Holder or from the Lender, 

the Lender must continue to perform all 

necessary servicing and liquidation 

actions for the loan up to the point the 

loan is transferred to the purchaser in an 

asset sale. The Lender also must 

cooperate and take all necessary actions 

to effectuate both the asset sale and the 

transfer of the loan to the purchaser in 

the asset sale. 

(c) 504 loans—(1) PCLP Loans. After 

SBA’s purchase of a Debenture, SBA 

may at its sole discretion sell a 

defaulted PCLP Loan in an asset sale 

conducted or overseen by SBA, after 

providing to the PCLP CDC that made 

the loan advance notice of not less than 

90 days before the date upon which 

SBA first makes its records concerning 

such loan available to prospective 

purchasers for examination. 

(2) All other 504 loans. After SBA’s 

purchase of a Debenture, SBA may at its 

sole discretion sell a defaulted 504 loan 

in an asset sale conducted or overseen 

by SBA. 

Subpart H—Development Company 

Loan Program (504) 

■ 20. Revise § 120.826 to read as 

follows: 

§ 120.826 Basic requirements for 

operating a CDC. 

A CDC must operate in accordance 

with all 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 all records 

and submit all reports required by SBA. 

■ 21. Amend § 120.841 by revising 

paragraph (c) to read as follows: 

§ 120.841 Qualifications for the ALP. 

* * * * * 

(c) Current reviews in compliance. 

SBA-conducted oversight reviews must 

be current (within past 12 months) for 

applicants for ALP status, and these 

reviews must have found the CDC to be 

in compliance with Loan Program 

Requirements. 

* * * * * 

■ 22. Amend § 120.845 by revising the 

first sentence of paragraph (c)(1) to read 

as follows: 

§ 120.845 Premier Certified Lenders 

Program (PCLP). 

* * * * * 

(c) * * * 

(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 (h).* * * 

* * * * * 

■ 23. Amend § 120.846 by revising 

paragraph (a)(3) to read as follows: 

§ 120.846 Requirements for maintaining 

and reviewing PCLP Status. 

(a) * * * 

(3) Substantially comply with all Loan 

Program Requirements. 

* * * * * 

■ 24. Amend § 120.848 by revising 

paragraphs (a) and (f) to read as follows: 

§ 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. 

* * * * * 

(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. 

* * * * * 

■ 25. Amend § 120.854 by revising 

paragraph (a)(2) to read as follows: 

§ 120.854 Grounds for taking enforcement 

action against a CDC. 

* * * * * 

(a) * * * 

(2) The CDC has failed to comply 

materially with any Loan Program 

Requirement. 

* * * * * 

■ 26. Amend § 120.970 by revising 

paragraphs (a) and (h) to read as follows: 

§ 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. 

* * * * * 

(h) Additional servicing requirements 

are set forth in subpart E of this part. 

■ 27. Add a new undesignated center 

heading after § 120.972 to read as 

follows: 


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Federal Register / Vol. 72, No. 70 / Thursday, April 12, 2007 / Rules and Regulations 18365 

Authority of CDCs To Perform 

Liquidation and Debt Collection 

Litigation 

■ 28. Add § 120.975 to read as follows: 

§ 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. 

Dated: April 9, 2007. 

Steven C. Preston, 

Administrator. 

[FR Doc. E7–6946 Filed 4–11–07; 8:45 am] 

BILLING CODE 8025–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 25 

[Docket No. NM370; Special Conditions No. 

25–349–SC] 

Special Conditions: Dassault Aviation 

Model Falcon 7X Airplane; Side Stick 

Controllers, Electronic Flight Control 

System: Lateral-Directional and 

Longitudinal Stability, Low Energy 

Awareness, Flight Control Surface 

Position Awareness, and Flight 

Characteristics Compliance Via the 

Handling Qualities Rating Method; 

Flight Envelope Protection: General 

Limiting Requirements, High Incidence 

Protection Function, Normal Load 

Factor (g) Limiting, and Pitch, Roll, and 

High Speed Limiting Functions 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final special conditions. 

SUMMARY: These special conditions are 

issued for the Dassault Aviation Model 

Falcon 7X airplane. This airplane will 

have novel or unusual design features 

when compared to the state of 

technology envisioned in the 

airworthiness standards for transport 

category airplanes. These design 

features include side stick controllers, 

electronic flight control systems, and 

flight envelope protections. These 

special conditions pertain to control and 

handling qualities of the airplane and 

protection limits within the normal 

flight envelope. The applicable 

airworthiness regulations do not contain 

adequate or appropriate safety standards 

for these design features. These special 

conditions contain the additional safety 

standards that the Administrator 

considers necessary to establish a level 

of safety equivalent to that established 

by the existing airworthiness standards. 

EFFECTIVE DATE: April 4, 2007. 

FOR FURTHER INFORMATION CONTACT: Joe 

Jacobsen, FAA, Airplane and Flight 

Crew Interface Branch, ANM–111, 

Transport Airplane Directorate, Aircraft 

Certification Service, 1601 Lind Avenue 

SW., Renton, Washington 98057–3356; 

telephone (425) 227–2011; facsimile 

(425) 227–1149. 

SUPPLEMENTARY INFORMATION: 

Background 

On June 4, 2002, Dassault Aviation, 9 

rond Point des Champs Elysees, 75008, 

Paris, France, applied for FAA type 

certificate for its new Model Falcon 7X 

airplane. The Dassault Model Falcon 7X 

airplane is a 19 passenger transport 


rmajette on PROD1PC67 with RULES