[Federal Register Volume 62, Number 63 (Wednesday, April 2, 1997)]
[Rules and Regulations]
[Pages 15601-15602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8416]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120


Business Loan Programs

AGENCY: Small Business Administration.

ACTION: Interim final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) is modifying its 
rules regarding the financing and securitization of the unguaranteed 
portion of loans it guarantees under Section 7(a) of the Small Business 
Act. Present SBA regulations allow only non-depository lenders to 
engage in these practices (13 CFR 120.420, revised as of March 1, 
1996). This interim rule will permit both depository and non-depository 
lenders to pledge or sell the unguaranteed portions of SBA guaranteed 
loans.
    During the pendency of this interim final rule, subject to 
compliance with all other aspects of the interim final rule, SBA 
expects to give favorable review to any transaction which complies with 
the retainage requirements described in the notice of proposed 
rulemaking relevant to financing and securitization which appeared in 
the Federal Register on February 26, 1997. If SBA is presented with a 
transaction which is not structured in a manner consistent with such 
retainage requirements, SBA will need to assure itself as to safety and 
soundness considerations and compliance with the interim rule before 
giving its approval.

DATES: Effective: April 2, 1997.
    Comments must be submitted on or before May 2, 1997.

ADDRESSES: Please mail all comments to Jane Palsgrove Butler, Acting 
Associate Administrator for Financial Assistance, U.S. Small Business 
Administration, 409 Third Street, SW, Room 8200, Washington, D.C. 
20416.

FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Acting Deputy 
Associate Administrator for Financial Assistance, (202) 205-7505.

SUPPLEMENTARY INFORMATION: Over the past several years, the average SBA 
guarantee under its guaranteed business loan program (program) has 
decreased from nearly 90% to approximately 75%. This 150% increase in 
lender exposure requires lenders participating in the program to commit 
substantially more of their own capital in order to support their 
dollar volume of SBA guaranteed loans. In 1992, SBA promulgated 
regulations that permitted non-depository lenders participating in the 
program to pledge or sell the unguaranteed portions of SBA guaranteed 
loans, thereby permitting them to fund unguaranteed portions of SBA 
guaranteed loans with the proceeds of loans or securities offerings 
(securitizations). (See 13 CFR Sec. 120.420, revised as of March 1, 
1996.)
    Since that time, bank (depository) participants have asked SBA to 
modify its regulations to provide them the same ability to offset the 
increase in commitment of capital needed for them to continue 
participation in the program. These lenders have told SBA that, in many 
cases, it is more efficient to raise funds through a pledge or 
securitization than to attract additional deposits.
    Congress has now recognized the need to permit all participants in 
the program to have a level playing field in raising capital needed to 
fund the increased requirement for unguaranteed portions. Therefore, 
recent legislation prohibits the sale of unguaranteed portions under 
SBA's present regulations after March 31, 1997, unless SBA develops 
regulations permitting all participating lenders to sell the 
unguaranteed portions of their SBA guaranteed loans. See Sec. 103(e) of 
Public Law 104-408, Oct. 1, 1996, which directs SBA to promulgate a 
final regulation ``that applies uniformly to both depository 
institutions and other lenders * * * setting forth the terms and 
conditions under which such sales can be permitted, including 
maintenance of appropriate reserve requirements and other safeguards to 
protect the safety and soundness of the program.''
    On November 29, 1996, SBA published an advance notice of proposed 
rulemaking which requested the views of interested parties on how this 
statutory requirement might be satisfied. 61 FR 60649, Nov. 29, 1996.
    SBA received nine responses, including one response which had four 
signatories. The comments addressed several questions posed in the 
advance notice of proposed rulemaking regarding how the statutory 
mandate should be satisfied.
    On February 26, 1997, at 62 FR 8640, SBA published a notice of 
proposed rulemaking on this subject. The proposed rulemaking took the 
comments on the advance notice of proposed rulemaking fully into 
consideration. The public was given 30 days to comment on the proposal. 
As of March 21, 1997, SBA had not received any comments from the public 
in response to the proposed rulemaking.
    SBA recognizes the complexity of the issues surrounding the various 
means for implementing the statutory mandate. It is clear that 
additional time will be necessary to develop a full spectrum of comment 
on the notice of proposed rulemaking. It is SBA's desire to have the 
broadest possible public involvement in this rulemaking. At the same 
time, SBA does not wish to penalize any lender seeking to conduct a 
pledging or sale transaction after March 31, 1997.
    Under these circumstances, SBA has decided to extend, for an 
additional 30 days, the comment period on its proposed rule. Pending 
its review of all comments received and its issuance of a final rule on 
the subject, SBA also will promulgate an interim final rule which will 
allow all lenders in the program to proceed with securitizations, 
subject to prior SBA approval on a case by case basis. In this regard, 
SBA will extend to all of its lenders, on an interim basis, an existing 
regulation which previously has been applicable only to non-depository 
lenders. This will afford SBA the opportunity to obtain further public 
comment, to consider how best to implement the statutory directive that 
a new rule be finalized, and to permit interim transactions to go 
forward on a basis consistent with safety and soundness in the program.
    SBA is convinced that it can review any transactions which take 
place during the interim period in a manner sufficient to protect such 
safety and soundness. It should be noted that all pledging or sale 
transactions which have taken place since 1992 have been

[[Page 15602]]

carefully reviewed by SBA personnel. SBA has ensured that language 
adequate to protect its interest has been built into the documentation 
for all of these transactions and that the transactions themselves do 
not add undue risk to the program. It will employ similar procedures in 
reviewing any transactions taking place during the pendency of the 
interim rule.
    While interested in receiving extensive comments on its proposed 
rule, SBA still believes that it sets out a reasonable approach to 
approving sales of the unguaranteed portions of SBA loans. Accordingly, 
subject to compliance with all other aspects of the interim rule, SBA 
expects to give favorable review to any interim period transaction 
which complies with the retainage requirements described in the notice 
of proposed rulemaking. If it is presented with a transaction which is 
not structured in a manner consistent with such retainage requirements, 
SBA will need to assure itself as to safety and soundness 
considerations and compliance with the interim rule before giving its 
approval.
    As expressed in both the advance notice and the notice of proposed 
rulemaking, SBA is concerned that there are multiple issues which need 
to be fully explored before this extremely complex matter is finally 
resolved. It is SBA's expectation that the public will comment on the 
substance of both the advance notice and the proposed rule during the 
pendency of this interim final rule, and that such comment will serve 
as the basis for a new final rule to be published shortly after the 
extended comment period closes.
    Compliance With Executive Orders 12612, 12778, and 12866, the 
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35).
    SBA certifies that this interim final rule does not constitute a 
significant rule within the meaning of Executive Order 12866 and will 
not have a significant economic impact on a substantial number of small 
entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 
601 et seq. It believes this rule is not likely to have an annual 
economic effect of $100 million or more, but requests comment from the 
public on its perception of the costs and benefits associated with this 
rule to enable it to decide whether to prepare a cost benefit analysis 
in conjunction with the final rule. SBA believes that the rule will not 
result in a major increase in costs or prices, or have a significant 
adverse effect on competition or the United States economy.
    The rule is consistent with the mandate of section 103(e) of Public 
Law 104-208 that it set forth terms and conditions under which sales 
for the purpose of securitization can be permitted, including the 
maintenance of appropriate reserve requirements and other safeguards to 
protect the safety and soundness of the program. SBA believes that the 
reserve requirements and other safeguards built into the rule satisfy 
this concern. For the reasons set forth above, SBA believes that the 
rule will help SBA lenders support an increased volume of SBA lending. 
Finally, the rule has no negative impact on State, local, or tribal 
governments.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
certifies that this final rule contains no new reporting or record 
keeping requirements.
    For purposes of Executive Order 12612, SBA certifies that this rule 
has no federalism implications warranting the preparation of a 
Federalism Assessment.
    For purposes of Executive Order 12778, SBA certifies that this rule 
is drafted, to the extent practicable, in accordance with the standards 
set forth in Section 2 of that Order.

List of Subjects in 13 CFR Part 120

    Business loans.

    For the reasons set forth above, SBA amends Part 120 of Title 13, 
Code of Federal Regulations, as follows:

PART 120--BUSINESS LOANS

    1. The authority citation for part 120 continues to read as 
follows:

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

    2. Section 120.420 is revised to read as follows:


Sec. 120.420  Financings by participating lenders.

    (a) A Lender may pledge the notes evidencing SBA guaranteed loans 
or sell the unguaranteed portions of such loans if SBA, notwithstanding 
the provisions of Sec. 120.453(c), in its sole discretion, gives its 
prior written consent. The Lender must be secure financially and have a 
history of compliance with SBA's regulations and any other applicable 
state or Federal statutory and regulatory requirements.
    (b) The Lender, SBA, and any third party involved in the 
transaction, as determined by SBA in its sole discretion, must enter 
into a written agreement satisfactory to SBA acknowledging SBA's 
interest as guarantor of the subject loans and accepting that all 
relevant third parties agree to recognize and uphold those interests 
under the Act, this part, and the contractual provisions of SBA's Loan 
Guarantee Agreement. In any such agreement, the parties must agree to 
the following conditions:

    (1) The Lender, SBA, or third party custodian agreeable to SBA, 
will hold all pertinent Loan Instruments, and the Lender will 
continue to service the loans after the pledge or transfer is made; 
and
    (2) The Lender must retain an economic risk in and bear the 
ultimate risk of loss on the unguaranteed portions. This must be 
demonstrated to SBA's satisfaction by establishing a sufficient 
reserve fund at the time of sale of the unguaranteed portions and, 
in the case of pledging notes, by retaining all of the economic 
interest in the unguaranteed portion of any loan which a note 
evidences.

    (c) The Lender may not use SBA guaranteed loans or the collateral 
supporting such loans as collateral for any borrowing not related to 
financing of the guaranteed or unguaranteed portion of SBA loans.

    Dated: March 26, 1997.
Ginger Ehn Lew,
Acting Administrator.
[FR Doc. 97-8416 Filed 4-1-97; 8:45 am]
BILLING CODE 8025-01-P