This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

24753

Vol. 63, No. 86

Tuesday, May 5, 1998

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Business Loan Program

AGENCY: Small Business Administration

(SBA).

ACTION: Proposed rule.

SUMMARY: This proposed rule would

implement Pub. L. 104–208, enacted on

September 30, 1996, and Pub. L. 105–

135, enacted on December 2, 1997, with

respect to SBA financing in the 504

Program, and would clarify existing

regulations. In the 504 program, the

proposed regulations would authorize

multiple businesses to obtain SBA

financing for a specific 504 Project,

allow a 504 Borrower to lease long term

no more than 20 percent of the 504

Project, describe how much a Borrower

must contribute to a 504 Project, and

modify allowable fees paid by a

Borrower, Third Party Lender, and CDC.

In addition, the proposed rule would

allow certain fees incurred by a CDC in

the closing of a 504 loan, up to $2,500

per closing, to be eligible administrative

costs.

DATE: Comments must be submitted on

or before July 6, 1998.

ADDRESS: Comments should be mailed

to Jane Palsgrove Butler, Acting

Associate Administrator for Financial

Assistance, Small Business

Administration, 409 Third Street, S.W.,

Washington, D.C. 20416.

FOR FURTHER INFORMATION CONTACT:

Michael J. Dowd, 202–205–6660.

SUPPLEMENTARY INFORMATION: Public

Law 105–135, the ‘‘Small Business

Reauthorization Act of 1997’’ (1997

legislation), enacted on December 2,

1997, and Public Law 104–208 (1996

legislation), enacted on September 30,

1996, amended the Small Business

Investment Act of 1958 (15 U.S.C. 601

et seq.). These proposed regulations

would implement the amendments

required by the 1996 legislation and

some of the amendments required under

the 1997 legislation, and make other

changes.

Changes to the 504 Program

The 1997 legislation and the 1996

legislation require SBA to amend its

regulations to implement the statutes.

SBA is also proposing some other

program changes.

• Section 502 of the Act authorizes

SBA to provide financial assistance

through a CDC to assist a small business

concern to acquire, construct, convert,

or expand its plant facility as a 504

Project pursuant to section 504 of the

Act. SBA interpreted the statute to

permit the Agency to assist only one

identifiable business for any particular

project. The 1997 legislation authorizes

SBA to provide such financial

assistance to more than one identifiable

small business. SBA proposes to amend

Section 120.801 of its regulations to

allow SBA to work with a CDC to assist

multiple small businesses for any

specific 504 Project, allowing two or

more unrelated small businesses to seek

SBA financial assistance for a qualified

504 Project.

• SBA is also proposing to amend its

regulations with respect to Eligible

Passive Companies in order to make that

rule consistent with the 1997

legislation. Current 13 CFR 120.111

allows SBA to assist an Eligible Passive

Company to use loan proceeds to

acquire property to lease to an

Operating Company. SBA is proposing

to amend 13 CFR 120.111 to authorize

SBA to provide financing to an Eligible

Passive Company which could use the

proceeds to lease property to multiple

unrelated Operating Companies. This

proposed change would make the

Eligible Passive Company provision

consistent with the proposed change to

13 CFR 120.801.

• The 1996 legislation amended the

Act with respect to the amount of a

Borrower’s contribution to the financing

of a 504 Project. SBA is proposing to

amend 13 CFR 120.910 of its regulations

to require the Borrower to contribute at

least 15 percent of the total cost of the

504 Project if the Borrower (or

Operating Company if the Borrower is

an Eligible Passive Company) has been

in business for 2 years or less, or if the

Project is the acquisition, construction,

conversion, or expansion of a limited or

single purpose building. The Borrower

must contribute at least 20 percent of

the total cost of the Project if both these

conditions exist.

• The 1996 legislation requires that

not less than 50 percent of a Project’s

cost must be financed by a Third Party

Lender if the Borrower’s contribution is

made under the conditions described

above for proposed 13 CFR 120.910.

This proposed revision of 13 CFR

120.920 implements that change.

• The 1997 legislation amended the

Act to permit a 504 Borrower to lease

long term no more than 20 percent of a

new 504 Project if the Borrower would

immediately occupy no less than 60

percent of the property. To comply with

the 1997 legislation, SBA is proposing

to amend 13 CFR parts 120.131 and

120.870 to authorize a Borrower to lease

long term up to 20 percent of the

rentable space in a 504 Project to third

parties when the Borrower will occupy

at least 60 percent of the rentable space

with plans to occupy another 20 percent

of the rentable space within 3 years. The

present law allows a Borrower in a 504

Project to lease up to 33 percent of a

new facility if the Borrower can show

that it will need additional space within

3 years and that it will fully use the

facility within 10 years. Under the

proposed rule, the Borrower will have

the option of showing that it will

ultimately use 80 percent of the rentable

space within 3 years, and that it plans

to lease long term 20 percent of the

space to others. The effect of this change

will be to allow a business to construct

a building in a good location without

being compelled to show that it will use

all of the space. Thus, the proposed rule

will alleviate the present strict

restrictions on the use of property.

• 13 CFR 120.862(b) sets forth

specific public policy goals a CDC may

use to qualify a 504 Project or support

an increased amount of 504 financing.

13 CFR 120.862(b)(3) lists expanding

Minority Enterprise Development as one

of the public policy goals. SBA is

proposing to amend 13 CFR

120.862(b)(3) to direct the reader to the

correct section in SBA’s regulation

designating the specific minority groups

to which the subsection applies. 13 CFR

120.862 (b)(7) lists as one of the public

policy goals the assistance of businesses

affected by Federal budget reductions.

SBA is proposing to amend 13 CFR

120.862(b)(7) by clarifying that the

public policy goal is to assist any

eligible small business in an area
24754 Federal Register / Vol. 63, No. 86 /Tuesday, May 5, 1998 / Proposed Rules

affected by such reductions, not only

those businesses which can show that

they were affected adversely by the

budget reduction. Therefore, if a

geographic area has been adversely

affected by Federal budget reductions,

SBA can assist a business located in that

area or moving to that area without

showing that the particular business

was affected.

• The 1996 legislation requires SBA

to charge the Borrower a fee of not more

than 0.9375 percent on the unpaid

principal balance of the loan as

determined at 5-year anniversary

intervals. SBA is amending 13 CFR

120.971 of its regulations to implement

this change. In addition, 13 CFR

120.971(a)(3) raises the minimum

servicing fee from .5 percent to .625

percent.

• SBA is proposing to insert a new

Section 120.972 in 13 CFR to implement

the 1996 legislation which requires SBA

to collect a one-time fee equal to 50

basis points on the total participation in

a Project by a Third Party Lender when

that Third Party Lender occupies a

senior credit position to that of SBA. In

addition, under the proposed regulation,

SBA will collect an annual fee from

each CDC equal to 0.125 percent of the

outstanding principal balance of any

Debenture guaranteed by SBA after

September 30, 1996. The CDC must pay

the fee from the servicing fees collected

by the CDC and not from additional fees

imposed on the Borrower.

• Currently, under 13 CFR

120.921(d), any future advance by a

Third Party Lender in excess of the

outstanding balance and accrued

interest must be subordinated to the

CDC/SBA lien unless the future advance

is to collect payments, maintain

collateral, or protect the Third Party

Lender’s lien position on the Third

Party Loan. SBA has been unable at

times to realize the full benefit of its lien

position, despite its regulations

requiring future advances to be

subordinate to the CDC/SBA lien.

Moreover, if a Third Party Lender

wants to make additional capital

available to a 504 Borrower, it easily can

do so through another loan. SBA is

proposing to revise 13 CFR 120.921(d)

to state that the Third Party Loan cannot

be open-ended as to amount, and after

completion of the 504 Project, a Third

Party Lender may only make a future

advance under the Third Party Loan to

collect amounts due on the Third Party

Loan note, maintain collateral or protect

its lien.

• SBA also has been unable to realize

the full benefit of its lien position

because of prepayment penalties, late

fees, and escalated interest after default

due under the Third Party Loan.

Accordingly, SBA also proposes to add

a new paragraph (e) to 13 CFR 120.921

that would state that the Third Party

Lender’s lien is subordinate to the CDC/

SBA lien with respect to prepayment

penalties, late fees, and escalated

interest after default due under the

Third Party lien.

• When a small business defaults on

a Third Party Loan, SBA may choose to

assume the obligations of the Borrower.

The 1996 legislation amended the Act to

ensure that when SBA assumes such

obligation for Projects approved after

September 30, 1996, it only will pay the

interest rate on the note in effect

immediately prior to the date of the

Borrower’s default. SBA is proposing to

redesignate and revise present

paragraph (e) of Section 120.921 of 13

CFR to become new paragraph (f) stating

that SBA only will pay the interest rate

in effect immediately prior to the date

of the Borrower’s default with respect to

a Project approved after September 30,

1996.

• SBA is proposing to amend 13 CFR

120.802 to clarify the definition for

Third Party Loan and 13 CFR

120.801(c)(3) to reflect that definition.

• Currently, Section 120.870(c)(1) of

13 CFR requires the term of a lease of

the Project premises to be at least equal

to the terms of the Debenture. However,

this may not be necessary if the Project

is only machinery and equipment.

Therefore, SBA proposes to delete

machinery and equipment from the

definition to clarify that the length of a

lease for machinery and equipment is a

credit issue.

Changes to CDC Closing Fees

Section 120.883 of 13 CFR sets forth

administrative costs which may be paid

with the proceeds of a loan funded by

a 504 Debenture rather than out of the

Borrower’s own resources. Section

120.971 of 13 CFR sets forth the fees

that a CDC may charge a Borrower.

Throughout the history of the 504

Program, most of the services required

to prepare 504 loan documents and

close a 504 loan have been performed

for CDCs, at CDC cost, by legal counsel,

paralegals, and CDC staff. The CDC has

then charged its Borrower a fee at

closing to reimburse the CDC for these

expenses (‘‘CDC Closing Fee’’).

Although this CDC Closing Fee

reimburses the CDC for expenses the

CDC pays to its own lawyers, the

Borrower is not considered to be paying

a legal fee, since the Borrower is not

represented by CDC counsel. The

Borrower pays separately the legal fees

of its legal counsel.

Under the 504 Program, loan proceeds

may be used to pay eligible Project costs

and eligible administrative costs.

Eligible Project costs are costs directly

attributable to the Project including

professional fees essential to the Project

for services such as architecture,

engineering, and environmental studies.

The Borrower’s legal fees for Projectrelated matters such as zoning, title

searches, and recording fees, as well as

interest and points on the interim

construction loan, are eligible Project

costs. The Borrower’s legal fees

associated with the closing are not

eligible Project costs.

Eligible administrative costs are

amounts the Borrower pays for services

connected with closing, but not directly

attributable to the Project itself. These

include SBA’s guarantee fee, the CDC’s

processing fee, and 504 closing agent

fees. The Borrower’s legal fees

associated with the closing are not

eligible administrative costs. Until

March 1, 1996, the CDC Closing Fee was

an eligible administrative cost. By

regulation, the Borrower could pay the

CDC Closing Fee out of the proceeds of

a 504 loan up to a maximum of $2,500.

Since then, SBA has not recognized the

CDC Closing Fee as an eligible

administrative cost, and Borrowers must

reimburse the CDC out of their own

resources.

CDCs, Borrowers, and SBA share a

common interest in minimizing legal

fees to reduce costs to the Borrower.

During the period before March 1, 1996,

some in the 504 industry felt that SBA’s

regulation influenced the market rate for

legal fees and other miscellaneous

expenses associated with 504 Closings.

They argued that attorney fees charged

CDCs by CDC counsel were maintained

at an artificially high level because the

CDC Closing Fee was an eligible

administrative cost financed out of the

loan proceeds. They further argued that

the reference in the regulation to a

$2,500 limitation established a

minimum base for the attorney fees.

SBA received 15 comments

concerning these issues during the

comment period following publication

of its proposed rule changes in 60 FR

64356 on December 15, 1995. Most of

them supported retaining the CDC

Closing Fee as an eligible administrative

cost. SBA believed, however, that legal

expenses associated with the 504

Closing should be determined by the

competitive marketplace and that there

was some merit in the contention that

the eligibility of the CDC Closing Fee as

an administrative cost resulted in higher

attorney fees. Despite the opposition

expressed in most of the comments

received, SBA decided to exclude the
Federal Register / Vol. 63, No. 86 /Tuesday, May 5, 1998 / Proposed Rules 24755

CDC Closing Fee from eligible

administrative costs and eliminated the

$2,500 reference in its final rule

published in 61 FR 3226, dated January

31, 1996.

SBA expected that these regulatory

changes would reduce attorney fees. It

also anticipated downward competitive

pressure on such fees as more attorneys

became designated to perform expedited

504 loan closings.

CDCs have been closing loans under

the new rules for nearly 2 years.

Approximately 140 attorneys are now

enrolled as designated closing attorneys,

and more than 50 percent of all 504

loans close under the expedited process.

Yet fees associated with 504 closings

charged CDCs by CDC counsel do not

appear to have decreased.

Legislation enacted since the rule

became effective has imposed additional

fees upon Borrowers. Industry

representatives indicate that the

combination of increased fees and the

inability to pay the CDC Closing Fee out

of the Debenture proceeds has reduced

access by small businesses to the 504

Program. Because the fees now are not

eligible administrative costs, they must

be paid by the Borrowers from other

resources. Not all Borrowers can afford

to pay these costs without use of the

Debenture proceeds.

In an effort to assist its small business

customers, SBA is proposing to make

CDC Closing Fees eligible

administrative costs up to a maximum

of $2,500 per Closing.

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 proposed rule

does not constitute a significant rule

within the meaning of Executive Order

12866, since it is not likely to have an

annual effect on the economy of $100

million or more, result in a major

increase in costs or prices, or have a

significant adverse effect on competition

or the U.S. economy.

SBA certifies that this proposed rule

will not have a significant economic

impact on a substantial number of small

entities within the meaning of the

Regulatory Flexibility Act, 5 U.S.C. 601,

et seq. Last year, SBA made

approximately four thousand 504 loans.

Currently there are approximately 300

CDCs, less than 15 of which are Premier

CDCs. While the 1997 legislation

removes the limit on the number of

CDCs that can become Premier CDCs,

SBA anticipates that, at most, only half

of the CDCs would be affected by this

rule. Thus the changes to the Program

in the proposed rule, including the

changes to the Closing Fee provisions

and the changes implementing P.L. 104–

208 and P.L. 105–135 will not constitute

a significant impact on a substantial

number of small businesses.

SBA certifies that this proposed rule

does not impose any additional

reporting or recordkeeping requirements

under the Paperwork Reduction Act, 44

U.S.C. chapter 35.

For purposes of Executive Order

12612, SBA certifies that this proposed

rule has no federalism implications

warranting preparation of a Federalism

Assessment.

For purposes of Executive Order

12778, SBA certifies that this proposed

rule is drafted, to the extent practicable,

to accord with the standards set forth in

section 2 of that Order.

List of Subjects in 13 CFR Part 120

Loan programs—business, Small

businesses.

Accordingly, pursuant to authority

contained in section 5(b)(6) of the Small

Business Act (15 U.S.C. 634(b)(6)), SBA

proposes to amend part 120, chapter I,

title 13, Code of Federal Regulations as

follows:

PART 120—BUSINESS LOANS

1. The authority citation for Part 120

would continue to read as follows:

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

and (h).

2. Amend § 120.111 by revising the

first sentence to read as follows:

§ 120.111 What conditions must an

Eligible Passive Company satisfy?

An Eligible Passive Company must

use loan proceeds to acquire or lease,

and/or improve or renovate real or

personal property (including eligible

refinancing) that it leases to one or more

Operating Companies for the conduct of

the Operating Company’s business

(references to one Operating Company

include multiple Operating Companies,

as applicable). * * *

* * * * *

3. Amend § 120.131(a) by adding a

new sentence at the end to read as

follows:

§ 120.131 Leasing part of new

construction or existing building to another

business.

(a) * * * (See § 120.870(c) for an

exception with respect to 504 Projects.)

* * * * *

4. Amend § 120.801 by revising the

first sentence of paragraph (a) and

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

§ 120.801 How is a 504 Project financed?

(a) One or more small businesses may

apply for 504 financing through a CDC

serving the area in which the 504

Project is located. * * *

* * * * *

(c) * * *

(3) Third Party Loan comprising the

balance of the financing, collateralized

by a first lien on the Project property

(see section 120.920).

* * * * *

5. Amend § 120.802 by revising the

definition of Third Party Loan to read as

follows:

§ 120.802 Definitions.

* * * * *

Third Party Loan is a loan from a

commercial or private lender, investor,

or Federal (non-SBA), State or local

government source that is part of the

Project financing.

* * * * *

6. Amend § 120.862 by revising the

parenthetical clause in paragraph (b)(3)

and by revising paragraph (b)(7) to read

as follows:

§ 120.862 Other economic development

objectives.

* * * * *

(b) Public Policy goals: * * *

(3) * * * (See § 124.105(b) for

minority groups who qualify for this

description.);

* * * * *

(7) Assisting businesses in or moving

to areas affected by Federal budget

reductions, including base closings,

either because of the loss of Federal

contracts in the area or the reduction in

revenues in the area due to a decreased

Federal presence.

7. Amend § 120.870 by revising

paragraph (a)(1) and adding a new

paragraph (c) to read as follows:

§ 120.870 Leasing Project Property.

(a) * * *

(1) The remaining term of the lease,

including options to renew, exercisable

solely by the lessee, equals or exceeds

the term of the Debenture;

* * * * *

(c ) If the Project is for new

construction, a Borrower may lease long

term no more than 20 percent of the

rentable property in the Project to one

or more tenants if the Borrower

immediately occupies not less than 60

percent of the rentable property with

plans to occupy the remaining 20

percent within 3 years.

8. Revise § 120.883 to read as follows:
24756 Federal Register / Vol. 63, No. 86 /Tuesday, May 5, 1998 / Proposed Rules

§ 120.883 Eligible administrative costs for

504 loans.

The following administrative costs are

not part of Project costs, but may be

paid with the proceeds of the 504 loan

and the Debenture (see § 120.971):

(a) SBA guarantee fee;

(b) Funding fee (to cover the cost of

a public issuance of securities and the

Trustee);

(c) CDC processing fee;

(d) Borrower’s out-of-pocket costs

associated with the closing of the 504

loan (other than legal fees);

(e) CDC Closing Fee (see

§ 120.971(a)(2)) up to a maximum of

$2,500; and

(f) Underwriters’ fee.

9. Revise § 120.910 to read as follows:

§ 120.910 How much must the Borrower

contribute?

(a) The Borrower must contribute to

the Project cash (or property acceptable

to SBA obtained with the cash) or land

(that is part of the Project Property), in

an amount equal to the following

percentage of the Project cost, exclusive

of administrative cost:

(1) At least 15 percent, if the Borrower

(or Operating Company if the Borrower

is an Eligible Passive Company) has

been in operation for 2 years or less;

(2) At least 15 percent, if the Project

involves the acquisition, construction,

conversion, or expansion of a limited or

single purpose building or structure;

(3) At least 20 percent, if the Project

involves both of the conditions

described in paragraphs (a) (1) and (2)

of this section; or

(4) At least 10 percent, in all other

circumstances.

(b) The source of the contribution may

be a CDC or any other source except an

SBA business loan program (see

§ 120.913 for SBIC exception).

10. Revise § 120.920 to read as

follows:

§ 120.920 Required participation by the

Third Party Lender.

(a) Amount of Third Party Loans. A

Project financing must include one or

more Third Party Loans totaling at least

as much as the 504 loan. However, the

Third Party Loans must total at least 50

percent of the total cost of the Project if:

(1) The Borrower (or Operating

Company, if the Borrower is an Eligible

Passive Company) has been in operation

for 2 years or less, or

(2) The Project is for the acquisition,

construction, conversion, or expansion

of a limited or single purpose asset.

(b) Third Party Loan collateral. Third

Party Loans usually are collateralized by

a first lien on the Project property. They

cannot be guaranteed by SBA.

11. In § 120.921 revise and

redesignate paragraphs (d) and (e) as

paragraphs (e) and (f) and add a new

paragraph (d) to read as follows:

§ 120.921 Terms of Third Party Loans.

* * * * *

(d) Future advances. The Third Party

Loan must not be open-ended. After

completion of the Project, the Third

Party Lender may not make future

advances under the Third Party Loan

except expenditures to collect amounts

due the Third Party Loan notes,

maintain collateral, and protect the

Third Party Lender’s lien position on

the Third Party Loan.

(e) Subordination. The Third Party

Lender’s lien will be subordinate to the

CDC/SBA lien as to any prepayment

penalties, late fees, and increased

default interest due under the Third

Party Loan.

(f) Escalation upon default. A ThirdParty Lender may not escalate the rate

of interest upon default to a rate greater

than the maximum rate set forth in

paragraph (b) of this section. With

respect to any Project approved after

September 30, 1996, SBA will only pay

the interest rate on the note in effect

prior to the date of the Borrower’s

default.

12. Amend § 120.971 by revising the

first sentence of paragraph (a)(2) and

paragraphs (a)(3), and (d)(2) to read as

follows:

§ 120.971 Allowable fees paid by

Borrower.

(a) * * *

(2) Closing fee. The CDC may charge

a reasonable closing fee in an amount

sufficient to reimburse it for the

expenses of its in-house or outside legal

counsel, and other miscellaneous

closing costs (CDC Closing Fee). * * *

(3) Servicing fee. The CDC will charge

a monthly servicing fee of not less than

0.625 percent per annum nor more than

2 percent per annum on the unpaid

balance of the loan as determined at 5-

year anniversary intervals. A servicing

fee in excess of 1.5 percent in a Rural

Area and 1 percent everywhere else

requires SBA’s prior written approval,

based on evidence of substantial need.

The servicing fee may be paid only from

loan payments received. The fees may

be accrued without interest and

collected from the CSA when the

payments are made.

* * * * *

(d) * * *

(2) For loans approved by SBA after

September 30, 1996, SBA charges a fee

of not more than 0.9375 percent per

annum on the unpaid principal balance

of the loan as determined at 5-year

anniversary intervals.

* * * * *

13. In part 120 redesignate § 120.972

as § 120.973, and add a new § 120.972

to read as follows:

§ 120.972 Third Party Lender participation

fee and Development company fee.

(a) Participation fee. For loans

approved by SBA after September 30,

1996, SBA must collect a one-time fee

from the Third Party Lender equal to 50

basis points on its total participation in

a Project when the Third Party Lender

occupies a senior credit position to SBA

in the project.

(b) Development company fee. For

loans approved by SBA after September

30, 1996, SBA must collect an annual

fee from the CDC equal to 0.125 percent

of the outstanding principal balance of

the debenture. The fee must be paid

from the servicing fees collected by the

CDC and cannot be paid from any

additional fees imposed on the

Borrowers.

Dated: April 28, 1998.

Aida Alvarez,

Administrator.

[FR Doc. 98–11910 Filed 5–4–98; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 97–CE–148–AD]

RIN 2120–AA64

Airworthiness Directives; Raytheon

Aircraft Company Models A200CT,

B200, B200C, B200CT, 200T/B200T,

300, B300, and B300C Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes to

adopt a new airworthiness directive

(AD) that would apply to Raytheon

Aircraft Company (Raytheon) Models

A200CT, B200, B200C, B200CT, 200T/

B200T, 300, B300, and B300C airplanes.

The proposed action would require

replacing the main landing gear left and

right actuator clevis assembly. Reports

of main landing gear failure on two of

the affected airplanes prompted the

proposed action. The actions specified

by the proposed AD are intended to

prevent failure of the actuator clevis

assembly in the main landing gear,

which could result in loss