[Federal Register Volume 63, Number 86 (Tuesday, May 5, 1998)]
[Rules and Regulations]
[Pages 24739-24740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11848]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 63, No. 86 / Tuesday, May 5, 1998 / Rules and 
Regulations

[[Page 24739]]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120


Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Interim final rule.

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SUMMARY: This interim final rule implements Pub. L. 105-135, enacted on 
December 2, 1997, with respect to SBA financing in the pilot Premier 
Certified Lenders Program (PCLP). The interim final rule extends the 
pilot to October 1, 2000, and expands the authority of a Certified 
Development Company (CDC) participating in the PCLP (Premier CDC).

DATES: This rule is effective May 4, 1998. Comments must be submitted 
on or before July 6, 1998. SBA will publish a final rule after the end 
of the comment period.

ADDRESSES: 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: LeAnn M. Oliver, 202-205-6485.

SUPPLEMENTARY INFORMATION: Pub. L. 105-135, the ``Small Business 
Reauthorization Act of 1997'' (1997 legislation), enacted on December 
2, 1997, amends Section 504 of the Small Business Investment Act of 
1958 (15 U.S.C. 601 et seq.) and requires SBA to promulgate regulations 
to carry out the amendments. SBA is promulgating this regulation in 
interim final rule form to enable qualified CDCs to participate in the 
PCLP Program as soon as possible. Because this regulation merely 
implements provisions contained in the1997 legislation, SBA is 
satisfied that the interim final rule poses no risk to SBA's PCLP 
program. SBA is seeking comments in regards to this interim final 
regulation. After the 60 day comment period has expired, SBA will issue 
a final rule.

Changes to PCLP

    <bullet> The current SBA PCLP is limited to 15 CDCs. The interim 
final rule will open the program to all qualified CDCs.
    <bullet> The interim final rule expands and clarifies the authority 
of a Premier CDC to foreclose, litigate, and liquidate 504 loans made 
under PCLP.
    <bullet> The interim final rule clarifies that SBA makes the 
eligibility determination regarding 504 loans and Borrowers. The 
Premier CDC makes all other determinations regarding loan approval.
    <bullet> The interim final rule requires that if there is a default 
on a Debenture issued under PCLP, the Premier CDC must reimburse SBA 
for 10 percent of any loss incurred as a result of the default. The 
amount for which a CDC is liable is referred to as ``Exposure.'' To 
cover its Exposure, a Premier CDC must maintain a loss reserve of 
segregated assets. This interim final rule codifies SBA's current 
interpretation of a loan loss reserve and, in addition, permits a 
Premier CDC to use irrevocable letters of credit to fund the loss 
reserve. The criterion for an eligible letter of credit is based on its 
terms and the strength of the institution making the commitment. The 
interim final rule defines an eligible letter of credit as one that: 
(1) is issued by a ``well capitalized bank'' as defined by the Federal 
Deposit Insurance Corporation (FDIC); (2) has a term equal to or 
greater than the term of the financings it secures; and (3) is 
otherwise acceptable to SBA. SBA plans to review the terms of each 
irrevocable letter of credit to ensure that SBA is protected adequately 
against loss.
    <bullet> Currently a Premier CDC is required to maintain a loss 
reserve equal to the greater of its historic loss rate on its 
Debentures or 10 percent of its Exposure. The interim final rule limits 
the calculation of the loss reserve to 10 percent of the Premier CDC's 
Exposure or 1 percent of the Debentures it issues under PCLP. The 
Premier CDC must contribute 50 percent of required funds to the loss 
reserve when a 504 Debenture is closed, 25 percent within 1 year after 
the Debenture is closed, and 25 percent within 2 years after the 
Debenture is closed.
    <bullet> Although a Premier CDC's Exposure is 10 percent of any 
loss incurred by SBA from a default on a 504 Debenture processed 
through PCLP, the CDC must contribute only 10 percent of its Exposure 
(which is only 1 percent of SBA's loss from the default) on each 
Debenture to the loss reserve. The interim final rule amends the 
current regulations to clarify that SBA may use all assets in a Premier 
CDC's loss reserve to reimburse the Agency for the full 10 percent of 
its loss. If there is not enough in the loss reserve, the interim final 
rule requires that a Premier CDC pay SBA, within 45 days of demand for 
the payment, the difference between the Premier CDC's Exposure and the 
amount withdrawn by SBA from the loss reserve.
    <bullet> The interim final rule specifies that a Premier CDC must 
replenish withdrawn loss reserve assets within 30 days with an 
equivalent amount of assets.
    <bullet> The interim final rule requires SBA to allow a Premier CDC 
to withdraw loss reserve assets attributable to any paid off Debenture.
    <bullet> The interim final rule extends the pilot PCLP to October 
1, 2000.
    <bullet> The interim final rule requires a CDC seeking to 
participate in PCLP to apply to the SBA field office in which it is 
most active.

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, 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 interim final rule does 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 PCLP implementing the 1997

[[Page 24740]]

legislation do not constitute a significant impact on a substantial 
number of small businesses.
    SBA certifies that this interim final rule does not impose any 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C. chapter 35.
    For purposes of Executive Order 12612, SBA certifies that this 
interim final rule has no federalism implications warranting 
preparation of a Federalism Assessment.
    For purposes of Executive Order 12778, SBA certifies that this 
interim final 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 amends part 120, 
chapter I, 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. Revise Sec. 120.845 to read as follows:


Sec. 120.845  Premier Certified Lenders Program (PCLP).

    The SBA has established a pilot program to designate a number of 
CDCs as Premier Certified Lenders (``Premier CDCs''), and to authorize 
them to approve, close, service, foreclose, litigate, and liquidate 504 
loans subject to SBA regulations, procedures, and policies. A Premier 
CDC's authority to approve loans under the Program is subject to SBA's 
determination that the loan and Borrower meet SBA's eligibility 
requirements.
    (a) PCLP loan approvals. A Premier CDC notifies SBA of its approval 
of a PCLP loan by submitting appropriate documentation to SBA's loan 
processing center. SBA will notify the Premier CDC of the SBA loan 
number (if it does not identify a problem with eligibility, and funds 
are available).
    (b) Premier CDC Exposure. A Premier CDC must reimburse SBA for 10 
percent of any loss incurred by SBA as a result of a default by the 
Premier CDC on a Debenture issued under the PCLP (``Exposure'').
    (c) Loss reserve. A Premier CDC must establish a loss reserve to 
pay its Exposure to SBA.
    (1) Assets. A Premier CDC's loss reserve must be composed of any 
combination of: segregated funds on deposit in one or more federally 
insured depository institutions; or irrevocable letters of credit. All 
loss reserve deposits and letters of credit must be assigned by the 
Premier CDC to SBA in a manner acceptable to SBA. A Premier CDC's loss 
reserve deposits in an institution may exceed the institution's insured 
amount, but only if the institution is ``well capitalized'' as defined 
in regulations of the Federal Deposit Insurance Corporation, as amended 
(12 CFR 325.103) (``well capitalized bank''). A loss reserve 
irrevocable letter of credit must (i) be issued by a well capitalized 
bank, (ii) have a term equal to or longer than the term of the 
financings it secures, and (iii) be otherwise acceptable to the SBA.
    (2) Contributions. A Premier CDC's loss reserve must total 1 
percent of the Debentures it issues under the PCLP Program. A Premier 
CDC must contribute 50 percent of the required loss reserve 
attributable to each financing when the Debenture it issues to fund the 
financing is closed, 25 percent within 1 year after the Debenture is 
closed, and 25 percent within 2 years after the Debenture is closed.
    (3) Reimbursement. SBA determines a Premier CDC's Exposure on a 
loan and withdraws the amount necessary to cover the Exposure. If, 
after full use of any assets in the loss reserve, there are not enough 
loss reserve assets to cover a Premier CDC's Exposure, the Premier CDC 
must pay SBA any difference between the Exposure and the loss reserve 
assets withdrawn by SBA to cover the Exposure within 45 days of a 
demand for payment by SBA.
    (4) Replenishment. If SBA withdraws assets from the loss reserve to 
cover a Premier CDC's Exposure, the CDC must replace the withdrawn loss 
reserve assets within 30 days of the withdrawal with contributions 
equal to or greater than the amount of the assets withdrawn.
    (5) Withdrawal. A Premier CDC may withdraw loss reserve assets 
attributable to any repaid Debenture upon written approval by SBA.
    (d) Review. SBA will review a Premier CDC's financings annually.
    (e) Suspension and revocation. The AA/FA may suspend or revoke a 
CDC's Premier designation upon written notice stating the reasons for 
the suspension or revocation at least 10 business days prior to the 
effective date of the suspension or revocation. Reasons for suspension 
or revocation may include loan performance unacceptable to SBA, failure 
to meet loss reserve or eligibility criteria, or violations of 
applicable statutes, regulations, or published SBA policies and 
procedures. A Premier CDC may appeal the suspension or revocation made 
under this section pursuant to the procedures set forth in part 134 of 
this chapter. The action of the AA/FA shall remain in effect pending 
resolution of the appeal.
    (f) Applications. A CDC may obtain information concerning this 
pilot program from the Office of Program Development in the Office of 
Financial Assistance at SBA's Headquarters. A CDC may submit its 
application to the SBA field office in which it is most active. The SBA 
field office will send the application with its recommendation to the 
AA/FA for a final decision.
    (g) Acceptance into program. When determining a CDC's application, 
SBA will consider the CDC's ability to work with the local SBA office 
and the quality of past performance.
    (h) Program period. The PCLP pilot program ends on October 1, 2000.

    Dated: April 28, 1998.
Aida Alvarez,
Administrator.
[FR Doc. 98-11848 Filed 5-4-98; 8:45 am]
BILLING CODE 8025-01-P