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

66800 

Vol. 70, No. 212 

Thursday, November 3, 2005 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 120 

RIN 3245–AE83 

Business Loans and Development 

Company Loans; Liquidation and 

Litigation Procedures 

AGENCY: Small Business Administration. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule: 

Establishes procedures for Certified 

Development Companies (CDCs) that are 

eligible for, and that request, authority 

from SBA to handle liquidation and 

litigation of loans that are funded with 

the proceeds of debentures guaranteed 

by the SBA under the 504 business loan 

program, and rights of appeal from 

denied applications; provides for new 

liquidation and debt collection litigation 

procedures for authorized CDCs and for 

lenders participating in the 7(a) 

business loan program (Lenders); 

establishes procedures for, and 

restrictions on, the payment by SBA of 

legal fees and expenses to CDCs and 

Lenders; requires Lenders to complete 

all cost-effective debt recovery actions 

prior to requesting guaranty purchase by 

SBA; limits to 120 days the number of 

days of interest that SBA will pay 

Lenders on 7(a) loans that have gone 

into default; revises SBA regulations 

pertaining to loan servicing actions; 

states that for 7(a) loans approved after 

the effective date of this rule, a Lender’s 

consent to SBA’s sale of certain 7(a) 

loans after guaranty purchase is granted; 

and clarifies existing regulations 

regarding the applicability of SBA 

regulations and loan program 

requirements, and regarding SBA 

purchases of guaranties. 

DATES: Comments must be received on 

or before January 3, 2006. 

ADDRESSES: You may submit written 

comments, identified by agency name 

and RIN number for this rulemaking, by 

any of the following methods: Follow 

instructions for submitting electronic 

comments through the Federal 

eRulemaking Portal: http:// 

www.regulations.gov; E-mail: 

james.hammersley@sba.gov, Include 

RIN number in the subject line of the 

message; Fax: (202) 481–2381; Mail or 

Hand Delivery/Courier: James 

Hammersley, Acting Assistant 

Administrator, Office of Portfolio 

Management, Small Business 

Administration, 409 Third Street, SW., 

Washington, DC 20416. 

FOR FURTHER INFORMATION CONTACT: 

Walter C. Intlekofer, Director, Portfolio 

Management Division, Office of 

Financial Assistance, (202) 205–7543, 

walter.intlekofer@sba.gov. 

SUPPLEMENTARY INFORMATION: Section 

7(a) of the Small Business Act (‘‘Act’’), 

15 U.S.C. 636(a), authorizes SBA to 

guarantee loans made by Lenders to 

eligible small businesses (‘‘7(a) loans’’). 

Under the 504 business loan program, as 

authorized by Title V of the Small 

Business Investment Act (‘‘SBI Act’’), 15 

U.S.C. 695–697g, SBA guarantees the 

repayment of debentures issued by 

CDCs for purchase by investors. The 

proceeds from the sale of 504 

debentures are loaned to eligible small 

businesses to finance up to 40% of the 

cost of long-term fixed assets (‘‘504 

loans’’). If the borrower defaults on the 

repayment of a 504 or 7(a) loan, 

liquidation of the collateral securing the 

loan and debt collection litigation 

generally take place to recover as much 

of the loan balance as possible. 

Historically, SBA approval was 

needed for many servicing actions by 

Lenders and CDCs, and Agency 

personnel handled most liquidation and 

debt collection litigation on defaulted 

loans. In the past decade, however, 

Congress and SBA have delegated 

increased responsibilities to certain 

Lenders and CDCs to perform 

liquidation and debt collection litigation 

of 7(a) and 504 loans. SBA has now 

implemented a transformation initiative 

to streamline its small business loan 

assistance programs by delegating 

greater servicing and liquidation 

responsibilities to Lenders and CDCs, 

thereby reducing the SBA personnel 

needed to manage these programs and 

simplifying procedures for Lenders and 

CDCs through reducing their need to 

seek the prior approval of SBA for 

various actions. 

This proposed rule implements 

§ 307(b) of Pub. L. 106–554, which 

requires SBA to promulgate regulations 

to carry out § 510 of the SBI Act. 

Publication of the rule has been delayed 

because of a need to modify program 

responsibilities in the face of reduced 

Agency staffing. In addition, SBA’s 

increased reliance on Lenders and CDCs 

to perform servicing, liquidation and 

debt collection litigation has led the 

Agency to conclude that other revisions 

are necessary to SBA’s liquidation and 

debt collection litigation regulations. 

These proposed regulations will 

promote better understanding of Agency 

requirements and better oversight and 

management by SBA of Lender and CDC 

liquidation and debt collection 

litigation. 

The proposed regulations would, 

among other things: (1) Establish 

procedures for CDCs to request 

authority for and to conduct liquidation 

and debt collection litigation; (2) 

eliminate the current requirement for 

the submission of liquidation plans by 

Lenders, other than Certified Lender 

Program (CLP) Lenders which are 

required to submit plans by § 7(a)(19) of 

the Act (15 U.S.C. 636(a)(19)(C)), and 

revise the current requirements for the 

submission of litigation plans by 

Lenders and CDCs; (3) provide for rights 

of appeal from adverse decisions by 

SBA offices regarding liquidation plans 

or litigation plans; (4) establish 

procedures for, and restrictions on, the 

payment of legal fees and other costs of 

liquidation or debt collection litigation 

incurred by Lenders and CDCs; and (5) 

impose performance standards for 

servicing and liquidation efforts by 

Lenders and CDCs. 

With regard to the proposed 

regulations concerning performance by 

CDCs of liquidation and debt collection 

litigation activities with respect to their 

504 loans, the proposed rule 

contemplates that SBA will not 

reimburse CDCs for their internal 

administrative costs associated with 

such activities, whether such activities 

are performed by a CDC or a CDC’s 

contractor. SBA recognizes, however, 

that this decision may adversely affect 

the ability of some CDCs to liquidate 

and litigate their 504 loans and, 

therefore, is soliciting comments on this 

topic. However, subject to the 

provisions of proposed new § 120.542, 

SBA would reimburse CDCs for their 

reasonable, customary and necessary 

expense disbursements related to 

liquidation activities on particular 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66801 

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. 

As part of its transformation initiative, 

SBA is also proposing to revise current 

procedures which allow a Lender to 

request that SBA purchase its 

guaranteed portion of a 7(a) loan prior 

to the completion of liquidation efforts. 

Under current practices, SBA personnel 

may be required, for a single loan, to 

review a liquidation plan, various 

requests for approval of liquidation 

actions, liquidation status updates, and 

a liquidation wrap-up report. In 

addition, under existing practices, 

Lenders that are paid the guaranty prior 

to liquidation must then remit to SBA 

its guaranteed share of any moneys 

obtained through liquidation and debt 

collection litigation, and seek SBA’s 

payment of the Agency’s pro rata share 

of expenses they incur throughout the 

liquidation and litigation process. In 

addition, payment of a guaranty to 

Lenders prior to completion of 

liquidation gives lenders less incentive 

to diligently liquidate their loans. 

Proposed § 120.520 would preclude 

Lenders from requesting purchase of a 

loan guaranty until after liquidation is 

completed for all loans approved after 

the effective date of these regulations, 

except for earlier purchases as permitted 

by SBA in certain protracted liquidation 

situations. SBA would consider 

liquidation to be completed when the 

Lender has exhausted all prudent and 

commercially reasonable efforts to 

collect the debt. This will allow SBA 

personnel in most cases to review a 

Lender’s complete administration of a 

loan only once at the completion of 

liquidation efforts. Deferring a guaranty 

purchase review until after liquidation 

is completed will also limit the need for 

ongoing payments of expenses because 

SBA would normally make only one 

payment at the conclusion of 

liquidation. This proposed revision also 

would require lenders to conduct 

liquidation and debt collection litigation 

in a prompt and cost-effective manner. 

SBA is also proposing to revise 

current regulations regarding the 

Agency’s payment of interest to Lenders 

on defaulted 7(a) loans. Under current 

regulations, Lenders in certain loan 

programs that submit a complete 

guaranty purchase request to SBA 

within 120 days of an uncured payment 

default are entitled to the payment of 

SBA’s pro rata share of the interest on 

the loan from the interest paid-to-date 

until the date of purchase by SBA. 

Lenders that do not submit a purchase 

request within 120 days of default are 

only entitled to 120 days of interest. 

Payment of more than 120 days of 

interest has served as a disincentive for 

Lenders to liquidate prior to requesting 

purchase. Consequently, and also to 

increase consistency among SBA’s loan 

programs, SBA is proposing to limit 

payment of interest after default to 120 

days on all 7(a) loans approved after the 

effective date of the regulations except 

for those loans where the guaranteed 

portion has been sold in the SBA 

Secondary Market (as described in 13 

CFR part 120, subpart F). Nothing in the 

proposed rule would change the 

payment of interest and principal to 

Secondary Market investors. 

Finally, SBA is proposing another 

regulatory revision to facilitate SBA’s 

transformation initiative through the 

sale of groups of 7(a) and 504 loans in 

asset sales. SBA has determined that 

regulatory revisions are needed to 

address the issue of a Lender’s consent 

to the sale of 7(a) loans whose 

guaranteed portions Lender had sold in 

the Secondary Market and that SBA 

subsequently purchased from the 

Secondary Market investor after loan 

default, as well as those loans whose 

guaranteed portions SBA purchased 

prior to the completion of recovery 

efforts because of protracted liquidation 

proceedings. Accordingly, SBA is 

proposing to require, for all 7(a) loans 

approved after the effective date of the 

regulations, that Lenders which do not 

exercise their option to purchase the 

guaranteed portion of a defaulted 7(a) 

loan from a Registered Holder in the 

Secondary Market, as well as Lenders 

with respect to any loan whose 

guaranteed portion SBA has purchased 

prior to the completion of liquidation, 

will be deemed to have consented to the 

sale of that loan in an asset sale. In 

addition, SBA is proposing that after 

SBA has purchased a debenture as the 

result of a default of a 504 loan (other 

than a 504 loan made by a PCLP CDC), 

SBA may in its sole discretion place 

such loan in an asset sale conducted or 

overseen by SBA. For PCLP loans, SBA 

proposes that prior to including such 

loans in an asset sale, it will provide 

advance notice to the PCLP CDCs that 

made such loans, as required by 

§ 508(d)(1) of the SBI Act (15 U.S.C. 

697e(d)(1)). 

Section-by-Section Analysis 

Section 120.10—Definitions of 

Authorized CDC Liquidator, Loan 

Program Requirements and SOPs. SBA 

proposes to add a new definition in 

§ 120.10, ‘‘Authorized CDC Liquidator’’

to describe CDCs that have been 

delegated authority to perform 

liquidation and debt collection litigation 

pursuant to § 120.975. This term is used 

on numerous occasions throughout 

these proposed regulations. 

SBA also proposes to add a definition 

for the term ‘‘Loan Program 

Requirements’’ which include 

requirements imposed upon Lenders or 

CDCs by statute, SBA regulations, any 

agreement the Lender or CDC has 

executed with SBA, SBA Standard 

Operating Procedures (SOP), official 

SBA notices and forms applicable to the 

7(a) and 504 loan programs, and loan 

authorizations. For CDCs, this term also 

includes requirements imposed by 

Debentures, as that term is defined in 

§ 120.802. SBA proposes to make 

several conforming amendments to the 

following sections in order to use this 

new defined term consistently 

throughout part 120: §§ 120.826; 

120.841(c); 120.845(c)(1); 120.846(a)(3); 

120.848(a); 120.854(a)(2); and 

120.970(a). 

The proposed regulations also modify 

the definition of the term ‘‘SOPs’’ to 

provide notice of availability of Agency 

SOPs on SBA’s Web site, http:// 

www.sba.gov. 

Section 120.180—Compliance with 

Loan Program Requirements. SBA 

proposes to revise current § 120.180 to 

clarify that Loan Program Requirements 

in effect when a Lender or CDC 

undertook a particular action with 

respect to a specific 7(a) or 504 loan will 

govern that action, and that any 

subsequent changes in program 

requirements will govern actions by a 

Lender or CDC that occur after the 

revision of the requirement had been 

implemented. For example, if a Lender 

closed a 7(a) loan in 2003, the Loan 

Program Requirements in effect at that 

time would govern the Lender’s closing 

of the loan. However, if SBA 

subsequently revised the requirements 

for liquidation in 2004, the Lender 

would be subject to the 2004 liquidation 

requirements to the extent that the 

Lender’s liquidation actions occur after 

the time of the revision. The proposed 

regulation also codifies longstanding 

Agency, Lender and CDC practice that 

Lenders and CDCs must comply with 

Agency Loan Program Requirements 

including SOPs and official notices. 

Section 120.181—SBA control over 

Lenders and CDCs. Proposed § 120.181 

would clarify that Lenders or CDCs, and 

their contractors, are independent 

contractors and that SBA is not 

responsible or liable for actions taken by 

Lenders, CDCs or their contractors. 

Section 120.197—Notifying SBA’s 

Office of Inspector General of suspected 

66802 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

fraud. SBA proposes to add this new 

section regarding notification to SBA’s 

Office of Inspector General (OIG) of 

fraud. The OIG’s mission includes 

investigating potential fraud for 

criminal prosecution. This provision is 

designed to ensure that Lenders, CDCs 

and others who may have knowledge of 

suspected fraud in the 7(a) and 504 loan 

programs provide this information to 

the OIG. 

Section 120.440—Minor Revision to 

Certified Lenders Program (CLP). Under 

the CLP, designated Lenders process, 

close, service and liquidate SBA 

guaranteed loans. The proposed revision 

of this section deletes the word ‘‘may’’

so that it is clear that CLP lenders must 

liquidate their 7(a) loans as do all other 

7(a) Lenders. 

Section 120.453—Revisions to 

Preferred Lender Program (PLP) 

responsibilities. SBA proposes to revise 

§ 120.453, which addresses servicing 

and liquidation by participants in the 

PLP. The revised regulation would 

delete the requirement that PLP Lenders 

submit liquidation plans to SBA, the 

performance standards for PLP Lender 

liquidation, and the need to obtain SBA 

consent to certain actions. Under the 

proposed rule, PLP Lenders will be 

treated the same as all 7(a) Lenders with 

respect to servicing and liquidation 

performance standards, the exemption 

from liquidation plan submission 

requirements, and the need to obtain 

SBA consent for non-delegated actions. 

Section 120.500—Loan servicing. The 

title for Subpart E is being revised to 

read Servicing and Liquidation. 

Therefore, SBA proposes to delete 

current § 120.500 because it would be 

rendered obsolete by these regulations. 

Section 120.510—Servicing Direct and 

Immediate Participation Loans. SBA no 

longer makes direct loans under the 7(a) 

program and proposed § 120.520(b) 

requires that Lenders perform loan 

servicing. Therefore, SBA proposes to 

delete this section because it is no 

longer needed. 

Section 120.511—Servicing 

guaranteed loans. Under proposed 

§ 120.536, Lenders are required to 

service 7(a) loans. Therefore, SBA 

proposes to delete this section because 

it is no longer needed. 

Section 120.512—Servicing a loan 

after SBA honors the guarantee. Under 

proposed § 120.520, Lenders normally 

would not be able to request purchase 

until after completion of liquidation 

efforts on a loan. Further, the last 

sentence in current § 120.512 regarding 

SBA discretion to take over loan 

servicing has been incorporated into 

proposed § 120.536(d). Therefore, SBA 

proposes to delete this section because 

it is no longer needed. 

Section 120.513—Servicing actions 

that require prior written consent of 

SBA. SBA is amending these 

requirements and promulgating the 

revised regulations under new 

§ 120.536. Therefore, SBA proposes to 

delete this section because it is no 

longer needed. 

Section 120.520—Servicing and SBA 

honoring of its guarantee. SBA proposes 

to revise this section to implement the 

requirement, for all loans approved after 

the effective date of the regulations, that 

Lenders normally must perform 

liquidation before requesting purchase, 

as discussed above. In addition, 

proposed paragraph (b) would also 

codify existing SBA policy that SBA 

will not purchase a guaranty unless the 

Lender has provided sufficient 

documentation, as described by SBA in 

its SOPs, which includes a listing of the 

documents in Lender’s possession that 

Lender must copy and submit to SBA 

with Lender’s purchase request, to allow 

the Agency to perform a guaranty 

purchase review. SBA’s ability to 

enforce Lender compliance with the 

requirements of the 7(a) program 

requires that Lenders provide adequate 

documentation to allow the Agency to 

review the Lender’s administration of a 

particular loan. The proposed paragraph 

also would retain the existing regulatory 

provision that SBA may purchase a 7(a) 

guaranty at any time in its discretion. 

Proposed paragraph (c) would clarify 

purchase requirements in the event that 

a Lender sells the guaranteed portion of 

a loan in the Secondary Market as 

permitted by Subpart F of Part 120. 

Consistent with existing SBA policy, 

this provision would make clear that a 

Lender’s failure to provide adequate 

documentation to SBA regarding a 

guaranty that has been sold in the 

Secondary Market may be considered a 

material failure to comply with SBA 

loan program requirements, and may 

lead to an enforcement action under 

§ 120.524. As noted above, it is critical 

to SBA’s oversight responsibility that 

Lenders provide adequate 

documentation to allow the Agency to 

conduct a guaranty purchase review, 

including those that take place 

subsequent to a Secondary Market 

purchase made by SBA. 

Proposed paragraph (d) would largely 

incorporate and clarify language that 

currently exists in § 120.520(b). The 

proposed paragraph would also refer to 

the guaranty purchase standards in 

§ 120.524(a). 

Section 120.522—Payment of interest. 

The proposed revision of this regulation 

would eliminate the current regulatory 

provision which provides that SBA may 

pay more than 120 days of interest 

depending upon when the Lender 

submits a complete purchase request to 

SBA. As discussed above, SBA’s 

proposed regulation would require that 

Lenders normally complete liquidation 

prior to requesting purchase. Therefore, 

the proposed regulation would limit 

interest purchased to 120 days to 

prevent SBA from having to pay 

excessive interest on defaulted loans. 

This provision does not affect the 

payment of interest to Secondary Market 

investors. 

Section 120.524—Guaranty purchase 

standards and procedures. SBA is 

proposing to revise paragraph (a)(1) to 

codify SBA policy that a Lender’s 

material failure to comply with a Loan 

Program Requirement, as defined in 

§ 120.10, discussed above, can 

constitute a basis for the denial of a 

guaranty. The Agency is proposing 

additional minor clarifications of 

§ 120.524 to amend paragraph (a)(8) 

because the existing provision would be 

rendered obsolete by the proposed 

requirement that Lenders normally 

complete liquidation prior to requesting 

purchase of a guaranty. Currently, 

Lenders can lose a guaranty if they do 

not request purchase within 120 days 

after a note has matured. Under the 

proposed regulations, it is possible that 

liquidation could be ongoing at that 

time. Inasmuch as proposed § 120.520 

precludes Lenders from requesting 

purchase prior to the completion of 

liquidation except in certain protracted 

liquidation situations, § 120.524(a)(8) 

could cause confusion for Lenders as to 

whether they would potentially lose an 

SBA guaranty if they didn’t request 

guaranty purchase prior to the 

completion of liquidation. Therefore, 

SBA proposes to amend this provision 

to address this situation and also to 

increase the time limit to 180 days. SBA 

is also proposing to revise paragraphs 

(b), (c), and (d) to incorporate minor 

clarifications of the Agency’s guaranty 

purchase rights. 

Section 120.535—Servicing and 

liquidation performance standards. SBA 

is proposing to add paragraphs (a) and 

(b) to include standards of performance 

for loan servicing and loan liquidation, 

which include the requirements that 

Lenders and CDCs service and liquidate 

their SBA loans using prudent lending 

standards and do so with no less 

diligence than their practice on their 

non-SBA loans. These standards would 

codify long standing SBA policy and are 

necessary so that SBA can effectively 

enforce Lender and CDC performance in 

the 7(a) and 504 Programs. Paragraph (c) 

would incorporate language set forth in 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66803 

§ 510(c)(3) of the SBI Act (15 U.S.C. 

697g(c)(3)). Paragraph (d) would 

incorporate existing language in current 

§ 120.512, which, as noted above, is 

being deleted. However, paragraph (d) 

would expand the existing language in 

that section to cover 504 loans as well 

as 7(a) loans. SBA must retain this 

authority in order to be able to assume 

loan servicing or liquidation of either a 

7(a) or 504 loan if it is in the Agency’s 

interest to do so. 

Section 120.536—Servicing and 

liquidation actions that require the prior 

written consent of SBA. This proposed 

provision would incorporate and revise 

regulations currently set forth at 

§ 120.513, but would expand the 

existing regulations to include 

additional limitations on servicing and 

liquidation actions by CDCs that 

previously had been imposed by SBA 

policy as set forth in Agency SOPs. 

Section 120.540—Uniform 

Liquidation and Debt Collection 

Procedures. Pursuant to § 510 of the SBI 

Act (15 U.S.C. 697g), and the broad 

authority to manage the 7(a) loan 

guaranty program which § 5(b)(7) of the 

Act (15 U.S.C. 634(b)(7)) confers upon 

SBA, SBA proposes to add new 

regulations establishing uniform 

procedures for the performance of 

liquidation and debt collection litigation 

actions by Lenders and CDCs. These 

proposed regulations revise the 

requirements for submission of 

liquidation and litigation plans for 

SBA’s prior review by Lenders and 

those CDCs that are authorized to 

conduct liquidation and debt collection 

litigation (which SBA has defined in 

these proposed regulations as 

Authorized CDC Liquidators, see 

proposed § 120.10 above.) The proposed 

regulations also clarify the types of 

liquidation actions that require prior 

written consent from SBA, and establish 

rights of appeal for Lenders or 

Authorized CDC Liquidators from 

decisions by SBA offices regarding 

liquidation or litigation plans. 

Under current regulations and 

procedures, many Lenders are required 

to submit liquidation plans to SBA for 

review prior to conducting liquidation 

efforts and to provide SBA with 

liquidation wrap-up reports at the 

conclusion of liquidation. These 

requirements are contained in the 

current version of § 120.512, and SBA 

SOP 50 51, Loan Liquidation and 

Acquired Property, and SOP 70 50, 

Legal Responsibilities. (SBA SOPs are 

available on SBA’s Web site, http:// 

www.sba.gov, in the online library.) 

SBA proposes to redesignate the 

existing § 120.540 as § 120.545 and to 

add a new § 120.540 regarding the 

submission of liquidation and litigation 

plans. Proposed § 120.540 would delete 

the liquidation plan submission 

requirement for Lenders, except for 

loans made by Lenders under the 

Certified Lender Program (CLP) as 

required by § 7(a)(19)(C) of the Act (15 

U.S.C. 636(a)(19)(C)). Instead, Lenders 

(other than CLP Lenders) would only 

need to submit liquidation wrap-up 

reports to SBA at the conclusion of 

liquidation. Other than the elimination 

of the requirement for the submission of 

liquidation plans by Lenders (other than 

CLP Lenders), SBA does not intend that 

these proposed regulations significantly 

alter current procedures for the 

performance of liquidation by Lenders. 

SBA has retained the requirement that 

CLP Lenders and Authorized CDC 

Liquidators submit liquidation plans to 

SBA in accordance with the 

requirements of § 7(a)(19)(C) of the Act 

(15 U.S.C. 636(a)(19)(C)), and § 510 of 

the SBI Act (15 U.S.C. 697g). In addition 

to the fact that the SBI Act requires 

Authorized CDC Liquidators to submit 

liquidation plans, SBA believes that 

differences between the 7(a) and 504 

loan programs also warrant continued 

submission of liquidation plans by 

CDCs. Although CDCs are responsible 

for their actions taken in connection 

with 504 loans, most CDCs do not have 

a direct financial interest in 504 loans 

funded by the issuance of SBAguaranteed debentures. SBA, therefore, 

believes that it is in the Agency’s 

interest to require additional oversight 

of Authorized CDC Liquidator efforts. 

Section 120.540 of the proposed 

regulations would also modify the 

existing requirement that Lenders and 

Authorized CDC Liquidators submit 

litigation plans to SBA for review of 

certain debt collection litigation. 

Current Agency procedures require 

Lenders to submit litigation plans for 

litigation defined as ‘‘Non-Routine 

Litigation,’’ which includes contested 

litigation or litigation with expected or 

actual costs in excess of $5,000. 

Litigation can be very costly and, 

because SBA is required to pay its pro 

rata share of certain of these expenses, 

the Agency believes that there is 

considerable need to review and 

approve Non-Routine Litigation prior to 

its initiation to prevent payment of 

excessive fees. SBA is also concerned 

that debt collection litigation by Lenders 

and Authorized CDC Liquidators, unlike 

the liquidation of collateral, raises the 

prospect of adverse judicial decisions 

that could serve as harmful precedent 

restricting future debt collection 

litigation by SBA or other governmental 

agencies. Accordingly, the proposed 

regulations would codify the existing 

litigation plan requirement. However, in 

order to reduce the burden on SBA 

personnel and delegate greater 

responsibilities to Lenders and 

Authorized CDC Liquidators, the 

proposed regulations raise the dollar 

threshold for what is considered NonRoutine Litigation from litigation 

costing $5,000 to $10,000, thereby 

reducing the frequency of plan 

submissions for Agency review. 

Proposed § 120.540 also would: 

(1) Require submission of an amended 

liquidation or litigation plan for SBA 

approval if material changes occur 

during the course of liquidation or 

litigation, such as when Routine 

Litigation changes to Non-Routine 

Litigation; 

(2) Provide for emergency situations 

by allowing a Lender or Authorized 

CDC Liquidator to undertake urgent 

liquidation or litigation actions by 

obtaining SBA’s prior written approval 

where practicable, but without the need 

to submit a liquidation or litigation plan 

prior to taking an urgent action; 

(3) Provide a right of appeal in the 

event that a Lender or Authorized CDC 

Liquidator disagrees with a decision by 

an SBA field office or servicing center 

regarding a liquidation or litigation 

plan; and 

(4) Identify when SBA’s prior written 

consent is required for specific 

liquidation actions. 

Section 120.541—Deadlines for SBA 

approval. Section 510(c)(2) of the SBI 

Act (15 U.S.C. 697g), imposes deadlines 

on SBA approval of CDC liquidation 

plans and other actions that could arise 

during the servicing or liquidation 

phase of a loan. So that Authorized CDC 

Liquidators and Lenders will be treated 

similarly, SBA is proposing in § 120.541 

uniform deadlines for SBA’s approval of 

proposed liquidation plans, litigation 

plans and other requests. These 

deadlines will expedite SBA 

consideration of these requests. At the 

same time, as recognized in § 510(c)(2) 

of the SBI Act, SBA will be able to 

notify a Lender or Authorized CDC 

Liquidator if it is unable to meet the 

deadline and request additional 

information as necessary to be able to 

process the request. The section also 

incorporates specific language in 

§ 7(a)(19)(C) of the Act (15 U.S.C. 

636(a)(19)(C)) relating to submission of 

liquidation plans by Lenders which 

have made a loan under their CLP 

authority. 

Section 120.542—Payment of legal 

fees and other expenses incurred in 

liquidation, debt collection litigation 

and other litigation. SBA is proposing 

new regulations regarding the 

reimbursement and payment of legal 

66804 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

fees and other costs to Lenders and 

CDCs for liquidation, debt collection 

litigation, and any other litigation. 

Proposed § 120.542(a) prohibits the 

reimbursement of legal fees incurred by 

a Lender or Authorized CDC Liquidator 

in the following situations: (1) When a 

Lender or Authorized CDC Liquidator 

asserts claims against SBA in any type 

of litigation, unless payment of such 

fees is otherwise required by federal 

law; (2) when outside counsel of a 

Lender or Authorized CDC Liquidator 

performs non-legal work in connection 

with liquidation or debt collection 

litigation without SBA consent; and (3) 

when a Lender or Authorized CDC 

Liquidator undertakes actions in 

connection with liquidation or debt 

collection litigation which only benefit 

the Lender or CDC. 

Proposed § 120.542(b) also clarifies 

that SBA will not pay for legal fees or 

costs incurred by a Lender or CDC in 

defending against a bad faith lending 

claim or any other claim brought by a 

borrower or guarantor against a Lender 

or CDC, or for the settlement of, or 

adverse judgment incurred in, any such 

suit unless SBA specifically directed the 

Lender or CDC to take the allegedly 

wrongful action in question. 

In order to ensure that Lenders and 

Authorized CDC Liquidators comply 

with the SBA requirements for 

liquidation and debt collection 

litigation, proposed § 120.542(c) allows 

SBA to deny legal fees and other costs 

incurred during the liquidation or debt 

collection litigation in connection with 

a 7(a) or 504 loan if a Lender or 

Authorized CDC Liquidator: (1) Fails to 

act in accordance with commercially 

reasonable lending standards, in a 

prudent manner, or in compliance with 

SBA requirements; (2) fails to obtain 

SBA prior written approval (using 

procedures described in Agency SOPs) 

of a liquidation and/or litigation plan, or 

an amended plan, when such approval 

is required by these regulations; or (3) 

fails to obtain prior SBA approval (using 

procedures described in Agency SOPs) 

of other servicing or liquidation actions 

if approval is required by § 120.536. To 

limit the expense of unnecessary or 

unreasonable legal expenses, SBA also 

proposes to be able to deny legal fees 

and other litigation or liquidation 

expenses that SBA had not previously 

approved if such fees or expenses are 

not reasonable, customary or necessary 

in the locality where the Lender or 

Authorized CDC Liquidator is 

conducting the liquidation or litigation. 

Proposed §§ 120.542(d) and (e) also 

provide rights of appeal to specific 

officials in SBA’s Headquarters if a 

Lender or Authorized CDC Liquidator 

disagrees with an SBA determination to 

deny reimbursement of liquidation or 

litigation fees or costs. 

Section 120.546—Loan asset sales. As 

discussed above, SBA wants to facilitate 

its transformation initiative by 

proposing certain changes to its loan 

asset sale program. The proposed 

section would impose a requirement, for 

all 7(a) loans made after the effective 

date of the regulations, that Lenders will 

be deemed to have consented to the sale 

of a loan in an asset sale under the 

specified circumstances. This provision 

is needed to facilitate an effective asset 

sales program by SBA. The proposed 

section also addresses 504 loans to be 

sold in asset sales. 

Section 120.848—PCLP CDC servicing 

and liquidation actions. SBA is 

proposing a minor revision of this 

section to include a cross-reference to 

the proposed servicing regulations in 

subpart E of part 120. 

Section 120.970—CDC servicing 

actions. SBA is proposing a minor 

revision of this section to include a 

cross-reference to the proposed 

servicing regulations in subpart E of part 

120. 

Section 120.975—CDC Authority to 

Perform Liquidation and Debt collection 

Litigation. Section 510(c) of the SBI Act 

(15 U.S.C. 697g) authorizes certain CDCs 

to perform liquidation and debt 

collection litigation with respect to 504 

loans. SBA proposes adding a new 

regulation, § 120.975, to establish 

criteria for CDCs that request authority 

to become an Authorized CDC 

Liquidator, with authority delegated 

from SBA to conduct foreclosure and 

other liquidation actions, and debt 

collection litigation, on behalf of SBA. 

Section 510(b)(1) of the SBI Act (15 

U.S.C. 697g(b)(1)) provides that CDCs 

qualified to receive such delegated 

authority are those that participated in 

the loan liquidation pilot program 

established by the Small Business 

Programs Improvement Act of 1996; are 

participating in the Premier Certified 

Lenders Program (PCLP); or have made 

an average of at least ten 504 loans per 

year during the three fiscal years 

immediately prior to the date on which 

the CDC requests this authority to 

liquidate and litigate, as well as show 

that it has trained employees, or has 

engaged contractors satisfactory to SBA, 

to perform these actions. 

PCLP CDCs are already required to 

perform liquidation and debt collection 

litigation on their PCLP loans, pursuant 

to § 508(e)(1) of the SBI Act (15 U.S.C. 

697e(e)(1)) and the existing § 120.848(f). 

This proposed rule would require PCLP 

CDCs that meet the statutory test, 

consisting of having either trained 

employees or having engaged 

contractors satisfactory to SBA, as 

determined by SBA, to exercise their 

delegated authority to perform 

liquidation and debt collection litigation 

on their other 504 loans as well, upon 

receiving written notice from SBA that 

the CDC has met the statutory test and 

without the CDC first having to apply 

for SBA approval to exercise such 

delegated authority. All other CDCs 

would be required to apply for SBA 

approval. 

In accordance with § 510(b)(2) of the 

SBI Act (15 U.S.C. 697g(b)(2)), a 

qualified non-PCLP CDC requesting to 

handle liquidation and debt collection 

litigation must submit an application to 

SBA. The proposed regulations also 

provide for rights of appeal from the 

denial by SBA of applications from nonPCLP CDCs. 

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 Proposed 

Rule 

The objective of the proposed 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. The 

proposed 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. 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66805 

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 

Proposed Rule 

1. Potential Benefits and Costs to 

Lenders. The proposed rule would 

provide benefits for Lenders because it 

reduces the costs for those institutions 

to participate in the 7(a) program by 

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). 

Submission of liquidation plans is 

currently required in 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. Because fewer cases 

would rise above that higher 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 proposed rule 

would result in a cost savings of 

$75,000. 

Lenders also would benefit under a 

provision of the proposed rule which 

defers, until after liquidation is 

complete, SBA’s guaranty purchase on 

loans whose guaranteed portions have 

not been sold in the Secondary Market. 

Currently, Lenders whose loans SBA 

has purchased are required to process 

paperwork (SBA Form 172, Transaction 

Report on Loan Serviced by Lender) in 

connection with the remittance to SBA 

of the Agency’s portion of any 

collections the Lender receives 

subsequent to guaranty purchase. Under 

the proposed rule, Lenders that are 

required to complete liquidation prior to 

purchase would not remit any payments 

to SBA along with a Form 172 unless 

collections are obtained by the Lenders 

subsequent to guaranty purchase. 

Finally, the proposed rule would 

reduce the number of loan servicing and 

liquidation actions taken by Lenders 

that require prior SBA approval as 

compared with existing SBA 

requirements, and make remaining SBA 

prior approval requirements similar 

among the various SBA loan programs. 

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 proposed rule except 

for the loss of income that would result 

from the proposed limitation on interest 

on guarantees purchased by SBA to 120 

days. However, such a limitation would 

affect only a small percentage (estimated 

at around 10%) of SBA guaranty 

purchases, and Lenders typically place 

loans on interest non-accrual after 90 

days delinquency. SBA is requesting 

comments from the public on any 

monetized, quantitative or qualitative 

costs of Lenders’ compliance with this 

rule. Please send comments to the SBA 

official referenced in the ADDRESSES

section of the preamble. 

2. Potential Benefits and Costs to 

CDCs. As provided by statute, this 

proposed 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 proposed regulations. 

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 

proposed 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 proposed 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 

proposed rule would also incur added 

costs through acquiring resources and 

creating the necessary internal 

structures to engage in liquidation and 

litigation activities. SBA is requesting 

comments from the public on any other 

monetized, quantitative or qualitative 

costs of CDCs’ compliance with this 

rule. Please send comments to the SBA 

official referenced in the ADDRESSES

section of the preamble. 

3. Potential Benefits and Costs for 

SBA and the Federal Government. The 

proposed 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 proposed rule). SBA estimates that 

ending this requirement would 

eliminate the need for SBA to review 

about 4,000 liquidation plans a year. 

66806 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

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 proposed 

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. 

SBA would also benefit under a 

provision of the proposed rule which 

defers, until after Lender liquidation is 

complete, SBA’s guaranty purchase on 

loans whose guaranteed portion has not 

been sold in the Secondary Market 

(except for earlier purchases as 

permitted by SBA in certain protracted 

liquidation situations). This would 

allow SBA personnel, in most cases, to 

review a Lender’s complete 

administration of a loan, including 

liquidation expenses incurred and 

recoveries received, only once at the 

completion of liquidation efforts. 

Currently, Lenders whose loans SBA 

has purchased are required to submit 

SBA Form 172 (Transaction Report on 

Loan Serviced by Lender) in connection 

with the remittance to SBA of the 

Agency’s portion of any collections the 

Lender receives subsequent to guaranty 

purchase. Under the proposed rule, 

Lenders that are required to complete 

liquidation prior to purchase would not 

remit any payments to SBA along with 

a Form 172 unless collections are 

obtained by the Lenders subsequent to 

guaranty purchase. Consequently, SBA 

would be relieved of the administrative 

burden of reviewing and processing a 

large number of lender payments under 

the proposed rule. 

Although under the proposed 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 proposed 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 

of guaranty purchase requests, the 

proposed rule would save taxpayer 

dollars by limiting payment of interest 

to Lenders 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 limits 

interest purchased to 120 days in two of 

the existing 7(a) loan programs, 

including 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 

through enabling the sale of groups of 

7(a) and 504 loans in asset sales. To this 

end, the rule provides that Lenders that 

do not exercise their option to purchase 

the guaranteed portion of a defaulted 

7(a) loan from a Registered Holder in the 

Secondary Market, as well as Lenders 

with respect to any loan whose 

guaranteed portion SBA has purchased 

prior to the completion of liquidation, 

would be deemed to have consented to 

the sale of that loan in an asset sale. In 

addition, SBA is proposing that after 

SBA has purchased a debenture as the 

result of a default of a 504 loan, SBA 

may place such loan in an asset sale 

conducted or overseen by the Agency. 

Costs imposed on SBA as a result of 

the proposed rules would include 

personnel and administrative costs 

associated with implementing appeals 

processes to which Lenders and 

Authorized CDC Liquidators may be 

entitled under the proposed 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. Proposed Rule Is the Best Available 

Means To Reach the Regulatory 

Objective 

This proposed 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. SBA is 

requesting comments from the public on 

any potentially effective and reasonably 

feasible alternatives to this rule as it 

applies to Lenders, and the costs and 

benefits of those alternatives. Please 

send comments to the SBA official 

referenced in the ADDRESSES section of 

the preamble. 

With respect to CDCs that are eligible 

for and request liquidations and debt 

collection authority from SBA, the 

proposed rule merely implement 

§ 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 proposed 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 

proposed 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 

proposed action does not have 

retroactive or preemptive effect. 

Executive Order 13132 

This proposed rule would 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 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66807 

purposes of Executive Order 13132, 

SBA has determined that this proposed 

rule has no federalism implications 

warranting preparation of a federalism 

assessment. 

Regulatory Flexibility Act 

Based on the following analysis, SBA 

certifies that the proposed rule would 

not have a significant economic impact 

on a substantial number of small entities 

under the Regulatory Flexibility Act 

(‘‘RFA’’), 5 U.S.C. 601 et seq. 

This proposed rule directly affects 

only those CDCs that are eligible for, 

and that request, authority from SBA to 

conduct liquidation and debt collection 

litigation, of which SBA estimates that 

there are approximately 80 out of about 

270 active CDCs, and an unknown 

number of small lending institutions. 

SBA assumes, therefore, that this 

proposed rule may have an impact on a 

substantial number of small entities. 

However, the proposed rule merely 

implements statutory mandates and, 

further, SBA has determined that the 

impact on entities affected by the 

proposed rule will not be significant for 

the reasons set forth below. 

The proposed rule would not impose 

a significant economic impact on small 

lending institutions because it in fact 

reduces the costs for those institutions 

to participate in the 7(a) program by 

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 proposed 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 proposed rule 

will result in a cost savings of $75,000. 

The proposed rule also would not 

have a significant economic impact on 

CDCs, which are entities that are 

licensed and regulated by SBA. As 

provided by statute, the 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 proposed regulations. 

Such benefits include the ability to 

pursue quicker liquidations and 

possibly achieve higher 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 

provisions of proposed new § 120.542, 

SBA would reimburse 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 CDCs will be 

required to submit to the Agency for 

approval, as required by statute, about 

300 liquidation plans per year. 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 for 

all plans would be $18,000 per year. 

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 will be 

also be required to liquidate and litigate 

their non-PCLP loans by this rule in 

order to have one consistent standard 

for all their loans. 

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 proposed regulations merely 

codifies 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. 

Accordingly, SBA certifies that this 

rule will not have a significant 

economic impact on a substantial 

number of small entities. SBA invites 

comments from members of the public 

who believe there will be significant 

impact either on CDCs, small lending 

institutions, or small businesses that 

receive funding from, or with the 

assistance of, CDCS or such institutions. 

Paperwork Reduction Act 

SBA has determined that this 

proposed rule imposes additional 

reporting or recordkeeping requirements 

under the Paperwork Reduction Act 

(‘‘PRA’’), 44 U.S.C. 3501–3520. This 

collection of information, as defined by 

the PRA, includes four different 

reporting requirements which are (1) the 

application for CDCs to apply for 

liquidation and debt collection litigation 

authority on 504 loans, (2) a liquidation 

plan describing proposed collection 

activities for defaulted 504 loans, (3) a 

litigation plan describing proposed debt 

collection litigation for defaulted 7(a) or 

504 loans, and (4) a request for a waiver 

of the need for a written liquidation or 

litigation plan. The titles, descriptions 

and respondent descriptions of the 

information collections are discussed 

below with an estimate of the annual 

reporting burden. Included in the 

estimate is the time for reviewing 

instructions, searching existing data 

sources, gathering and maintaining the 

data needed, and completing and 

reviewing each collection of 

information. 

SBA invites comments on: (1) 

Whether the proposed collection of 

information is necessary for the proper 

performance of SBA’s functions, 

66808 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

including whether the information will 

have a practical utility; (2) the accuracy 

of SBA’s estimate of the burden of the 

proposed collections of information, 

including the validity of the 

methodology and assumptions used; (3) 

ways to enhance the quality, utility, and 

clarity of the information to be 

collected; and (4) ways to minimize the 

burden of the collection of information 

on respondents, including the use of 

automated collection techniques, when 

appropriate, and other forms of 

information technology. 

Please send comments by the closing 

date for comment for this proposed rule 

to David Rostker, Office of Management 

and Budget, Office of Information and 

Regulatory Affairs, 725 17th Street, 

NW., Washington, DC 20503 and to 

James Hammersley, Acting Assistant 

Administrator, Office of Portfolio 

Management, Small Business 

Administration, 409 Third Street, SW., 

Washington, DC 20416. 

A. Application for Liquidation 

Authority 

Title: CDC Application for Authority 

to Perform Liquidation and Debt 

Collection Litigation on 504 Loans [No 

SBA Form Number]. 

Summary: As described in proposed 

§ 120.975, certain CDCs that seek 

authority from SBA to perform 

liquidation and debt collection litigation 

in connection with defaulted loans will 

submit the application to the Agency. 

SBA will review the application to 

determine whether the CDC has 

participated in the CDC loan liquidation 

pilot program, is participating in the 

PCLP, or has made sufficient loans in 

the past three years, as specified in the 

SBI Act and the proposed rule, and has 

trained employees or contractors, 

satisfactory to SBA, to perform 

liquidation and litigation in a manner 

that will reduce the risk of loss to the 

Agency. Recoveries from these 

liquidation efforts and debt collection 

litigation will be remitted to SBA to 

reduce the Agency’s loss on the loan. 

Need and Purpose: Section 510 of the 

SBI Act (15 U.S.C. 697g) authorizes 

certain CDCs to conduct liquidation and 

debt collection litigation in connection 

with section 504 loans that have gone 

into default, and specifies the criteria 

that CDCs must meet to apply for this 

authority. The proposed regulation 

incorporates the statutory criteria. SBA 

will use the information CDCs submit to 

determine whether the CDC meets the 

qualifications. 

Description of Respondents: CDCs 

that have requested authority to handle 

liquidation and litigation and which 

meet the specified criteria. SBA 

estimates that approximately 40 CDCs 

annually will apply for the liquidation 

authority. 

SBA estimates the burden of this 

collection of information as follows: An 

applicant will complete this collection 

normally only once. SBA estimates that 

the time needed to complete this 

collection will average one hour. SBA 

estimates that the cost to complete this 

collection will be approximately $30 per 

hour. Therefore, SBA estimates that the 

total annual burden for the 40 

applications per year is 40 hours per 

year and the total cost is $1,200 per 

year. 

B. The Liquidation Plan 

Title: SBA Liquidation Plan [SBA 

Form 1979]. 

Summary: The liquidation plan will 

describe the specific steps that CDCs 

anticipate using to recover through 

liquidation of collateral and other 

actions, debts owed on their defaulted 

504 loans. 

Need and Purpose: This plan is 

required under proposed § 120.540(a), 

and is needed for SBA to oversee 

recovery actions of CDCs because SBA, 

as guarantor on CDC debentures, may 

incur financial losses of 100% on 

defaulted 504 loans funded by these 

debentures. Thus, SBA must oversee 

and manage the liquidation actions of 

CDCs to ensure that they will take 

action to maximize recovery, minimize 

risks, and limit unnecessary and 

excessive costs. SBA is authorized to 

require submission of this plan under 

several statutory provisions: sections 

5(b)(7), 7(a)(2)(C), and 7(a)(19) of the Act 

(15 U.S.C. 634(b)(7), 636(a)(2)(C) and 

(a)(19)), and section 510 of the SBI Act 

(15 U.S.C. 697g). 

Description of Respondents: The 

respondents are CDCs that have made 

504 loans funded by SBA guaranteed 

debentures and that are authorized to 

conduct liquidation (Authorized CDC 

Liquidation). SBA estimates that such 

CDCs would submit approximately 300 

liquidation plans each year. 

SBA estimates that the average 

amount of time for an Authorized CDC 

Liquidator to complete this collection is 

two hours. SBA estimates that the cost 

to complete this collection will be 

approximately $30 per hour. Therefore, 

we estimate that the total annual burden 

for all CDCs affected by this requirement 

is 600 hours and the total cost is 

$18,000 per year. 

C. The Litigation Plan 

Title: SBA Litigation Plan [No SBA 

Form Number]. 

Summary: The litigation plan will 

describe the proposed conduct of debt 

collection litigation that Lenders/CDCs 

anticipate using to recover debts owed 

on their defaulted 7(a) and 504 loans 

where litigation is not anticipated to be 

Non-Routine Litigation. 

Need and Purpose: This plan is 

required under proposed § 120.540(b), 

and is needed for SBA to oversee and 

manage debt collection litigation by 

Lenders and CDCs because SBA, as 

guarantor on 7(a) loans and 504 

debentures, may incur financial losses 

of up to 90% on defaulted 7(a) loans 

and 100% on defaulted 504 loans. Thus, 

SBA must oversee the liquidation 

actions of Lender/CDCs to ensure that 

they will take action to maximize 

recovery, minimize risks, and limit 

unnecessary and excessive costs. SBA is 

authorized to require submission of this 

plan under several statutory provisions: 

sections 5(b)(7), 7(a)(2)(C), and 7(a)(19) 

of the Act (15 U.S.C. 634(b)(7), 

636(a)(2)(C) and (a)(19)), and section 

510 of the SBI Act (15 U.S.C. 697g). 

Description of Respondents: 

Respondents include Lenders that have 

made 7(a) guaranteed loans and CDCs 

that have made 504 loans funded by 

SBA guaranteed debentures. A 

Litigation plan will only be needed if 

litigation falls within the definition of 

Non-Routine Litigation. However, SBA 

has not maintained data on how many 

debt collection actions are initiated in 

connection with defaulted 7(a) or 504 

loans or the average litigation costs or 

contested nature of such litigation. 

Therefore, SBA is calculating that an 

applicant will complete this collection 

once per defaulted loan. SBA estimates 

that such Lenders and CDCs will submit 

approximately 3,000 litigation plans 

each year. 

SBA estimates that the average 

amount of time needed to complete this 

collection is one hour. SBA anticipates 

that the work will be done largely by 

private sector attorneys and estimates 

that this will cost approximately $150 

per hour. Therefore, we estimate that 

the total annual burden for all entities 

affected by this requirement is 3,000 

hours per year and the total cost is 

$450,000 per year. 

D. Request for Emergency Waiver 

Title: Request for waiver of need for 

written liquidation or litigation plan [No 

SBA Form Number]. 

Summary: As described in proposed 

§ 120.540(f), Lenders and Authorized 

CDC Liquidators who are required to 

submit written liquidation or litigation 

plans to SBA for advance approval, may 

request a waiver of such requirement 

under urgent circumstances (for 

example, when an immediate response 

to litigation is required). Such Lenders 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66809 

and Authorized CDC Liquidators would 

be required to apply for and obtain 

SBA’s consent to such a waiver before 

taking the urgent action. 

Need and Purpose: SBA must oversee 

Lenders’ and CDCs’ liquidation and 

litigation actions for the reasons 

described above. However, SBA 

recognizes that circumstances may arise 

in which obtaining prior SBA approval 

may be impracticable and potentially 

delay urgently-needed liquidation or 

litigation action. Therefore, SBA 

proposes to create a limited waiver to 

address such circumstances. 

Description of Respondents: The 

respondents are Lenders and CDCs who 

are subject to the requirement to submit 

liquidation or litigation plans. SBA 

estimates that SBA will receive 500 

waiver requests each year. 

SBA estimates that the average 

amount of time for a Lender or CDC to 

complete this collection is one-half 

hour. SBA anticipates that this work 

will be done largely by private sector 

attorneys and expects will cost 

approximately $150 per hour. Therefore, 

SBA estimates that the total annual 

burden for Lenders and CDCs affected 

by this requirement is 250 hours and the 

total cost is $37,500 per year. 

List of Subjects in 13 CFR Part 120 

Loan programs—business, Reporting 

and recordkeeping requirements, Small 

businesses. 

For the reasons set forth above, SBA 

proposes to amend 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’’ to read as follows: 

§ 120.10 Definitions. 

* * * * * 

Authorized CDC Liquidator: 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: 

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 

3–4. Revise the undesignated center 

heading immediately preceding 

§ 120.180 and revise § 120.180 to read as 

follows: 

Applicability and Enforceability of 

Loan Program Requirements 

§ 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 new § 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 

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. Amend § 120.453 by revising the 

heading and the section 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. 

9a. Revise the heading of subpart E to 

read as follows: 

Subpart E—Servicing, Liquidation, and 

Debt Collection Litigation of 7(a) and 

504 Loans 

§§ 120.500, 120.510, 120.511, 120.512, and 

120.513 [Removed] 

10. Remove §§ 120.500, 120.510, 

120.511, 120.512, and 120.513, and the 

undesignated center heading 

immediately preceding § 120.510 

entitled ‘‘Servicing’’. 

11. Amend § 120.520 by revising the 

heading and the section to read as 

follows: 

§ 120.520 Purchase of 7(a) Loan 

Guarantees. 

(a) When SBA will purchase. (1) For 

loans approved on or after the effective 

date of this regulation. A Lender must 

not make demand on SBA to purchase 

a guaranteed portion of a loan until after 

the Lender has completed liquidation 

for that loan. SBA considers liquidation 

to be completed when a Lender has 

exhausted all prudent and commercially 

reasonable efforts to collect upon the 

debt. However, a Lender may request in 

writing that SBA purchase the 

guaranteed portion of a loan prior to 

completion of liquidation, if a debt 

collection judicial or other similar 

proceeding involving that loan 

(including but not limited to foreclosure 

and bankruptcy proceedings) has been 

underway for more than eighteen (18) 

months. In addition, SBA, in its sole 

discretion, may purchase the guaranteed 

66810 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

portion of a loan at any time with or 

without a request from a Lender. 

(2) For loans approved before the 

effective date of this regulation. The 

regulations applicable to the time that a 

Lender may demand 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, pursuant to 

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 provide documentation 

upon request by SBA 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. 

(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 

by deleting 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 the effective date 

of this regulation. 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 the 

effective date of this regulation. 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. 

* * * * * 

14–15. Add the following new 

§ 120.535 and § 120.536 to read as 

follows: 

§ 120.535. Standards for Lender and CDC 

loan servicing, loan liquidation and debt 

collection litigation. 

(a) 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. 

(b) 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. 

(c) 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 may, in its discretion, 

undertake the servicing or liquidation of 

any 7(a) or 504 loan. If SBA elects to 

service or liquidate 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 and liquidate 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. 

(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. 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66811 

(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 and 

commercially reasonable. 

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. 

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 and 

costs 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 and costs 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 costs of 

conducting the litigation exceed 

$10,000, or has approved an amended 

plan, and thereafter the anticipated or 

actual costs of conducting the litigation 

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 circumstances (Emergency) 

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 

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 

66812 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

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), 120.537(c)(5) 

or 120.537(c)(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) 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. 

(d) 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. 

19. Add a new § 120.546 to read as 

follows: 

§ 120.546 Loan asset sales. 

(a) General. Loan asset sales are 

governed by § 120.845(b)(4) and by this 

section. 

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

on or after the effective date of this 

regulation. 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 if: 

(i) For a loan where the guaranteed 

portion has been sold in the Secondary 

Market pursuant to subpart F of this part 

and the loan subsequently goes into 

default, and the Lender does not 

exercise its option to purchase the 

guaranteed portion of the loan from the 

Registered Holder and instead SBA 

purchases the guaranteed portion of the 

loan from the Registered Holder; or 

(ii) SBA has purchased the guaranteed 

portion of a loan prior to completion of 

liquidation as provided in 

§ 120.520(a)(1). 

(2) For loans approved before the 

effective date of this regulation. SBA 

must obtain written consent from the 

Lender for the sale of such loans in an 

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. 

20. Revise § 120.826 to read as 

follows: 

Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 66813 

§ 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 the records 

and submit the reports required by SBA. 

21. Revise § 120.841(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. Revise § 120.845(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. Revise § 120.846(a)(3) to read as 

follows: 

§ 120.846 Requirements for maintaining 

and reviewing PCLP Status. 

(a) * * * 

(3) Substantially comply with all Loan 

Program Requirements. 

* * * * * 

Subpart H—Development Company 

Loan Program (504) 

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. 

* * * * * 

25. Revise § 120.854(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. 

* * * * * 

24. 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. 

26. Add a new undesignated center 

heading after § 120.972 to read as 

follows: Authority of CDCs to Perform 

Liquidation and Debt Collection 

Litigation. 

27. 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 the 

effective date of this regulation; 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 

66814 Federal Register / Vol. 70, No. 212 / Thursday, November 3, 2005 / Proposed Rules 

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. 

Hector V. Barreto, 

Administrator. 

[FR Doc. 05–21681 Filed 11–2–05; 8:45 am] 

BILLING CODE 8025–01–P 

LEGAL SERVICES CORPORATION 

45 CFR Part 1631 

Expenditure of Grant Funds 

AGENCY: Legal Services Corporation. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This Notice of Proposed 

Rulemaking (NPRM) proposes to delete 

in its entirety of the Legal Services 

Corporation’s regulation at 45 CFR part 

1631, Expenditure of Grant Funds. The 

proposed deletion is warranted because 

the statutory authority for part 1631 is 

no longer the prevailing rule of law. 

DATES: Comments on this NPRM are due 

on December 5, 2005. 

ADDRESSES: Written comments may be 

submitted by mail, fax or e-mail to 

Mattie C. Condray at the addresses 

listed below. 

FOR FURTHER INFORMATION CONTACT: 

Mattie C. Condray, Senior Assistant 

General Counsel, Office of Legal Affairs, 

Legal Services Corporation, 3333 K 

Street, NW., Washington DC 20007; 

202–295–1624 (ph); 202–337–6519 (fax); 

mcondray@lsc.gov. 

SUPPLEMENTARY INFORMATION: Part 1631 

provides that LSC grant recipients may 

not expend LSC funds except as in 

accordance with the restrictions and 

provisions contained in the 

Corporation’s Fiscal Year 1986 

appropriations measure (Pub. L. 99–180, 

99 Stat. 1136), unless such funds are 

expended pursuant to a waiver from the 

Corporation. Part 1631 was promulgated 

in 1986 in response to Congressional 

concerns that some pre-1982 funds were 

being held by recipients and spent on 

activities which were not prohibited at 

the time the funds were appropriated, 

but which were later prohibited (and on 

which recipients could not spend 

currently appropriated funds). 51 FR 

24826 (July 9, 1986). 

In 2005, there is no longer any 

concern that recipients have any pre1982 funds to spend. In addition, in 

1996, Congress adopted new restrictions 

and provisions applicable to recipients 

of LSC funds which supersede the 

restrictions in Public Law 99–180. 

Public Law 104–134, 110 Stat. 1321. 

These restrictions have been 

incorporated by reference in each 

subsequent appropriation, including the 

current appropriation. Public Law 108–

447, 118 Stat. 2809. These restrictions 

have been separately incorporated into 

LSC’s regulations and removal of part 

1631 will have no effect on the later 

restrictions and provisions imposed by 

Pub. L. 104–134. See, e.g., 45 CFR part 

1610. 

As part 1631 is now obsolete, LSC 

believes it is appropriate at this time to 

delete part 1631 in its entirety. LSC 

believes this action will streamline 

LSC’s regulations and avoid any 

potential confusion the continued 

existence of part 1631 might create. 

Accordingly, LSC proposes to remove 

and reserve part 1631 from Chapter XVI 

of Title 45 of the Code of Federal 

Regulations. 

PART 1631—[REMOVED AND 

RESERVED] 

For reasons set forth above, and under 

the authority of 42 U.S.C. 2996g(e), LSC 

proposes to remove and reserve 45 CFR 

Part 1631. 

Victor M. Fortuno, 

General Counsel and Vice President for Legal 

Affairs. 

[FR Doc. 05–21942 Filed 11–2–05; 8:45 am] 

BILLING CODE 7050–01–P 

DEPARTMENT OF JUSTICE 

Bureau of Prisons 

28 CFR Part 524 

[BOP–1131–P] 

RIN 1120–AB32 

Classification and Program Review 

AGENCY: Bureau of Prisons, Justice. 

ACTION: Proposed Rule. 

SUMMARY: In this document, the Bureau 

of Prisons (Bureau) proposes to revise 

its regulations on classification and 

program review to remove unnecessary 

regulations and to ensure that 

classification and program review 

procedures adequately address inmate 

needs. 

DATES: Comments due by January 3, 

2006. 

ADDRESSES: Our e-mail address is 

BOPRULES@BOP.GOV. Comments 

should be submitted to the Rules Unit, 

Office of General Counsel, Bureau of 

Prisons, 320 First Street, NW., 

Washington, DC 20534. You may view 

an electronic version of this rule at 

http://www.regulations.gov. You may 

also comment via the Internet to BOP at 

BOPRULES@BOP.GOV or by using the 

http://www.regulations.gov comment 

form for this regulation. When 

submitting comments electronically you 

must include the BOP Docket No. in the 

subject box. 

FOR FURTHER INFORMATION CONTACT: 

Sarah Qureshi, Office of General 

Counsel, Bureau of Prisons, phone (202) 

307–2105. 

SUPPLEMENTARY INFORMATION: In this 

document, we revise and streamline the 

regulations which set forth the 

classification and program review rules, 

which currently describe procedure, 

practice, and general statements of 

policy, to remove an unnecessary level 

of operational details with regard to the 

classification and program review 

process. 

Details removed from the regulations 

will be addressed in our corresponding 

policy statement on the classification 

and review program. We do not, by this 

rule, intend to make any substantive 

changes to the current rules or to the 

classification and program review 

system. We merely intend to clarify and 

streamline the existing rules. 

Executive Order 12866 

This regulation has been drafted and 

reviewed in accordance with Executive 

Order 12866, ‘‘Regulatory Planning and 

Review’’, section 1(b), Principles of 

Regulation. The Director, Bureau of 

Prisons has determined that this rule is 

not a ‘‘significant regulatory action’’

under Executive Order 12866, section 

3(f), and accordingly this rule has not 

been reviewed by the Office of 

Management and Budget. 

Executive Order 13132 

This regulation will not have 

substantial direct effects on the States, 

on the relationship between the national 

government and the States, or on 

distribution of power and 

responsibilities among the various 

levels of government. Therefore, under 

Executive Order 13132, we determine 

that this rule does not have sufficient 

federalism implications to warrant the 

preparation of a Federalism Assessment. 

Regulatory Flexibility Act 

The Director of the Bureau of Prisons, 

under the Regulatory Flexibility Act (5 

U.S.C. 605(b)), reviewed this regulation