[Federal Register Volume 70, Number 212 (Thursday, November 3, 2005)]
[Proposed Rules]
[Pages 66800-66814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-21681]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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.

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

[[Page 66800]]



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: 
<a href="/cdn-cgi/l/email-protection#0268636f67712c6a636f6f6770716e677b427160632c656d74"><span class="__cf_email__" data-cfemail="87ede6eae2f4a9efe6eaeae2f5f4ebe2fec7f4e5e6a9e0e8f1">[email protected]</span></a>, 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, <a href="/cdn-cgi/l/email-protection#4235232e3627306c2b2c362e27292d242730023120236c252d34"><span class="__cf_email__" data-cfemail="4d3a2c2139283f63242339212826222b283f0d3e2f2c632a223b">[email protected]</span></a>.

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 Sec.  307(b) of Pub. L. 106-554, 
which requires SBA to promulgate regulations to carry out Sec.  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 Sec.  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 Sec.  
120.542, SBA would reimburse CDCs for their reasonable, customary and 
necessary expense disbursements related to liquidation activities on 
particular

[[Page 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 Sec.  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 Sec.  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 
Sec.  120.10, ``Authorized CDC Liquidator'' to describe CDCs that have 
been delegated authority to perform liquidation and debt collection 
litigation pursuant to Sec.  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 Sec.  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: Sec. Sec.  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 Sec.  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 Sec.  
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

[[Page 66802]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  120.512 regarding SBA 
discretion to take over loan servicing has been incorporated into 
proposed Sec.  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 Sec.  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 Sec.  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 Sec.  120.520(b). The proposed 
paragraph would also refer to the guaranty purchase standards in Sec.  
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 Sec.  120.10, discussed above, can constitute a basis for 
the denial of a guaranty. The Agency is proposing additional minor 
clarifications of Sec.  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 Sec.  
120.520 precludes Lenders from requesting purchase prior to the 
completion of liquidation except in certain protracted liquidation 
situations, Sec.  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

[[Page 66803]]

Sec.  510(c)(3) of the SBI Act (15 U.S.C. 697g(c)(3)). Paragraph (d) 
would incorporate existing language in current Sec.  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 Sec.  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 Sec.  510 of the SBI Act (15 U.S.C. 697g), and 
the broad authority to manage the 7(a) loan guaranty program which 
Sec.  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 
Sec.  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 Sec.  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 Sec.  120.540 as Sec.  
120.545 and to add a new Sec.  120.540 regarding the submission of 
liquidation and litigation plans. Proposed Sec.  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 Sec.  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 Sec.  7(a)(19)(C) of the Act (15 U.S.C. 636(a)(19)(C)), 
and Sec.  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 SBA-guaranteed 
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 Non-Routine Litigation from litigation 
costing $5,000 to $10,000, thereby reducing the frequency of plan 
submissions for Agency review.
    Proposed Sec.  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 
Sec.  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 Sec.  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 Sec.  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

[[Page 66804]]

fees and other costs to Lenders and CDCs for liquidation, debt 
collection litigation, and any other litigation. Proposed Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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, Sec.  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 Sec.  508(e)(1) 
of the SBI Act (15 U.S.C. 697e(e)(1)) and the existing Sec.  
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 Sec.  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 non-PCLP 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.

[[Page 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.

[[Page 66806]]

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 pre-approval 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 Sec.  307(b) of Pub. L. 106-554, which requires SBA to 
promulgate regulations to carry out Sec.  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 
Sec. Sec.  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

[[Page 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 Sec.  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 Non-Routine 
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,

[[Page 66808]]

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 Sec.  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 Sec.  
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 Sec.  
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 Sec.  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

[[Page 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 Sec.  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:


Sec.  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 Sec.  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 Sec.  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 
Sec.  120.180 and revise Sec.  120.180 to read as follows:

Applicability and Enforceability of Loan Program Requirements


Sec.  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 Sec.  120.181 to read as follows:


Sec.  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 
Sec.  120.195 to read as follows:

Reporting

    7. Add new Sec.  120.197 to read as follows:


Sec.  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 Sec.  120.440 by revising the heading and the first 
sentence to read as follows:


Sec.  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 Sec.  120.453 by revising the heading and the section to 
read as follows:


Sec.  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


Sec. Sec.  120.500, 120.510, 120.511, 120.512, and 120.513  [Removed]

    10. Remove Sec. Sec.  120.500, 120.510, 120.511, 120.512, and 
120.513, and the undesignated center heading immediately preceding 
Sec.  120.510 entitled ``Servicing''.
    11. Amend Sec.  120.520 by revising the heading and the section to 
read as follows:


Sec.  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

[[Page 66810]]

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 Sec.  
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 Sec.  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 Sec.  120.524. A Lender's failure to provide sufficient 
documentation may constitute a material failure to comply with SBA 
requirements under Sec.  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 Sec.  120.524(a) in connection with that loan.
    12. Amend Sec.  120.522 by revising the section heading and 
paragraph (b), and by deleting paragraph (d), to read as follows:


Sec.  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 Sec.  120.524 by revising paragraphs (a)(1), (a)(8), and 
(b) through (d) to read as follows:


Sec.  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 Sec.  120.535 and Sec.  120.536 to 
read as follows:


Sec.  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.


Sec.  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.

[[Page 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 Sec.  120.540 
entitled ``Liquidation of Collateral.''


Sec.  120.540  [Redesignated as Sec.  120.545]

    17. Redesignate Sec.  120.540 as Sec.  120.545.
    18. Add new Sec.  120.540 through Sec.  120.542 to read as follows:


Sec.  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 non-
adversarial 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

[[Page 66812]]

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.


Sec.  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 Sec. Sec.  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 Sec.  120.536(b)(5) or Sec.  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.


Sec.  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 non-legal 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 Sec.  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 Sec.  
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 Sec.  120.546 to read as follows:


Sec.  120.546  Loan asset sales.

    (a) General. Loan asset sales are governed by Sec.  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 Sec.  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 Sec.  120.826 to read as follows:

[[Page 66813]]

Sec.  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 Sec.  120.841(c) to read as follows:


Sec.  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 Sec.  120.845(c)(1) to read as follows:


Sec.  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 
Sec.  120.841(a) through (h).
* * * * *
    23. Revise Sec.  120.846(a)(3) to read as follows:


Sec.  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 Sec.  120.848 by revising paragraphs (a) and (f) to read 
as follows:


Sec.  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 Sec.  120.854(a)(2) to read as follows:


Sec.  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 Sec.  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 Sec.  120.972 to 
read as follows: Authority of CDCs to Perform Liquidation and Debt 
Collection Litigation.
    27. Add Sec.  120.975 to read as follows:


Sec.  120.975  CDC Liquidation of Loans and Debt Collection Litigation.

    (a) PCLP CDCs. If a CDC is designated as a PCLP CDC under Sec.  
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 Sec.  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

[[Page 66814]]

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


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