This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

64356

Vol. 60, No. 241

Friday, December 15, 1995

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 108, 116, 120, 122, 131

Business Loan Programs

AGENCY: Small Business Administration

(SBA).

ACTION: Proposed rule.

SUMMARY: In response to President

Clinton’s government-wide regulatory

review directive, SBA has completed a

page-by-page and line-by-line review of

all of its existing regulations. SBA

determined that it could eliminate some

regulations and consolidate, clarify, and

simplify the remainder. This proposed

rule consolidates five current CFR parts

into one Part to be known as Part 120.

The surviving Part 120 covers virtually

all policies and regulations, other than

size standards, applicable to SBA’s

business (non-disaster) loan programs.

Almost all provisions have been

reworded, renumbered, and relocated.

There are a few new or revised policies.

Several sections have been deleted.

However, most of the revisions merely

streamline and clarify the regulations

and do not represent substantive

change.

DATES: Comments must be submitted on

or before January 16, 1996.

ADDRESSES: Address written comments

to David R. Kohler, Associate General

Counsel for General Law, (120) Small

Business Administration, 409 3rd Street

S.W., Washington, D.C. 20416.

FOR FURTHER INFORMATION CONTACT:

Ronald Matzner, Associate Deputy

General Counsel; Office of General

Counsel, at (202) 205–6882.

SUPPLEMENTARY INFORMATION: On March

4, 1995, President Clinton directed all

federal agencies to conduct a page-bypage, line-by-line review of their

existing regulations to determine which

could be eliminated or streamlined. The

President’s directive complemented

SBA’s ongoing reinvention effort, which

had already targeted portions of the

business loan programs for streamlining

and simplification. From its review of

its business loan programs, SBA is

proposing to eliminate many pages of

business loan regulations and

consolidate and simplify the remainder.

The proposed rule combines Parts

108, 116, 120, 122 and 131 of 13 CFR

into one new Part to be known as Part

120. The new Part 120 will regulate all

of SBA’s non-disaster financial

assistance to small businesses under its

general business loan program (‘‘7(a)

loans’’), its microloan demonstration

program (‘‘Microloans’’), and its

development company program (‘‘504

loans’’).

Many repetitive and overlapping

sections from the current regulations

will be eliminated. The remaining

provisions will be easy to find and easy

to understand. Formerly, provisions

applicable to a business loan program

were often located in different Parts.

Sometimes unintended differences

developed between the loan programs in

the interpretation or implementation of

similar program policies because of

minor inconsistencies in the language of

the provisions in the several Parts.

These inconsistencies have been

eliminated.

In the proposed rule, the basic

requirements that apply to all of the

business loan programs are located in

subpart A. These include elements

currently found in portions of Parts 108,

116, and 120. Policies specific to a

particular program are in the separate

subpart applying to that program. Rules

specific to 7(a) loans will be in subpart

B and include elements currently in

portions of Parts 116, 120, and 122.

Regulations applying to SBA’s special

purpose loans currently in Part 122 and

a portion of Part 116 will be in subpart

C. Subparts D, E, and F will contain

rules regarding lenders, program

administration, and the secondary

market currently found primarily in Part

120. The loan moratorium provisions

presently in Part 131 will also be in

subpart E. Subpart G will contain rules

specific to Microloans currently in Part

122. Finally, regulations applying only

to 504 loans currently located in Part

108 will be in subpart H. The following

chart summarizes the proposed rule:

Subpart Subject matter covered

Section

numbers

Introduction ... Overview of

Part 120;

definitions.

120.1 to

120.99.

Subpart Subject matter covered

Section

numbers

A .................... Policies applicable to

all business loans.

120.100 to

120.199.

B .................... Loanmaking

policy specific to

Guarantees and

Direct 7(a)

Loans.

120.200 to

120.299.

C .................... Special Purpose

Loans.

120.300 to

120.399.

D .................... Lenders ....... 120.400 to

120.499.

E .................... Loan Administration.120.500 to

120.599.

F .................... Secondary

Market.

120.600 to

120.699.

G ................... Microloan

Demonstration

Program.

120.700 to

120.799.

H .................... Development

Company

Loan Program (504).

120.800 to

120.899.

The most noticeable change in the

proposed regulation is in the format.

The rule is written in a ‘‘user-friendly’’,

‘‘plain-language’’ style. Provisions have

been grouped in logical sequences.

Descriptive headings make it easier to

find sections. Hyphenated section

numbers are no longer used. Questions

and answers are sometimes used.

Wherever possible, ordinary language is

used instead of ‘‘government-speak’’.

SBA’s intent was to write regulations

that provide easy-to-comprehend notice

of the general content of a policy, rather

than detailed information explaining or

expounding upon that policy. Much

explanatory material currently in the

regulations and used primarily by SBA

personnel to implement SBA’s programs

has been eliminated from the proposed

rule, but is available to the public and

may be found in SBA policy guidances,

Standard Operating Procedures

(‘‘SOPs’’), and other SBA materials.

Most of the revisions do not represent

policy changes. In many cases, the

wording of the regulation has been

changed to conform to actual conduct.

Although SBA is not aware of any

instances, SBA requests comments

regarding any inadvertent substantive

changes which may have been caused

by rewording and format changes.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64357

There are a few substantial policy

changes in the proposed rule, however.

For example, the ‘‘alter ego’’ rule has

been completely revised making more

Passive Companies eligible for financial

assistance, and new provisions are being

proposed allowing Certified

Development Companies (‘‘CDCs’’) to

expand into other areas not being

adequately serviced by the existing

CDCs in those areas. These and other

substantive policies are explained in

detail below in the section by section

analysis.

Comments to this proposed rule are

invited, including suggestions for

further clarification and streamlining.

Send them to the person and address

noted above, within the time specified.

Each subpart is addressed separately

below. Conversion tables are provided

detailing all deletions, consolidations,

relocations, and policy changes.

Immediately below is a chart showing

the location of surviving material by

Parts.

Former

part # Subject matter New 120 subpart New sectionnumber(s)

108 ........ Development Company Loans ........................................ H ....................................................................................... 120.800–899

116 ........ Subpart A—Veterans ....................................................... N/A ................................................................................... 120.104

116 ........ Subpart B—Flood Insurance ........................................... N/A ................................................................................... 120.170

116 ........ Subpart C—Lead-based Paint ......................................... N/A ................................................................................... 120.173

116 ........ Subpart D—Floodplain Management and Woodlands

Protection.

N/A ................................................................................... 120.172

116 ........ Subpart E—Coastal Barrier Resources Act .................... N/A ................................................................................... 120.175

120 ........ Subpart—General; Subpart A—Loan-Making Policy ....... Dispersed in Intro., Subpart A, Subpart B. ...................... 120.1

120 ........ Subpart B—Loan Administration ..................................... Subpart E ......................................................................... 120.500–599

120 ........ Subpart C—Loan Participants ......................................... Subpart D ......................................................................... ..........................

120 ........ Subpart D ......................................................................... Subpart D ......................................................................... ..........................

120 ........ Subpart E ......................................................................... Subpart D ......................................................................... ..........................

120 ........ Subpart F ......................................................................... Subpart F ......................................................................... ..........................

120 ........ Subpart G ......................................................................... Subpart F ......................................................................... ..........................

122 ........ Subpart A—General Provisions ....................................... Dispersed in Introduction, Subpart A, Subpart B ............ ..........................

122 ........ Subpart B—Special Purpose Loans ................................ Subpart C ......................................................................... ..........................

131 ........ Loan Moratorium .............................................................. Subpart E ......................................................................... 120.532–536

Definitions applicable to all business

loans are located in § 120.10, combining

separate definitions previously in Parts

108 and 120. Nearly all have been

reworded. Some definitions have been

added, and some have been eliminated

because they were redundant or were

incorporated into the text. Of particular

note is the definition of ‘‘Associate,’’

which was broadened. Conversely, the

definition of ‘‘close relative’’ was

limited to the closest family

relationship. The net effect of the

changes is to pinpoint more effectively

the individuals subject to the ethical

requirements and conflict of interest

prohibitions of the regulations. Terms

which are defined in the proposed rule

are capitalized in this preamble for

consistency. In addition, references to

SBA Regional offices and officers have

been eliminated and usually, but not

always, replaced with a reference to

District Director because of SBA’s recent

restructuring.

A detailed listing of changes specific

to each subpart follows.

120 Subpart A and B—General Loan

Policy and Guaranteed and Direct 7(a)

Loans

The following is a conversion table for

Subparts A and B:

Former section

number

New part 120 number for loan

provisions

Action(s) (Note: all sections were renumbered and moved, or deleted)Extent of policy change, if any; comments

on action(s)

116.1–116.3 ............. 120.104 ..................................... Revised; Subpart was split; provisions

moved to program Parts.

Minor policy change; explanatory material

and definitions will be in SOP or other

policy material.

116.10–116.12 ......... 120.170 ..................................... Revised; provisions condensed ................ No policy change; explanatory material

will be in SOP or other policy material.

116.20–116.23 ......... 120.173 ..................................... Revised; provisions condensed ................ No policy change; explanatory material

will be in SOP or other policy material.

116.30–116.35 ......... 120.172 ..................................... Revised; provisions condensed ................ No policy change; explanatory material

will be in SOP or other policy material.

116.40–116.41 ......... 120.175 ..................................... Revised; provisions condensed ................ No policy change.

116 Appendix A ....... N/A ............................................ Deleted ...................................................... No policy change. Material no longer

needed.

116 Appendix B ....... N/A ............................................ Deleted ...................................................... No policy change. Material no longer

needed.

120.1–1 .................... 120.1 ......................................... Revised; some deletion; material moved .. No policy change. Some explanatory material no longer valid.

120.1–2 .................... 120.4 ......................................... Revised ...................................................... No policy change.

120.1–3 .................... 120.180 ..................................... Revised ...................................................... No policy change.

120.1–4 .................... N/A ............................................ Deleted. Unnecessary ............................... No policy change.

120.2 ........................ 120.10 ....................................... Rewritten ................................................... No policy change. New definitions are

added; an owner is now considered an

‘‘Associate.’’

120.2–1 .................... 120.1 ......................................... Rewritten ................................................... No policy change.

120.2–2 .................... 120.10 ....................................... Revised ...................................................... See Policy Note above.

120.2–3 .................... N/A ............................................ Deleted ...................................................... No policy change. Definition will no longer

be used.
64358 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

Former section

number

New part 120 number for loan

provisions

Action(s) (Note: all sections were renumbered and moved, or deleted)Extent of policy change, if any; comments

on action(s)

120.2–4 .................... 120.10 ....................................... Revised ...................................................... Minor policy change. This definition has

been dropped, but sub-definitions were

modified and included elsewhere.

120.2–5 .................... 120.10 ....................................... Revised ...................................................... Minor policy change. Definition of Lending

Institution was dropped.

120.2–6 .................... 120.10 ....................................... Revised ...................................................... Minor policy change. Both definitions were

dropped.

120.2–7 .................... N/A ............................................ Deleted ...................................................... Minor policy change. Definition was

dropped, as no longer used.

120.2–8 .................... 120.470 ..................................... Rewritten ................................................... No policy change.

120.3–1 .................... 120.2 ......................................... Rewritten ................................................... No policy change.

120.3–2 .................... 120.2(a) .................................... Rewritten ................................................... No policy change.

120.3–3 .................... 120.2 ......................................... Rewritten ................................................... No policy change.

120.3–4 .................... 120.101 ..................................... Consolidated with 120.103–1 .................... No policy change.

120.100 .................... N/A ............................................ Deleted ...................................................... No policy change. Section not needed.

120.101–1(a) ............ 120.100(d) ................................ Rewritten ................................................... No policy change.

120.101–1(b) ............ 120.103 ..................................... Rewritten ................................................... No policy change.

120.101–1(c) ............ 120.110(j) ................................. Revised ...................................................... No policy change. Section now combined

with another.

120.101–2 ................ 120.110 ..................................... Revised ...................................................... No policy change.

120.101–2(a) ............ 120.110(k) ................................ Revised ...................................................... Clarifies policy regarding promotion of religion. See Note 1, below.

120.101–2(b) ............ 120.110(g) ................................ Revised ...................................................... No policy change. explanatory material

will be in SOP or other policy material.

120.101–2(c) ............ 120.110(h) ................................ Revised ...................................................... No policy change. Needless wording was

deleted.

120.101–2(d) ............ 120.110(b)(c), 120.111 ............. Revised; new rule included ....................... Major policy changes. See Note 2, below.

120.101–2(d) (1)

through (7).

120.111 ..................................... Revised; New Rule. ................................... Major policy changes. See Note 2, below.

120.101–2(d) ............ 120.110(g) ................................ Revised ...................................................... No policy change.

120.101–2(f) ............. 120.110(f) ................................. Rewritten ................................................... No policy change.

120.101–2(g) ............ 120.110(m) ............................... Revised ...................................................... No policy change.

120.102 .................... 120.120 ..................................... Revised ...................................................... No policy change.

120.102–1 ................ 120.130(f), 120.201 .................. Revised ...................................................... No policy change.

120.102–2 ................ 120.207, 120.130(d) ................. Revised ...................................................... No policy change.

120.102–3 ................ 120.130(a) ................................ Revised ...................................................... No policy change.

120.102–4 ................ 120.104, 120.130(b) ................. Revised ...................................................... No policy change.

120.102–4(a) ............ 120.104 ..................................... Revised ...................................................... No policy change.

120.102–4(b) ............ 120.104 ..................................... Revised ...................................................... No policy change.

120.102–5 ................ 120.130(c) ................................ Revised ...................................................... No policy change.

120.102–6 ................ 120.202 ..................................... Revised ...................................................... No policy change. Wording changed to reflect agency policy.

120.102–7 ................ 120.110(i) ................................. Revised ...................................................... Minor policy change. See Note 3 below.

120.102–8 ................ 120.130, 120.130(e) ................. Revised ...................................................... No policy change.

120.102–9 ................ None ......................................... Deleted ...................................................... Minor policy change. Provision was not

used.

120.102–10,

120.102–10 (a)–(f).

120.140, 120.110(o) ................. Revised; new Rule .................................... Major policy change. See Note 4 below.

120.102–11 .............. 120.130 ..................................... Revised ...................................................... Minor new policy. 180-day parameter

added.

120.102–12 (a)–(d) .. 120.110(q) ................................ Revised ...................................................... Minor policy change. See Note 5 below.

120.103–1(a),

120.103–1(b).

120.101, 120.102 ..................... Rewritten ................................................... Major policy change. See Note 6 below.

120.103–2 ................ 120.150 ..................................... Revised ...................................................... No policy change.

120.103–2(a) ............ 120.150 ..................................... Revised ...................................................... No policy change.

120.103–2(b) ............ 120.150(f) ................................. Rewritten ................................................... No policy change.

120.103–2(c) ............ 120.160(a), 120.201 ................. Revised ...................................................... Minor policy change or clarification. See

Note 7 below.

120.103–2(d) ............ 120.160(b) ................................ Revised ...................................................... No policy change.

120.103–2(e) ............ 120.160(c), 120.170 ................. Revised ...................................................... No policy change. Though not now specifically mentioned in the regulation, life

insurance may still be required as part

of prudent lending.

120.103–2(f) ............. 120.170, 120.172–73,

120.175–76.

Revised ...................................................... No policy change.

120.103–2(g) ............ 120.160(d) ................................ Revised ...................................................... Minor policy change—depository plan no

longer required.

120.103–2(h) ............ 120.200 ..................................... Revised ...................................................... No policy change.

120.103–3 (a)–(e) .... 120.193 ..................................... Revised ...................................................... No policy change.

120.104–1 (a)–(e) .... 120.220 ..................................... Rewritten ................................................... No policy change.

120.104–1(f) ............. N/A ............................................ Deleted ...................................................... Eliminated from statute.

120.104–2(a)(1) ....... N/A ............................................ Deleted ...................................................... No policy change; policy will now be contained in SOP or other policy guidance.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64359

Former section

number

New part 120 number for loan

provisions

Action(s) (Note: all sections were renumbered and moved, or deleted)Extent of policy change, if any; comments

on action(s)

120.104–2(a)(2) ....... N/A ............................................ Deleted ...................................................... Major policy change; deleted from the Act.

120.104–2(a)(3) ....... N/A ............................................ Deleted ...................................................... Provision eliminated by statute (and had

never been implemented by SBA).

120.104–2(b) ............ 120.221(e)(f) ............................. Rewritten ................................................... No policy change.

120.104–2(c) ............ 120.221(b) ................................ Rewritten ................................................... No policy change.

120.104–2(d) ............ 120.222 ..................................... Revised ...................................................... No policy change.

120.104–2(e)(1) ....... 120.222 ..................................... Revised ...................................................... No policy change.

120.104–2(e)(2) ....... 120.221(a) ................................ Revised ...................................................... No policy change.

120.104–2(e)(3) ....... 120.223(a), 120.222(e),

120.221(d).

Revised ...................................................... No policy change.

120.104–2(e)(4) ....... 120.222(c) ................................ Rewritten ................................................... No policy change.

120.104–2(f) ............. 120.195 ..................................... Rewritten ................................................... No policy change—Clarified that does

apply to 504 loans. See Note 8.

120.105 .................... 120.176 ..................................... Rewritten; consolidated ............................. No policy change. Note that recent regulatory additions appear in 120.171 and

174. More guidance can be found in

SOP.

120 Appendix A ....... N/A ............................................ Deleted ...................................................... No policy change. Terms of the agreement are in effect. Agreement will appear in SOP or other policy material.

122.1 ........................ 120.1 ......................................... Combined .................................................. No policy change.

122.2 ........................ N/A ............................................ Deleted ...................................................... No policy change.

122.3–1 .................... 120.180 ..................................... Consolidated .............................................. No policy change.

122.3–2 .................... N/A ............................................ Deleted ...................................................... No policy change.

122.4 ........................ 120.176 ..................................... Consolidated .............................................. No policy change.

122.5–1 .................... 120.101 ..................................... Revised; combined .................................... No policy change.

122.5–2 .................... 120.191 ..................................... Revised ...................................................... No policy change.

122.5–3 .................... 120.101, 120.190(d) ................. Consolidated; rewritten .............................. No policy change.

122.5–4 .................... 120.192 ..................................... Rewritten ................................................... No policy change.

122.5–5 .................... 120.192 (definition.) .................. Revised ...................................................... No policy change.

122.6–1(a)(b) ........... 120.212 ..................................... Revised ...................................................... No policy change.

122.6–2 .................... 120.530 ..................................... Moved; revised .......................................... No policy change.

122.6–3, Part 131 .... 120.532–535 ............................. Moved; combined; revised ........................ No policy change.

122.7 ........................ 120.151 ..................................... Rewritten ................................................... No policy change.

122.7–1 .................... 120.211(a)(b) ............................ Revised ...................................................... No policy change.

122.7–2 .................... 120.211(c) ................................ Rewritten ................................................... Reference to District Director’s authority

to make exceptions will be in SOP.

122.7–3 .................... 120.151 ..................................... Rewritten ................................................... No policy change.

122.7–3(a) ................ 120.210(a) ................................ Revised ...................................................... Minor policy change; increase approval

will be by AA/FA.

122.7–3(b) ................ 120.210(b) ................................ Revised ...................................................... No policy change.

122.7–3(c) ................ 120.210(c) ................................ Revised ...................................................... No policy change.

122.8–1 .................... 120.213(b) ................................ Revised ...................................................... No policy change.

122.8–2 .................... 120.213(b) ................................ Revised ...................................................... No policy change.

122.8–3 .................... 120.213(a) ................................ Revised ...................................................... No policy change.

122.8–4 .................... 120.214 ..................................... Rewritten ................................................... No policy change.

122.8–4(a) ................ 120.214(a) ................................ Rewritten ................................................... No policy change.

122.8–4(b) ................ 120.214(a) ................................ Rewritten ................................................... No policy change.

122.8–4(c) ................ 120.214(b) ................................ Revised ...................................................... Clarifies that movement in amount of loan

must equal movement in base rate.

122.8–4(d) ................ 120.214(c) ................................ Moved ........................................................ No policy change.

122.8–4(e) ................ 120.214(d) ................................ Moved ........................................................ No policy change.

122.8–4(f) ................. 120.214(e) ................................ Moved ........................................................ No policy change.

122.8–4(g) ................ 120.214(f) ................................. Rewritten ................................................... No policy change.

122.8–4(h) ................ 120.214(g) ................................ Revised ...................................................... No policy change.

The following chart lists additions to

Part 120:

Section

number Subject matter covered

120.110(r) Prohibition for businesses engaged in political and lobbying

activities.

120.110(o) Prohibition for businesses engaged in pornographic or sexually-oriented (non-medical)

activities. See Note 1 below.

Section

number Subject matter covered

120.171 ... Compliance with Child Support

Obligations as a condition of

an SBA loan.

120.174 ... Earthquake hazards notice.

120.190 ... Where a business applies for a

loan.

120.193 ... Use of computer generated

forms.

Note 1. SBA often receives eligibility

questions from Borrowers and Lenders. In the

proposed rule, SBA has attempted to

delineate clearly and succinctly the

businesses that are ineligible for SBA

financial assistance. In particular, SBA field

offices, loan applicants, Lenders,

development corporations and other SBA

intermediaries have requested guidance

concerning the eligibility of businesses

which may be engaged in religious activities.

After consulting with the Department of

Justice, SBA proposes to provide such

guidance through these new regulations.

The present regulation states that churches

and religious organizations are ineligible for

SBA financial assistance. It does not specify
64360 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

whether the prohibition extends to

businesses principally engaged in promoting

religion through their activities. Nonetheless,

such businesses in the past have been found

to be ineligible.

SBA’s primary focus is to provide financial

assistance to for-profit small businesses that

can contribute to job growth and economic

development in the United States. Within the

limits set by the Establishment Clause of the

Constitution, SBA does not disqualify

otherwise eligible small businesses from

receiving financial assistance merely because

they offer religious books, articles, or other

products for sale or because they support or

encourage moral and ethical values based

upon religious beliefs. At the same time, SBA

does not make financial assistance available

to religious entities or their affiliates for use

in directly promoting or teaching religion.

The Establishment Clause of the First

Amendment, which states ‘‘Congress shall

make no law respecting an establishment of

religion,’’ serves as a limitation on

governmental activities with regard to

religion. The Establishment Clause primarily

proscribes ‘‘sponsorship, financial support,

and active involvement of the sovereign in

religious activity.’’ Walz v. Tax Commission,

397 U.S. 664, 668 (1970). ‘‘Neither a state nor

the Federal Government * * * can pass laws

which aid one religion, aid all religions, or

prefer one religion over another * * * No tax

in any amount, large or small, can be levied

to support any religious activities or

institutions, whatever they may be called, or

whatever form they may adopt to teach or

practice religion.’’ Everson v. Bd. of Educ.,

330 U.S. 1, 15–16 (1947); see also Grand

Rapids School Dist. v. Ball, 473 U.S. 373, 381

(1985) (quoting this language); McCollum v.

Bd. of Educ., 333 U.S. 203, 210 (1948) (same).

Under the proposed rule, SBA would not

provide financial assistance to businesses

principally engaged in teaching, instructing,

counseling, or indoctrinating religion or

religious beliefs. While incidental or indirect

support of religious objectives might be

permissible, SBA would not provide

financial assistance to a newspaper,

broadcasting business, day care center, or

private school principally engaged in such

activities.

Some of the more difficult eligibility

inquiries received by SBA field offices have

involved businesses which engage in

activities in a secular setting which may be

considered to be religious in nature. The U.S.

Supreme Court has held that aid used to fund

specifically religious activities in an

otherwise substantially secular setting, has

the primary effect of advancing religion, and

therefore violates the Establishment Clause.

Hunt v. McNair, 413 U.S. 734 (1973); Bowen

v. Kendrick, 487 U.S. 589, 613 (1988). The

facts of each situation must be carefully

examined. With the above Supreme Court

standard in mind, SBA proposes to include

among ineligible businesses those principally

engaged in teaching, instructing, counseling

or indoctrinating religion or religious beliefs,

whether the setting is religious or secular,

because, in SBA’s view, financial assistance

to such small businesses would violate the

Establishment Clause.

SBA field office personnel and others also

have sought guidance on the eligibility of

small businesses which sell sexually oriented

products or services, or engage in sexually

oriented activities. The present regulation is

silent regarding obscene, pornographic, or

sexually oriented activities. A business

engaging in any such activity that is illegal

is ineligible under § 120.110(h) of this

regulation. However, SBA receives inquiries

regarding businesses engaged in activities

which, while not illegal, may be considered

by the average person to be obscene or

pornographic.

‘‘Obscene’’ material is not protected by the

First Amendment. It has been defined by the

United States Supreme Court in the context

of a criminal case, Miller v. California, 413

U.S. 15, 24 (1973), as follows: ‘‘* * *

whether a work which depicts or describes

sexual conduct is obscene is [determined by]

whether the average person, applying

contemporary community standards, would

find that the work, taken as a whole, appeals

to the prurient interest, whether the work

depicts or describes, in a patently offensive

way, sexual conduct specifically defined by

the applicable state law, and whether the

work, taken as a whole, lacks serious literary,

artistic, political, or scientific value.’’

Under Supreme Court precedent, ‘‘[w]hen

the government appropriates funds to

establish a program, it is entitled to define

the limits of that program.’’ Rust v. Sullivan,

114 L.Ed.2d 233, 256 (1991). In

implementing its programs, SBA must also

follow the Congressional mandate set forth in

Section 4(d) of the Small Business Act (15

U.S.C. 633(d)) (‘‘the Act’’) to consider the

public interest in granting or denying an

application for SBA financial assistance.

Having considered the legal precedent and

the Congressional mandate, SBA has

determined that it may exclude small

businesses engaging in lawful activities of an

obscene, pornographic, or prurient sexual

nature. Under the proposed rule, SBA would

not provide financial assistance to small

businesses which present live performances

of a prurient sexual nature or which derive

significant gross revenue from the sale, on a

regular basis, of products or services, or the

presentation of depictions or displays, of a

pornographic, obscene, or prurient sexual

nature. Thus, an establishment featuring

nude dancing, or a book, magazine or video

store containing merchandise of a prurient

sexual nature would not be eligible for SBA

financial assistance if the obscene,

pornographic, or prurient activity

contributed to the generation of a significant

portion of the gross revenue of the business.

SBA considers this proposed rule to be

consistent with its obligation to direct its

limited resources and financial assistance to

small businesses in ways which will best

accomplish SBA’s mission, serve its

constituency, and serve the public interest.

Applicants’ First Amendment freedoms are

in no way abridged. They may still express

their views, exercise their freedoms, operate

their businesses, and obtain any other aid

available to them.

SBA is considering the use of a percentage

of gross revenue instead of ‘‘significant’’ in

the final formulation of this rule and requests

commenters to focus particularly on the

relative merits of the two approaches and

what percentage would be appropriate.

Note 2. The proposed regulation

establishes a new ‘‘Eligible Passive

Company’’ rule replacing the current ‘‘alter

ego’’ rule. The new rule will be found at

§ 120.111. An ‘‘Eligible Passive Company’’ is

defined as an entity which does not engage

in regular and continuous business activity,

which leases real or personal property to an

Operating Company for use in the Operating

Company’s operations. SBA generally makes

business loans only to small businesses

engaged in regular business activities, and

prohibits such assistance to entities engaged

in passive investment or real estate

development, or which do not engage in

regular and continuous activity as an

operating business. SBA calls such entities

‘‘passive businesses.’’ At the same time, SBA

recognizes that valid business reasons may

exist for an Operating Company not to own

the real estate and fixed assets used to

conduct its business. This proposed rule

would allow certain passive businesses to be

eligible for SBA assistance if that assistance

is used only to acquire and/or improve real

or personal property leased to a small

business and is used in that small business’

operations. The proposed rule would

eliminate certain requirements and

restrictions which presently limit the use of

real estate holding entities in SBA’s businessloan and development company programs.

For purposes of these regulations, an

Operating Company is defined in section

120.100 as a small business actively currently

involved in conducting business operations

or about to be located on real property owned

by an Eligible Passive Company, or using or

about to use in its business operations,

personal property owned by an Eligible

Passive Company.

Many years ago, SBA agreed to assist

eligible Operating Companies seeking SBA

financial assistance through their affiliated

‘‘mirror image’’ passive businesses by

creating an exception for such ‘‘alter egos’’.

Subsequent modifications to the mirror

image requirement permitted variations in

ownership percentages between the operating

business and the alter ego for immediate

family members. Such variances led to

conflicting interpretations of the policy,

which have frustrated its original intent and

confused both the public and SBA personnel.

Such variances limited the effectiveness of

the intended assistance. In addition, the

variances caused inconsistencies between the

7(a) loan program and the development

company loan program.

On February 22, 1994, SBA published (59

FR 8425) a proposed rule (‘‘1994 proposal’’)

to eliminate the conflicting interpretations

and inconsistencies and to revise the family

member common ownership threshold to

extend the alter ego exception to additional

passive businesses. SBA received more than

twenty detailed comments suggesting

changes in the proposal. It also has received

many other suggestions and

recommendations from small business

owners, development companies, lending

institutions and SBA employees at regulatory

partnership meetings and other outreach

activities conducted by SBA. After

considering these comments and suggestions,

SBA has revised its thinking sufficiently to
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64361

warrant publication of this new proposed

rule, included here as an integral part of

SBA’s overall regulatory streamlining.

In its 1994 proposal, SBA suggested

reducing the common ownership threshold

for any passive business and Operating

Company to 20 percent. Most of the

comments suggested that, as an exception to

a ‘‘mirror image’’ requirement, a 20 percent

threshold was insufficient to support a nexus

between a passive business and an Operating

Company. Some suggested that the nexus be

increased to 50 percent, others to 80 percent.

However, others suggested that SBA

eliminate the ‘‘mirror image’’ rule altogether.

After carefully considering all of the options,

the goals and the objectives of SBA’s loan

programs, SBA proposes to eliminate the

present alter ego rule, and allow such a loan

whenever it essentially represents financial

assistance to an Operating Company.

Many small businesses utilize separate

entities to hold the real estate or leasehold

improvements used in the operation of their

businesses. SBA now believes that an Eligible

Passive Company, without regard to its

ownership interests, should be an eligible

entity for SBA financial assistance if it only

uses such assistance to acquire and/or

improve real or personal property which it

leases to an Operating Company for the

conduct of its operations.

SBA’s new proposed ‘‘Eligible Passive

Company’’ rule recognizes that an Eligible

Passive Company may be an individual, sole

proprietorship, corporation, limited liability

company, an irrevocable trust or any form of

partnership. Under the current rule, trust

ownership of any part of an Eligible Passive

Company is prohibited in the SBA business

loan program. The development company

program permits the use of trusts as eligible

owners. In this proposed rule (as in its 1994

proposal), SBA proposes to eliminate the

inconsistency between the 7(a) loan program

and the development company loan program.

SBA believes that there is no reason to

prohibit a small business concern using the

SBA’s business loan programs from taking

advantage of the tax and planning benefits

which may be inherent in the use of an

irrevocable trust. Trust eligibility shall be

determined by the eligibility status of the

trustor (grantor/settlor), with all donors to the

trust being presumed conclusively to have

trustor status for eligibility purposes.

SBA welcomes comments on whether use

of a revocable trust should also be permitted.

While this would give Borrowers greater

planning flexibility, the trustor’s reserved

authority to amend the trust might lead to

fronts or other abuses. Under this proposed

rule, an Operating Company must be an

eligible small business under SBA’s

standards, and the proposed use of proceeds

by the Eligible Passive Company would have

to be an eligible use if the Operating

Company were obtaining the financing

directly. This ensures that the Eligible

Passive Company will utilize SBA’s financial

assistance in the same manner as an eligible

small business. As suggested by several

comments on the 1994 proposal, both the

Eligible Passive Company and the Operating

Company must meet SBA’s size standards (13

CFR Part 121).

In response to other comments on the 1994

proposal, the new rule clarifies that the lease

between the Eligible Passive Company and

the Operating Company must be

subordinated to SBA’s security interest,

mortgage or trust deed lien and the Eligible

Passive Company (as landlord) must pledge

as collateral an assignment of rents derived

from the lease. The requirement for an

assignment of the lease has been eliminated,

but an assignment may be required by SBA

when necessary to perfect a lien under

applicable law.

Several comments urged SBA not to

require the Operating Company to be a coBorrower on a loan to an Eligible Passive

Company, suggesting that legitimate tax and

business reasons exist in many cases for the

Operating Company to be a guarantor instead

of a co-Borrower. Believing this to be a credit

and business decision best left to the

discretion of SBA loan officers, the Borrower,

and (in the development company program)

the development company, SBA has

provided that the Operating Company may be

either a guarantor or a co-Borrower in most

cases. An exception is created for loans in the

7(a) loan programs in which working capital

funding is included, in which case the

Operating Company must be a co-Borrower.

When an Operating Company applies for

SBA loan assistance, each 20 percent or more

ownership interest holder in the Operating

Company must guarantee the loan. Since the

Operating Company will be a co-Borrower or

guarantor when an Eligible Passive Company

is the Borrower, the proposed rule would

extend the same requirement to ownership

interests of both the Operating Company and

the Eligible Passive Company.

Several comments noted that it is common

for an Operating Company to need working

capital when the Eligible Passive Company

applies for a loan primarily to finance the

acquisition of real or personal property. In

the past, SBA has required the Eligible

Passive Company to use the loan proceeds

solely to acquire and improve property for

lease to an Operating Company. Thus, two

separate SBA loans would be needed—one to

the Eligible Passive Company for the real

property and the other to the Operating

Company for working capital. The

commenters suggested that SBA permit

proceeds of a single loan to the Eligible

Passive Company to be used for working

capital in the Operating Company. This

proposed rule adopts these suggestions for

the 7(a) loan program, provided that the

Operating Company is a co-Borrower. The

loan proceeds for working capital would be

allocated to the Operating Company, while

those for acquisition and improvement of

property for lease to the Operating Company

would be allocated to the Eligible Passive

Business. Under this approach, small

businesses would no longer incur duplicate

costs and would benefit by reduced

paperwork and a streamlined loan process.

Several comments noted that a trust,

established to take advantage of tax and

planning benefits inherent in the trust form,

may have a need to engage in other activities.

They argued that SBA should not prohibit a

trust which qualifies as an Eligible Passive

Company from engaging in activities other

than the leasing of property to the Operating

Company. SBA agrees. Accordingly, under

this proposed rule, a trust qualifying as an

Eligible Passive Company may engage in

other activities authorized under its trust

documents. The Trustee will need to certify

to SBA (and provide pertinent language from

the trust document) that the Trustee has

authority to act, and that the trust has the

authority to borrow funds, pledge trust assets

and lease the property to the Operating

Company. The Trustee also will need to

provide SBA with a list of all trustors and

donors.

Note 3. To be eligible for SBA financial

assistance, the products and services of a

business must be available to the general

public. Because the current rule refers only

to recreational and amusement enterprises, it

is misleading and confusing, and is not

uniformly enforced by SBA field offices. The

proposed rule clarifies that private clubs and

businesses that limit the number of members

for reasons other than capacity are ineligible

for SBA financial assistance.

Note 4. The current regulations have

separate conflict-of-interest sections for

Lenders and development companies. SBA

has re-written and consolidated the sections.

The prohibitions are clear and consistent for

all business loan program participants. The

proposed rule expands the categories of

individuals subject to the requirements and

may encompass additional acts not

specifically enumerated.

Note 5. The prohibition against assisting a

business which previously has caused SBA

to sustain a loss is currently stated explicitly

only in the 7(a) regulations, although it is

applied in all of SBA’s business loan

programs. Its inclusion in subpart A clarifies

that the policy applies to all business loans.

Considerable explanatory material currently

in the 7(a) regulation has been removed and

will be placed in an SOP or other policy

guidance.

Note 6. SBA may provide financial

assistance only if the applicant shows that

the desired credit is needed and not

otherwise available on reasonable terms. In

§ 120.101, SBA clarifies its present policy.

The current provision, § 120.103–1 uses the

language ‘‘not otherwise available on

reasonable terms’’ without indicating any

factors which should be considered in

determining what is reasonable. Section 3(h)

of the Act defines ‘‘credit elsewhere’’ as the

availability of credit from non-Federal

sources on reasonable terms and conditions

taking into consideration the prevailing rates

and terms in the community in or near where

the concern transacts business, for similar

purposes and periods of time. SBA believes

the language in section 3(h) clarifies the

credit elsewhere test and proposes to include

the language in § 120.101. In addition, the

current regulation provides that the

certification made by a Lender in its

application for an SBA guarantee is generally

accepted as sufficient documentation that the

desired credit is unavailable to the applicant.

In the proposed § 120.101, SBA clarifies and

reaffirms its existing policy that the Lender

or CDC must have examined the availability

of credit to the applicant, have based its
64362 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

certification upon that examination, and have

documentation in its file to support the

certification.

In the 7(a) program, SBA often required

applicant principals and owners to use

personal assets before granting financial

assistance, unless undue hardship would

result. In the 504 program, SBA did not

enforce this policy and rarely required

applicants to use their own personal

resources.

In this proposed rule, SBA clarifies that

there is no difference between the business

loan programs regarding evidence of need.

SBA will consider the personal wealth and

resources of the principals and owners in

determining an applicant’s need for SBA

financial assistance in all business loan

programs, and SBA may require the

principals and owners of the applicant to use

their personal resources before SBA will

grant financial assistance.

Note 7. Current regulations require owners

of 20 percent or more of a business to

guarantee an SBA loan. Under SBA’s current

SOP, SBA may require owners of between 5

and 20 percent of a business to guarantee a

loan. Since the public is not always aware of

its SOP, SBA is including the latter policy in

this proposed rule. Rather than set an

arbitrary lower limit of 5 percent (or any

other number), SBA proposes that the rule

state that SBA may require holders of

interests of less than 20 percent of an

applicant to guarantee an SBA loan, when

appropriate under prudent underwriting

criteria.

Note 8. The use of SBA Form 159

(Compensation Agreement) in the 504

program has been a subject of controversy for

some time. The Act requires 7(a) applicants

to certify the names of and fees paid to all

professionals or other representatives

engaged by the applicant in connection with

the SBA financial assistance. Current section

120.104–2(f) implements the statutory

requirement. Title V of the Small Business

Investment Act, 15 U.S.C. 695 (‘‘Title V’’)

does not have a corresponding provision.

Despite this, SBA, citing section 7(a)(13) of

the Act, has generally extended the

requirement to the development company

program. Current section 108.503–6(e)

requires the loan application submitted to

SBA by a Certified Development Company

(CDC) to disclose the amount of all fees paid,

the names of the fee recipients, and a

description of the services rendered. Most

SBA field offices require in 504 loan

authorizations that Form 159 be submitted.

Many Lenders in the 7(a) program and CDCs

in the 504 Program contend that Form 159

has become a burden upon the Borrowers,

the Lenders and the CDCs. The 504 industry,

in particular, has asked SBA to eliminate the

form.

President Clinton has directed Federal

agencies to reduce the paperwork burden

upon the public whenever possible.

However, this requirement is contained in

the Act. Therefore, SBA may not eliminate

the regulation with respect to the 7(a)

program without a statutory change. Congress

has recently held hearings regarding the

disclosure of fees because of concern about

the increased number of investigations of

fraud by applicant representatives. As a

result, SBA believes it is prudent to continue

to require full disclosure of all fees. Since

SBA sees no reason to differentiate among

the various business loan programs regarding

this issue, SBA is proposing in this Rule to

maintain the requirement for all business

loans until such time that Congress revisits

the issue.

120 Subpart C—Special Purpose Loans

The proposed new Subpart C

reorganizes and consolidates the current

subpart B of Part 122, ‘‘Special Purpose

Loans’’ with a portion of Part 116.

In §§ 122.51 through 122.51–6,

currently known as ‘‘Handicapped

Assistance Loans,’’ the word ‘‘Disabled’’

replaces the word ‘‘Handicapped’’

wherever it appears. Section 122.60

‘‘Rural Loans’’ is deleted since this

special program expired on September

30, 1995. The section currently

beginning at § 122.61, ‘‘Microloan

Demonstration Project,’’ has been

reorganized as subpart G of Part 120 to

separate it from 7(a) Special Loan

Programs. There are no major

substantive changes in the remaining

eleven Special Loan Programs. A new

revolving credit program—CapLines—

replaces the GreenLine program and is

outlined in § 120.395.

In the proposed rule, this subpart

outlines the significant policies of each

program in a streamlined format while

deleting superfluous and repetitious

material.

120 Subpart D—Lenders

Proposed subpart D reorganizes and

consolidates current Part 120 subparts C

(‘‘Loan Participants’’), D (‘‘Preferred

Lenders Program’’), and E (‘‘Certified

Lenders Program’’). Sections have been

grouped together to aid the reader in

locating information. There are only a

few substantive changes in subpart D.

Proposed new § 120.430 states

specifically that SBA may review a

Lender’s records relating to SBA

guaranteed loans during normal

business hours. In addition, § 120.420,

which is the former § 120.301–7,

contains a new provision (120.420(c))

restricting the use of SBA loans by NonDepository Lenders.

(a) Certified Lenders Program

(‘‘CLP’’). The proposed rule deletes the

definitions found now at § 120.501.

Some of the terms are not used in the

subpart. Others apply to the entire Part

and will appear in § 120.10.

The proposed rule streamlines the

procedure for obtaining CLP status.

Thus, current § 120.502–1 will be

deleted and replaced with new

§ 120.441 authorizing SBA District

Directors (whose decision is final) to

approve and renew CLP Lenders.

Section 120.441(c) clarifies that CLP

status applies only in the SBA office

which approved that status.

The proposed rule will eliminate

current § 120.502–2, which specifies

factors which SBA will consider in

deciding whether a Lender should

become a CLP lender. Its replacement,

§ 120.441(a), retains several of the

current seven considerations. SBA may

consider other factors as well.

Proposed § 120.442, ‘‘Suspension or

revocation of CLP status’’ is new, and

follows the mechanism and procedure

established for PLP lenders.

(b) Preferred Lenders Program

(‘‘PLP’’). The proposed PLP regulations

delete superfluous information and have

been reorganized into a more logical

sequence. They also will reflect SBA

reorganization and program changes,

including the establishment of the

centralized PLP processing office

located in Sacramento, California.

The proposed rule deletes the

definitions found now at § 120.401.

Some of the terms are not used in the

subpart. Others apply to the entire Part

and will appear in § 120.10.

Current § 120.402–1 describes how a

Lender initially may become a PLP

Lender. Proposed § 120.451(a) describes

new procedures following SBA’s

structural reorganization. The branch or

district office will forward its

nomination of a Lender or the Lender’s

request for PLP status to the loan

processing center rather than to a

regional office. The district office’s

recommendation and the loan

processing center’s recommendation are

forwarded to the AA/FA who makes the

final determination. This section also

provides for expansion and

recertification of PLP status by the AA/

FA after a review of the PLP Lender by

SBA.

The section clarifies that if a PLP

Lender is not already a CLP Lender in

a territory into which it seeks to expand

its PLP status, it will automatically

obtain CLP status in the territory when

it is granted an extension of its PLP

status into that territory without

approval from the District Office.

Proposed § 120.451(b)(current

§ 120.402–2) describes the factors SBA

will consider in evaluating PLP

nominations. SBA has eliminated the

requirement that the Lender be a

Certified Lender before being

considered as a PLP Lender.

Proposed § 120.451(c) is a new

provision providing that the AA/FA will

designate the ‘‘area’’ in which a PLP

Lender can make PLP loans. SBA

believes that centralizing this function

in the AA/FA will result in a uniform

policy and practice.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64363

The proposed rule consolidates the

current § 120.403–1 (statutory ceiling),

§ 120.403–5 (interest rates), and

§ 120.403–6(b)(fees) into §§ 120.151,

120.213, 120.214, 120.221 and 120.222

respectively. The proposed rule deletes

the current § 120.403–3 (credit

allocation) because it is no longer used.

The proposed rule deletes the current

§ 120.403–6(a), which limits the fees a

PLP lender can charge if it sells the

guaranteed portion of a loan within six

months of disbursement, because SBA

feels there is no need to retain a cap on

this fee. It consolidates the current

§ 120.403–7(c) into § 120.430.

The current § 120.403–7 has been

rewritten as the new § 120.452(a)

specifying the requirements of PLP loan

processing. The section specifying the

percentage of a PLP loan that SBA will

guarantee has been moved from the

current § 120.403–2 to § 120.452(a)(3).

In proposed § 120.452(b), SBA describes

the new procedures for approving a PLP

loan by submitting documents to the

loan processing center, which issues an

SBA loan number.

The proposed rule consolidates the

current §§ 120.404–1 through 120.405–1

concerning servicing and liquidation

into proposed § 120.453, and deletes

current §§ 120.405–2 through 120.405–4

because they are redundant or

adequately described in SBA’s SOP.

In proposed § 120.451(f), SBA has

added a new provision to allow a PLP

Lender to submit a request to expand its

territory to the SBA loan processing

center.

(c) Small Business Lending

Companies (‘‘SBLC’’). The proposed

rule revises the SBLC regulations for

clarity and to eliminate details of the

program better suited to an SOP. The

sections have been renumbered,

reorganized in a more logical structure,

and presented in a question and answer

format.

Finally, a provision on SBA’s

authority to suspend or revoke an

SBLC’s license is proposed at § 120.475.

120 Subpart E—Loan Administration

New subpart E proposes general loan

administration rules. Basically, these

proposed rules reflect existing SBA

policies. Any SBA field office can

provide more detailed guidance

concerning any aspect of these proposed

rules.

Proposed §§ 120.510 and 120.511

describe the servicing responsibilities of

the parties making loans. SBA services

direct loans that it makes without the

participation of a Lender, while Lenders

service loans they make with the SBA

guarantee. After SBA honors its

guarantee, the Lender generally

continues to service the loan. Proposed

§ 120.512 describes this arrangement.

Proposed § 120.513 lists the servicing

actions that require the concurrence of

the Lender and the SBA because of their

importance to the effective and efficient

operation of SBA’s loan program. The

list includes the provisions contained in

the participation agreement which a

Lender executes with SBA to allow it to

make 7(a) guaranteed loans, such as the

alteration of terms and conditions of any

loan instrument, the release of collateral

with a value over 20 percent of the

original amount of the loan, the

acceleration of the maturity of a note,

and the initiation of litigation.

SBA has the authority to purchase the

guaranteed portion of a loan at any time,

and proposed § 120.520 provides that a

Lender may ask SBA to purchase the

guaranteed portion when the Borrower

has been continuously in default on its

installment payments to the Lender for

more than 60 days. If a Borrower cures

a default (see § 120.523) before SBA

purchases, the Lender’s right to request

purchase lapses. If SBA honors its

guarantee, it does not waive any right it

may have against the Lender because of

the Lender’s negligence, misconduct, or

violation of the regulations, the

guarantee agreement between the lender

and SBA, or any of the loan

instruments. SBA may sue to recover

the amounts paid and may assert as a

basis for recovery any of the grounds set

forth in § 120.524.

A Borrower’s obligation to pay

principal and interest continues after

SBA honors its guarantee. Proposed

§ 120.521 prescribes that the interest

rate for which the Borrower is liable

after the purchase continues to be the

rate stated in the note if it is a fixed rate

note. If a loan carries a fluctuating

interest rate, the Borrower is obliged for

the rate in effect at the time of the

earliest uncured default (where there

has been a default), or the rate in effect

at the time when SBA purchases (where

there has been no default). This means

that no further fluctuations of interest

can occur after SBA honors its

guarantee.

Proposed § 120.522 provides that the

interest rate for which SBA is liable

when it purchases the guaranteed

portion is the rate in the note if it is a

fixed rate loan, or the rate in effect on

the date of the earliest uncured default

(if a default has occurred) or when SBA

purchases (if there has been no default).

The section provides that SBA pays a

Lender no more than 120 days interest

from the date of a Borrower’s uncured

default, plus any deferment period or

time it takes for SBA to process a

request to purchase. This cut-off period

encourages a Lender to make timely

demand on SBA to purchase. Because

extenuating circumstances may occur,

the proposed section authorizes SBA to

extend the 120 day time period for good

cause.

Proposed § 120.523 defines ‘‘earliest

uncured default’’ as the date on which

a Borrower fails to pay a regular

installment payment which remains

unpaid for 60 days. If a Borrower makes

a payment before a Lender requests SBA

to honor its guarantee, the earliest

uncured default date advances to the

next unpaid installment date. This

means that if a Borrower cures early

defaults, the earliest uncured default

date continues to move forward.

SBA does not have to honor its

guarantee, under proposed § 120.524, if

a Lender, amoungst other things, fails to

make, close, service, or liquidate an

SBA guaranteed loan in a prudent

fashion. The regulation contemplates

that a Lender will comply with all the

provisions of the regulations, the loan

guarantee agreement it executed with

SBA, the loan authorization (which is

the document SBA issues to state that it

is providing its guarantee for a specific

loan request), and other loan

documents. A Lender’s failure to

disclose material facts, a Lender’s

making material misrepresentations to

SBA, or the Lender’s failure to use SBA

provided forms or exact computerized

facsimile copies also justifies denial of

liability under the guarantee. Other

Lender actions which would support

SBA’s denial of liability on its guarantee

include Lender’s failure to pay the

guarantee fee, Lender’s late demand on

SBA to purchase, or if the Borrower has

paid the loan in full.

In order to assure the successful

establishment and operation of a

Borrower, proposed § 120.530

authorizes SBA to defer a Borrower’s

initial payments for a stated period of

time. Under proposed § 120.531, SBA

could extend the maturity of a loan for

up to ten years beyond its stated

maturity if the extension would aid in

the orderly liquidation of the loan.

Proposed § 120.532 defines

‘‘Moratorium’’ to be the period of time

during which SBA assumes a

Borrower’s obligation to make

installment payments on a guaranteed

loan.

Under proposed § 120.533, SBA could

grant a Moratorium if the business

would become or remain insolvent

without it; if the business would

become or remain viable with a

Moratorium; if a deferment is not

available; if all the parties agree that

SBA could stop making payments at any

time; if the Borrower executes a demand
64364 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

note to repay SBA’s Moratorium

payments; and if SBA obtains security

which it deems necessary. These

conditions supporting a Moratorium

ensure that the parties know that their

obligations continue and that SBA

expects to be reimbursed for its

advances under this procedure.

Proposed § 120.534 allows SBA to

continue a Moratorium for six months.

SBA may extend a Moratorium for up to

five years if a Borrower could

demonstrate its eventual ability to repay

the original note (and the demand note

required for the Moratorium). Proposed

§ 120.535 lists the repayment terms for

a Moratorium. Under this section, the

interest rate on the demand note is the

same as for the guaranteed loan; SBA

will apply repayments first to accrued

interest and then to principal; and SBA

may demand payment in full under the

demand note or accept a repayment

schedule.

Proposed § 120.540 establishes SBA’s

policy concerning the liquidation of

collateral. Ordinarily, SBA does not

liquidate collateral if there is any

reasonable prospect that the Borrower or

guarantor (other than SBA) may repay

the loan within a reasonable period of

time. Without the Borrower’s consent,

SBA has the authority to sell a direct

loan, convert a direct loan to a

guaranteed or immediate participation

loan, or convert an immediate

participation loan to a guaranteed loan

or a loan owned solely by the Lender.

Importantly, this authority enables SBA

to take appropriate steps to resolve

issues and problems concerning a loan.

The proposed section also provides that

SBA will generally use competitive bids

or a negotiated sale to dispose of

collateral. Under the proposed section,

SBA and the Lender would share all

loan payments and recoveries, all

reasonable expenses, and any security

or guarantee which the Lender or SBA

may receive in connection with a loan.

The proposed section provides that

guarantors of financial assistance have

no rights of contribution against SBA on

a direct or guaranteed loan. The

proposed section makes clear that SBA

is not a co-guarantor with any other

guarantor, and that SBA’s guarantee is

unique, distinctive, and of a totally

different character than the guarantees

offered by other parties.

Under applicable federal law,

homestead protection for a farmerBorrower covers a residence and a

reasonable amount of adjoining real

property (‘‘the collateral’’) that are still

occupied by the farmer-Borrower after

being acquired by SBA as a result of

foreclosure, a voluntary conveyance, or

conveyance to the government by a

trustee in bankruptcy. The homestead

protection provisions in the proposed

rules cover SBA direct and guaranteed

loans, as well as SBA disaster loans.

Proposed § 120.550 specifies that a

farmer-Borrower who defaults on an

SBA loan would be allowed to lease the

collateral from SBA. Under proposed

§ 120.551, SBA must notify the farmerBorrower of the homestead protection

rights within 30 days after SBA acquires

the property. Under the proposed rule,

the farmer-Borrower has to apply to the

local SBA office for homestead

protection within 90 days after SBA

acquires the property, provide evidence

that the farm produces farm income

reasonable for the area and economic

conditions, show that at least 60 percent

of the farmer’s gross annual income

came from farm or ranch operations in

at least 2 out of the last 6 years, that the

farmer-Borrower has resided on the

property during the preceding 6 years,

and that the farmer is personally liable

for the debt. This last point means that

the SBA loan could have been made to

any individual or entity, so long as the

farmer-Borrower was personally liable

for the debt.

Under proposed § 120.552, the farmer,

under a lease with SBA, has to occupy

the residence and pay a reasonable rent

to SBA. The lease can be for a period of

up to 5 years, and can be renewed for

up to another 5 years. During the lease,

or at its end, the lessee-farmer has the

right of first refusal to reacquire the

homestead property under terms and

conditions no less favorable than those

offered to any other purchaser. If the

sale of the homestead property is an

installment sale, the purchase

agreement has to require a down

payment of no less than 20 percent of

the purchase price. The option price to

the lessee-farmer must be the appraised

fair market value determined by an

independent appraisal. SBA cannot

demand a payment for the homestead

property that exceeds the appraised

value.

Under proposed § 120.553, a farmerBorrower can appeal denial of a

homestead protection application to the

AA/FA. Until a final decision is made,

the farmer would be allowed to remain

on the property. If a conflict exists

between state law and the SBA

homestead provisions, state law

prevails.

120 Subpart F—Secondary Market

SBA has consolidated subparts F, G,

and H of Part 120 into one new Subpart

F, governing SBA’s secondary market

for SBA guaranteed portions of loans.

Subpart F covers central registration

requirements, the pooling and sale of

SBA guaranteed portions, and the sale

of individual SBA guaranteed portions

that do not comprise part of a Pool.

Provisions currently found in separate

subparts have been consolidated for

ease of understanding. SBA has

renumbered and reordered the resulting

provisions, but there are no substantive

or policy changes.

The following is a conversion chart

explaining where the current sections of

subparts F, G, and H of 120 will be

placed:

New section Old section

120.600 .... 120.601, 120.700, 120.800.

120.601 .... 120.602, 120.702, 120. 800,

120.802.

120.610 .... 120.706 and 120.803.

120.611 .... 120.707.

120.612 .... 120.710 and 120.807.

120.613 .... 120.301–2.

120.620 .... 120.711 and 120.701.

120.621 .... 120.801.

120.630 .... 120.703.

120.631 .... 120.704.

120.640 .... 120.709 and 120.806.

120.641 .... 120.713 and 120.809.

120.642 .... 120.708.

120.643 .... 120.805.

120.644 .... 120.804.

120.645 .... 120.605,120.605–1.

120.650 .... 120.603, 120.604, 120.604–1,

and 120.604–2.

120.651 .... 120.605–3.

120.652 .... 120.712 and 120.808.

120.660 .... 120.605–2, 120.705, and

120.810.

Proposed § 120.600 describes the

secondary market. Section 120.601

contains definitions used in subpart F.

Proposed § 120.610 provides that each

Certificate representing either the entire

individual guaranteed portion of an

individual 7(a) guaranteed loan or an

undivided interest in a Pool consisting

of the SBA guaranteed portions of a

number of 7(a) guaranteed loans

(‘‘Certificate’’) must be in registered

form only. This means that there are no

bearer Certificates. The section also

specifies payment terms for Certificates.

Proposed § 120.611 describes the

Pools which back Pool Certificates,

including Pool characteristics and Pool

Certificate interest rates. In § 120.612,

SBA specifies conditions which must be

met for an SBA guaranteed portion of a

loan to be eligible to back a Certificate.

Among other things, a loan must be

current.

Proposed § 120.613 describes a

secondary participation guarantee

agreement (SPGA). Before an SPGA may

be executed, the Lender must disburse

the full amount of the loan, pay SBA’s

guarantee fee, and give SBA copies of

the SPGA and note.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64365

Proposed § 120.620 describes the

extent of SBA’s guarantee of a Pool

Certificate. SBA guarantees the timely

payment, whether or not collected, of

principal and interest, and any

prepayment of principal on the loans.

SBA’s guarantee to a Registered Holder

in a Pool of SBA guaranteed portions of

loans is backed by the full faith and

credit of the United States.

Proposed § 120.621 describes the

extent of SBA’s guarantee of an

individual guaranteed portion. SBA

guarantees to purchase from the

Registered Holder the guaranteed

portion equal to the unpaid principal

and interest, less deductions for the

servicing fees of the Lender and the

fiscal and transfer agent (‘‘FTA’’). SBA

does not guarantee timely payment on

individual guaranteed portions. SBA’s

guarantee to a Registered Holder is

unconditional and is backed by the full

faith and credit of the United States.

SBA’s guarantee is triggered when the

Borrower defaults on installments of

principal or interest, the Lender fails to

send to the FTA any payments it

received from the Borrower, or the FTA

fails to send to the Registered Holder

any payments it received from the

Lender.

Proposed § 120.630 specifies the

qualifications that an entity must

possess to be a Pool Assembler. Among

other things, the entity must be subject

to regulation by an appropriate agency,

have the financial capability to assemble

acceptable guaranteed portions, and be

in good standing with SBA. In proposed

§ 120.631, SBA specifies reasons for

suspending a Pool Assembler from the

secondary market.

Proposed § 120.640 describes the

administration of the Pools and

individual guaranteed portions. The

FTA maintains a registry of Certificate

owners. Each Pool is self-liquidating,

which means that there is no

substitution of guaranteed portions of

loans that are paid off by the borrower

or SBA. If SBA pays a claim under a

guarantee with respect to a Certificate,

it is subrogated to the rights satisfied by

the payment. This means that SBA can

take any and all steps to be reimbursed

for payments it makes. Absent an

express statutory change, no federal,

state or local law can preclude or limit

SBA’s exercise of its ownership rights in

the portions of loans constituting the

Pool against which Certificates are

issued.

Proposed § 120.641 requires the Pool

Assembler, Registered Holder of a

Certificate representing an individual

guaranteed portion, or any subsequent

seller to disclose to the purchaser

information on the Certificate’s terms,

conditions, and yield. Section 120.642

specifies the documents that a Pool

Assembler must deliver to the FTA

before the FTA can issue a Certificate,

such as a Pool application form and

documents which evidence the

guaranteed portions which comprise the

Pool. Section 120.643 specifies the

documents that a seller must provide

the FTA before the FTA can issue the

initial Certificate for an individual SBA

guaranteed portion, including

documentation of ownership and a copy

of the note that represents the

guaranteed loan.

Proposed § 120.644 describes certain

conditions applying to the sale of

individual guaranteed portions. Each

Certificate which represents the

guaranteed portion of a single loan must

be for the entire amount of the

guaranteed portion. A Lender (or its

Associate) cannot purchase the

guaranteed portion of a loan which it

has made.

In § 120.645, SBA describes how to

transfer a Certificate and what

information a seller must supply to the

FTA. Transfers must comply with

Article 8 of the Uniform Commercial

Code of New York State.

Under § 120.650 the FTA registers,

issues, transfers title to, and redeems

Certificates. Proposed § 120.651 tells a

Registered Holder what information it

must give to the FTA to replace a

Certificate because of loss, theft,

destruction, mutilation or defacement.

Section 120.652 authorizes the FTA to

collect fees approved by SBA.

Proposed § 120.660 specifies the

reasons for SBA to suspend or revoke

the privilege of a lender, broker, dealer,

or Registered Holder to participate in

the secondary market.

Subpart G—Microloan Demonstration

Program

This proposed subpart revises,

amends, and reorganizes the rules

covering the microloan demonstration

program (‘‘microloans’’) currently

located in Part 122. Substantive changes

include: (1) § 120.708(c) provides a

clearer understanding of how SBA

determines the interest rate charged to

an intermediary; (2) § 120.708(e) makes

it clear that SBA loans to intermediaries

are non-recourse unless an intermediary

causes a loss to SBA by fraud or

negligence; and (3) § 120.710 requires an

intermediary to maintain accurate and

current books and records, and to report

periodically to SBA the status of its

microloan portfolio.

The following conversion chart shows

where to find the current Part 122

microloan sections:

Existing section Action New section

§ 122.61 (a) and (b) .................................................................. Revised ................................................................................... § 120.700 (a)–(c)

§ 122.61–2 (a)–(c) .................................................................... Retained .................................................................................. § 120.701 (a)–(c)

§ 122.61–2(d) ............................................................................ Revised ................................................................................... § 120.701(d)

§ 122.61–2 (e)–(g) .................................................................... Retained ..................................................................................

New .........................................................................................

§ 120.701 (e)–(g)

§ 120.701(h)

§ 122.61–3(a) ............................................................................ Revised ................................................................................... § 120.700(d)

§ 122.61–3(b) ............................................................................ Revised ................................................................................... § 120.703

§ 122.61–3(c) ............................................................................ Revised ................................................................................... § 120.703(c)

§ 122.61–4 (a) and (b) .............................................................. Revised ................................................................................... § 120.705

§ 122.61–4(c) ............................................................................ Deleted ....................................................................................

§ 122.61–5 ................................................................................ Revised ................................................................................... § 120.704

§ 122.61–6 (a)–(c) .................................................................... Revised ................................................................................... § 120.707

§ 122.61–6(d) ............................................................................ Revised ................................................................................... § 120.707

§ 122.61–6(e) ............................................................................ Revised ................................................................................... § 120.707

§ 122.61–6(f) ............................................................................. Deleted ....................................................................................

§ 122.61–7 ................................................................................ Revised ................................................................................... § 120.708

§ 122.61–8 (a)–(c) .................................................................... Revised ................................................................................... § 120.710

§ 122.61–8(d) ............................................................................ Deleted .................................................................................... § 120.710

§ 122.61–9 (a) and (b) .............................................................. Revised ................................................................................... § 120.710

§ 122.61–10 .............................................................................. Retained .................................................................................. § 120.712

§ 122.61–11(a) .......................................................................... Revised ................................................................................... § 120.712

§ 122.61–11(b) .......................................................................... Revised ................................................................................... § 120.702
64366 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

Existing section Action New section

§ 122.61–11(c) .......................................................................... Retained .................................................................................. § 120.712

§ 122.61–12 .............................................................................. Revised ................................................................................... § 120.711

Subpart H—Development Company

(504) Loan Program

This proposed rule makes current Part

108 a subpart of Part 120. The following

conversion chart details the

restructuring, subsection-by-subsection.

Those sections of Part 108 applicable to

all business loans have been

consolidated with the corresponding

7(a) provisions and placed in subpart A

(‘‘Policies Applying to All Business

Loans’’). Sections of Part 108 that apply

only to the Development Company Loan

Program (‘‘504 loans’’) will be in this

subpart H. Finally, some sections of Part

108 have been deleted as delineated in

the chart.

Part I—Section-by-Section Analysis of

Part 108

Former § 108 subpart Proposed action on subpart Comments on action

§ 108.1(a) ............................ Condensed and moved to § 120.800 ............................................................ No policy change.

§ 108.1(b) ............................ Condensed and moved to § 120.800 ............................................................ No policy change.

§ 108.1(c) ............................ Rewritten and moved to § 120.860–§ 120.862 .............................................. No policy change.

§ 108.1(d) ............................ Incorporated into § 120.862 ........................................................................... No policy change.

§ 108.1(e) ............................ Eliminated as redundant; incorporated into § 120.176 .................................. No policy change; eliminated because policy covered by other

parts.

§ 108.2 ................................. Definitions applying to all business loans are in § 120.10. Those applying

solely to 504 loans are in § 120.801. Some terms applying only to a certain subsection are defined in the subsection.

See comments below on specific

definitions.

§ 108.3(a) ............................ Rewritten and placed into § 120.881(a). Definition of Substantial Increase

in Unemployment is found in § 120.801.

No policy change.

§ 108.3(b) ............................ Eliminated ...................................................................................................... Deleted because 501 and 502 programs have been eliminated.

§ 108.3(c) ............................ Eliminated ...................................................................................................... Deleted because 501 and 502 programs have been eliminated.

§ 108.3(d) ............................ Eliminated ...................................................................................................... Deleted because 501 and 502 programs have been eliminated.

§ 108.4(a) ............................ Eliminated ...................................................................................................... No change of policy; rule eliminated

because inherent in standard business practice.

§ 108.4(b) ............................ Eliminated, but covered in § 120.826 ............................................................ No change in policy; will be covered

in SBA’s Standard Operating Procedure (SOP) or other policy guidance.

§ 108.4(c) ............................ Eliminated, but covered in § 120.826 ............................................................ No change in policy; will be covered

in SBA’s SOP or other policy guidance.

§ 108.4(d) ............................ Rewritten, clarified, and broadened. Most provisions consolidated with corresponding sections of current Part 120 into proposed § 120.140. See

Note 4, subparts A and B. Those applying only to 504 loans are in

§ 120.855.

Minor policy change: SBA may waive

prohibition on member of CDC

Board of Directors being on another CDC’s Board.

§ 108.4(e) ............................ Consolidated with § 108.4(d) and placed in § 120.40. Specific examples of

conflicts of interest will be found in SOP. Prohibition against debt refinancing is in § 120.884.

No policy change.

§ 108.4(f) ............................. Eliminated ...................................................................................................... Consolidated into § 120.176.

§ 108.5(a) ............................ Covered in § 120.826; specific explanations and details in SOP ................. No policy changes.

§ 108.5(b) ............................ Covered in § 120.826; specific explanations and details in SOP ................. Miniaturized reproductions of CDC

records no longer referenced.

Other technologies now available.

Specific details will be in SOP.

§ 108.5(c) ............................ Condensed into § 120.830(c) ........................................................................ No policy change.

§ 108.5(d) ............................ Condensed into § 120.830(d) and (e) ........................................................... Policy change -means of delivery will

be detailed in SOP.

§ 108.5(e) ............................ Eliminated ...................................................................................................... Report considered unnecessary

under Presidential directive to reduce paperwork.

§ 108.5(f) ............................. Eliminated ...................................................................................................... No policy change. Not required as

regulation.

§ 108.6 ................................. Eliminated ...................................................................................................... Reserved sections were removed.

§ 108.7(a) ............................ Consolidated in § 120.140 ............................................................................. No policy change.

§ 108.7(b) ............................ Eliminated. Provision covered in note and other closing documents ........... No policy change.

§ 108.8(a) ............................ Credit elsewhere test consolidated and placed in § 120.101; evidence of

need and use of personal resources by principals placed in § 120.102.

Major change of policy emphasis.

See Note 6, subparts A and B.

§ 108.8(b) ............................ Consolidated into § 120.150 and § 120.160 .................................................. No policy change.

§ 108.8(c) ............................ Sound business purpose is addressed in § 120.120 and § 120.150. Size

requirements is addressed in § 120.100(c) and § 120.880(b).

No policy change.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64367

Former § 108 subpart Proposed action on subpart Comments on action

§ 108.8(d) ............................ Replaced by § 120.111 .................................................................................. Major policy change. See Note 2,

subparts A and B.

§ 108.8(e) ............................ Condensed and placed in § 120.870 ............................................................. No policy change.

§ 108.8(f) ............................. Included in § 120.881. Financial and investment businesses addressed in

§ 120.110.

Clarifies policy. Ineligibility of project

because relocation will cause unemployment may be rebutted if the

relocation is crucial to the continued existence, economic wellbeing

or competitiveness of the applicant, and the benefit to new community outweighs injury to old.

§ 108.8(g) ............................ This subject is consolidated into § 120.110 and § 120.130 .......................... No policy change.

§ 108.9 ................................. Rewritten and placed in § 120.923(c) ............................................................ No policy change.

§ 108.10 ............................... Eliminated. Not necessary to include in regulation ....................................... No policy change.

§ 108.501 ............................. Eliminated ...................................................................................................... Deleted because program eliminated, but SBA still regulates existing loans under this program.

See § 120.180.

§ 108.501–1 ......................... Eliminated ...................................................................................................... Deleted because program eliminated, but SBA still regulates existing loans under this program.

See § 120.180.

§ 108.502 ............................. Eliminated ...................................................................................................... Deleted because program eliminated, but SBA still regulates existing loans under this program.

See § 120.180.

§ 108.502–1 ......................... Eliminated ...................................................................................................... Deleted because program eliminated, but SBA still regulates existing loans under this program.

See § 120.180.

§ 108.503(a) ........................ Eliminated ...................................................................................................... No policy change; covered in

§ 120.1.

§ 108.503(b) ........................ Rewritten and incorporated into § 120.2, § 120.860, § 120.861, and

§ 120.862.

No policy change.

§ 108.503(c) ........................ Rewritten and placed in § 120.829 ................................................................ Minor policy change. $45,000 is substituted for 25% increase, which

was $43,750. Specific instructions

and details in SOP and program

guidance.

§ 108.503(d) ........................ Condensed and placed in § 120.829(b) and (c) ............................................ No policy change; specific instructions and details in SOP and policy guidance.

§ 108.503–1(a) .................... Description of the program incorporated into § 120.2(c) and § 120.801. Eligible projects are in § 120.120, and applications for certification are in

§ 120.810.

No policy change

§ 108.503–1(b) .................... Rewritten and placed in § 120.820 through § 120.826, and § 120.855(a) .... No policy change; incidental benefit

to CDC Associate clarified to allow

relationship in the regular course

of business.

§ 108.503–1(c) .................... Rewritten and placed in § 120.821. See definition of Area of Operations in

§ 120.802. Extending a CDC’s Area of Operations is in § 120.835 and

§ 120.836. Expiration of existing, temporary Expansions is in § 120.837.

Case-by-case extensions are in § 120.838.

Important policy changes—see comments below.

§ 108.503–1(d) .................... Consolidated into § 120.822. Member or Board representation in another

CDC is in § 120.855(b).

Policy change. See Note under current § 108.4(d) above. Specific details and instructions will be in

SOP

§ 108.503–1(e) .................... Rewritten and placed in § 120.826 and § 120.827. SBIC limitation addressed in § 120.820.No policy change; Specifics addressed in SOP.

§ 108.503–1(f) ..................... Incorporated in § 120.827 .............................................................................. No policy change

§ 108.503–1(g) .................... Rewritten and placed in § 120.855(b) ........................................................... Policy change. See Note under current § 108.4(d) above.

§ 108.503–2(a) .................... Rewritten and placed in § 120.810 ................................................................ Small substantive change. Regional

offices removed from process because of SBA reorganization. More

information in SOP.

§ 108.503–2(b) .................... Rewritten and placed in § 120.811 ................................................................ Minor procedural changes. 10 day

period to submit notice to SBA

eliminated; officer and director addresses no longer required in notice.

§ 108.503–2(c) .................... Rewritten and placed in § 120.981 ................................................................ No policy changes.

§ 108.503–2(d) .................... Rewritten and placed in § 120.812 ................................................................ No policy change.

§ 108.503–2(e) .................... Rewritten and placed in § 120.980 ................................................................ No policy change.
64368 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

Former § 108 subpart Proposed action on subpart Comments on action

§ 108.503–3(a) .................... Rewritten and placed in § 120.827 ................................................................ No policy change.

§ 108.503–3(b) .................... Covered by § 120.827(a) ............................................................................... No policy change. Will be expounded

upon in SOP.

§ 108.503–3(c) .................... Rewritten and placed in § 120.828 ................................................................ Policy change. The number of loan

approvals required to satisfy the

minimum level of activity will now

be specified in annual program announcement. See major policy

change note (a) below.

§ 108.503–3(d) .................... Covered by § 120.826 ................................................................................... No policy change. Specifics in SOP.

§ 108.503–3(e) .................... Eliminated. ..................................................................................................... Deleted reserved section.

§ 108.503–3(f) ..................... Rewritten and placed in § 120.830(a) and (b) ............................................... No policy change. SBA streamlining

paperwork requirements under

Presidential directive. Specifics in

SOP.

§ 108.503–3(g) .................... Rewritten and placed in § 120.140(c). ........................................................... No policy change.

§ 108.503–3(h) .................... Rewritten and placed in § 120.983 ................................................................ No policy change.

§ 108.503–4(a) .................... Rewritten and placed in § 120.120, § 120.110, § 120.150 and § 120.193.

See § 120.871 and § 120.872 for portions of new construction or existing

building that may be leased.

No policy changes.

§ 108.503–4(b) .................... Rewritten and placed in § 120.130 and § 120.881 ........................................ Policy change. Airplanes in Alaska

and Hawaii no longer eligible. Reference to assets limited in potential use or marketability deleted.

This is part of the credit decision.

The rule clarifies the eligibility status of heavy construction equipment. See comment (d) below.

§ 108.503–4(c) .................... Rewritten and placed in § 120.882(a)(2) and § 120.884(a) and (c). Statutory ceiling discussed in § 120.931; SBIC participation in § 120.103 and

§ 120.913; and administrative ceiling in § 120.932..

Policy change. Any expenditure

made toward a project in anticipation of SBA assistance within 6

months of receipt by SBA of an

application is eligible. No notice is

required. See comment (b) below.

§ 108.503–5(a) .................... Rewritten and placed in § 120.120 and § 120.882 ........................................ No policy change.

§ 108.503–5(b) .................... Rewritten and placed in § 120.883 ................................................................ No policy change.

§ 108.503–5(c) .................... Rewritten and placed in § 120.130 and § 120.884 ........................................ No policy change.

§ 108.503–5(d) .................... Discussed in § 120.882(a)(2). Land contributions in § 120.911 .................... See comment under current

§ 108.503–4(c) above and policy

comment discussion (b) below.

Specific instructions and explanations will be in SOP.

§ 108.503–6(a) .................... Rewritten and placed in § 120.883(c), § 120.961(a), and § 120.971(a)(1) .... No policy change. Omits reference to

$2,500 in discussion of legal fees.

See note (c). Specifics in SOP.

§ 108.503–6(b) .................... Rewritten and placed in § 120.936 ................................................................ No policy change.

§ 108.503–6(c) .................... Rewritten and placed in § 120.961(b) ........................................................... No policy change.

§ 108.503–6(d) .................... Rewritten and placed in § 120.971(a)(3) ....................................................... No policy change.

§ 108.503–6(e) .................... Eliminated ...................................................................................................... Policy change. See Note 8, subparts

A and B.

§ 108.503–7(a) .................... Rewritten. Certification of project completion placed in § 120.891. Certifications of no adverse change are in § 120.892..No policy change. Specifics in SOP.

§ 108.503–7(b) .................... Rewritten and placed in § 120.890 ................................................................ No policy change.

§ 108.503–7(c) .................... Rewritten and placed in § 120.962 ................................................................ No policy change.

§ 108.503–8(a) .................... Rewritten and placed in § 120.900 ................................................................ No policy change, but (3) is now

called ‘‘Borrower contribution’’ instead of ‘‘the 503 Company injection’’.

§ 108.503–8(b) .................... Rewritten and placed in § 120.920 through § 120.925. Newly published (1/

20/95) ‘‘other real estate owned’’ provision placed in § 120.923(a).

No policy change, but § 120.923(b)

clarifies that some payments made

by lienholder are allowed to maintain and protect the lien position.

§ 108.503–9 ......................... Loan conditions are detailed in § 120.930 through § 120.941. Description

of program is in § 120.3 and § 120.801.

No policy change.

§ 108.503–10 ....................... Rewritten and placed in § 120.910 through § 120.913 .................................. No policy change. Some specifics

left for SOP.

§ 108.503–11 ....................... Eliminated. Consolidated with current § 108.504(e) into § 120.954 .............. No policy change.

§ 108.503–12 ....................... Rewritten and placed in § 120.960 ................................................................ No policy change. Specifics in SOP.

§ 108.503–13(a) and (b) ...... Rewritten and placed in § 120.970. Quarterly reports discussed in

§ 120.830(f).

No policy change. Specifics moved

to SOP.

§ 108.503–13(c) .................. Placed in 120.970. Incorporates § 120.513 ................................................... No policy changes. Specifics in SOP.

§ 108.503–13(d) .................. Rewritten and placed in § 120.971(a)(1) ....................................................... No policy change.

§ 108.503–13(e) .................. Rewritten and placed in § 120.982 ................................................................ No policy change.

§ 108.503–13(f) ................... Rewritten and placed in § 120.983 ................................................................ No policy change.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64369

Former § 108 subpart Proposed action on subpart Comments on action

§ 108.503–13(g) .................. Rewritten and placed in § 120.938 ................................................................ No policy change.

§ 108.503–13(h) .................. Consolidated into § 120.530 .......................................................................... No policy change. Specific information and explanatory material will

be in SOP.

§ 108.503–14 ....................... Rewritten and placed in § 120.970 ................................................................ No policy change. Specific information and explanatory material will

be in SOP.

§ 108.503–15(a) and (b) ...... Rewritten and placed in § 120.972 ................................................................ No policy change—specifics in SOP.

§ 108.503–15(c) and (d) ...... Eliminated ...................................................................................................... Deleted all reserve sections.

§ 108.503–15(e) .................. Rewritten and placed in § 120.984 ................................................................ No policy change.

§ 108.504 (a), (b) and (c) .... Consolidated into § 120.801 .......................................................................... No policy change.

§ 108.504(d) ........................ Placed in § 120.934 ....................................................................................... No policy change.

§ 108.504(e) ........................ Rewritten and placed in § 120.954 ................................................................ No policy change.

§ 108.504(f) ......................... Rewritten and placed in § 120.941 ................................................................ No policy change.

§ 108.504(g) ........................ Eliminated. More suitable for inclusion in SOP ............................................. No policy change.

§ 108.504(h) ........................ Rewritten and placed in § 120.941 ................................................................

§ 108.504(i) ......................... Consolidated into § 120.962 .......................................................................... No policy change.

§ 108.504(j) ......................... Rewritten and placed in § 120.939 ................................................................ No policy change.

§ 108.504(k) ........................ Placed into § 120.941 .................................................................................... No policy change.

§ 108.504(l) ......................... Eliminated ...................................................................................................... No policy change. Debentures are

sold through Pools.

§ 108.504–1 ......................... Condensed and placed in § 120.194 ............................................................. Computer generated forms now may

be used for all business loans, not

just 504 loans.

§ 108.505(a) ........................ Consolidated into § 120.1 .............................................................................. No policy change.

§ 108.505(b) ........................ Consolidated into § 120.2 and § 129.801 ...................................................... No policy change.

§ 108.505(c) ........................ SBA guarantee discussed in § 120.801; timely payment on Certificate is in

§ 120.942; effect of other laws is in § 120.991.

No policy change.

§ 108.505(d) ........................ Condensed and placed in 120.941 ............................................................... No policy change.

§ 108.505(e) ........................ Condensed and placed in § 120.942 ............................................................. No policy change.

§ 108.505(f) ......................... Placed in § 120.950, § 120.951 (selling agent), § 120.952 (fiscal agent),

§ 120.953 (trustee), and § 120.954 (central servicing agent). Bond/Insurance requirement moved to § 120.956(a).

No policy change, but reference to

‘‘Transfer Agent’’ has been deleted. ‘‘Trustee’’ has been used

since 1986.

§ 108.505(g) ........................ Eliminated. Regulations not necessary ......................................................... No policy change, but ‘‘Pooler’’ is

now referred to as ‘‘Underwriter’’

and specific conditions and duties

will be in SOP.

§ 108.505(h) ........................ Consolidated and placed in § 120.955 .......................................................... No policy change.

§ 108.505(i) ......................... Consolidated and placed in § 120.971(c) ...................................................... No policy change.

§ 108.505(j) ......................... Included in § 120.942(b) ................................................................................ No policy change.

§ 108.505(k) ........................ Condensed into § 120.940 ............................................................................. No policy change.

§ 108.505(l) ......................... Condensed into § 120.956 ............................................................................. No policy change.

§ 108.506 ............................. Condensed and consolidated into § 120.140(i) ............................................. No policy change.

§ 108.507 ............................. Rewritten and placed in § 120.850 ................................................................ No policy change.

§ 108.507–1 ......................... Merged into § 120.850 ................................................................................... No policy change.

§ 108.507–2 ......................... Consolidated into § 120.851 .......................................................................... Minor policy change. ADCs may be

for-profit, as well as non-profit status. SBA’s purpose is to encourage more organizations to aid

small businesses.

§ 108.507–3 ......................... Condensed into § 120.851 ............................................................................. No policy change. Specifics will be in

SOP.

§ 108.507–4 ......................... Consolidated into § 120.850(a) ...................................................................... No policy change.

§ 108.507–5 ......................... Reviews and audits consolidated into § 120.972. Suspension and revocation discussed in § 120.852.No policy change.

§ 108.508–1 ......................... This new program, published 4/26/95, was condensed and placed at

§ 120.840.

No policy change.

§ 108.509 ............................. This new program, published 4/26/95, was condensed and placed at

§ 120.845.

No policy change.

New ..................................... 120.831 .......................................................................................................... Minor policy change. CDCs would

disclose to SBA & Borrower any

compensation or remuneration received from a Lender or other

party involved in a 504 loan to

monitor any inducements.

Part II—Major Policy Changes

(a) Area of Operations. During the

policy review accompanying the

regulatory rewriting, SBA focused much

of its attention on the question of what

constitutes adequate service in an Area

of Operation. Throughout the history of

the 504 program there has been a great

divergence among CDCs in the number

of loan approvals each year. While some

CDCs have exhibited continued growth

measured by their loan approvals and
64370 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

ability to package, process and service

loans, other CDCs have lagged behind.

There are many complicated reasons for

this, but the net result has been a

patchwork of 504 service (measured by

loan approvals) across the country, with

many small businesses in some areas

receiving 504 assistance while in other

areas few, if any, small businesses have

received such assistance.

SBA attempted to address this issue

by permitting CDCs to expand

temporarily into adjacent areas, and

then, in l993, by designating a minimum

number of loan approvals per year

which a CDC must average over the

previous two fiscal year periods to

retain certification as a CDC. The

current number of required loan

approvals is two. SBA also established

the status of an Associate Development

Company (‘‘ADC’’). Those CDCs unable

or unwilling to meet the minimum

number of loan approvals may become

ADCs, thereby continuing to participate

in the program goals of economic and

community development without

having to make loans. A number of

CDCs have been decertified as a result

of this policy and have opted for ADC

status.

However, a focus on removal from

CDC status does not address the real

question of adequacy of service within

an Area of Operations. What constitutes

adequate service within a community?

The statutory objectives of the 504

program are to provide a portion of long

term fixed-asset financing for small

business projects that provide jobs and

result in economic development.

Clearly, these goals cannot be met in an

Area of Operations unless loans are

being packaged, processed, approved,

closed and serviced by one or more

CDCs. Unfortunately, SBA is aware of

too many locations across the country in

which present CDCs are unable or

unwilling to meet the small business

demand for 504 loans. Transferring an

existing CDC to ADC status does not

address this inadequacy. SBA has

concluded that the answer lies not in

decertification, but in competition and

customer service.

Therefore, in § 120.835, SBA is

proposing that existing CDCs be

permitted to expand into Areas of

Operations that are not being adequately

serviced. The expanding CDC would

have to show that the proposed Area of

Operations is not being adequately

served by the existing CDCs and that the

expanding CDC is well-qualified to

serve it. SBA is not proposing any

geographic or size limitation on CDCs

applying to service a location, but such

factors will be considered in evaluating

the application. A CDC must apply in

writing to the SBA district office serving

the geographic area in which the CDC

proposes to expand.

In this context, SBA has concluded

that there is no minimum loan approval

number appropriate to every CDC in

every location across the country. A

small CDC with a rural Area of

Operations and slow economic activity

may be providing adequate service at a

low level of approvals while a larger

CDC in a metropolitan region with

much economic activity may be

providing inadequate service, despite

having a greater number of loan

approvals.

SBA has also concluded that adequate

service includes adequate servicing of

loans, as well as the number of loan

approvals. Thus, any CDC seeking to

expand will have to show that it has a

history of adequate experience and

expertise in both loan packaging and

servicing, and that the existing CDCs in

the proposed area of expansion have not

been adequately packaging or servicing

loans. Even if the number of loan

approvals does not accurately represent

the competence of a CDC, it does

accurately reflect the adequacy of the

market penetration of 504 financing in

the proposed area of expansion.

In general, SBA will consider an Area

of Operations inadequately served if the

existing CDCs in the Area of Operations

have not averaged, over the last two

fiscal years, sufficient loan approvals for

the population, as published by SBA in

an annual program announcement. SBA

will establish the initial formula in a

program announcement upon

publication of the final rule, but would

like the benefit of comments on this

subject before committing any specific

numbers to print. SBA is considering a

two or three tier formula based on the

current national averages for CDC loan

approvals per number of population.

Suggestions have been received that the

formula should be based not on

population, but on the number of small

businesses in the Area of Operations or

some other factor. SBA is interested in

comments and would like

recommendations on how, if at all, to

incorporate a servicing component into

its approach.

SBA is proposing (§ 120.837) that all

existing, temporary expansions of Areas

of Operations will expire automatically

6 months after the effective date of these

regulations, unless a CDC applies for

permanent expansion into that Area

before the expiration date. SBA believes

that CDCs will best serve the small

business community by making a

permanent commitment to an Area of

Operations. Upon showing good cause,

a CDC will still be able to apply to SBA

to make an individual loan for a Project

outside its Area of Operations in an area

not being adequately served by other

CDCs (§ 120.838). Note also that the

Borrower may write to the AA/FA (but

not the District Director) to request the

servicing of a CDC not currently serving

the area. SBA has added this provision

to give Borrowers more flexibility if they

have a concern about the services of a

particular CDC.

(b) Expenditures in Anticipation of

Project. In the current regulations, costs

incurred by a Borrower in anticipation

of receiving a 504 loan are not eligible

to be included in Project costs unless

the applicant has filed a written notice

with the CDC and SBA within 60 days

of incurring the expense and SBA gives

written approval. As a result, CDCs and

SBA receive notices from many

potential borrowers considering 504

financing who desire to maximize

potential financing. Many of these

businesses never actually apply or their

applications are denied. In those cases,

the written notices are a useless

paperwork burden on SBA, the CDC and

the applicant.

Therefore, SBA is proposing

(§ 120.882(a)(2)) to eliminate the

requirement for written notice. Any

expense incurred toward a Project

within six months of receipt by SBA of

a complete loan application will be an

eligible Project cost.

(c) Legal Fees. The Borrower’s closing

costs, including legal fees, are eligible

for inclusion in the 504 loan. Typically,

legal services are provided by the CDC’s

counsel, who is usually experienced in

closing 504 loans and thus, is able to do

so cost effectively. Sometimes, a

Borrower will also retain an attorney.

Under the current regulations, the CDC

may charge the Borrower up to $2,500

for the legal services performed by the

CDC counsel, unless SBA approves a

higher fee in a complex case. If the fee

is more than $2,500, the CDC must pay

the difference. The CDC collects the fee

at closing and forwards it to the closing

attorney.

The $2,500 figure in the regulation

has engendered much debate within the

industry. Many CDCs feel the figure

establishes a minimum base for attorney

services and is, therefore, anticompetitive. On the other hand, during

the past five months, SBA has

conducted several expedited closing

training sessions for CDC counsel. Many

attorneys feel that the figure establishes

a ceiling for attorney services and is,

therefore, anti-competitive. There

appears to be a wide range of prices

charged by CDC counsel for closing

services. Most CDCs try to minimize
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64371

counsel fees to reduce costs to the

Borrower.

SBA has determined that there is no

reason for SBA to refer to any legal fee

amount. Whether it is viewed as a

ceiling or a base, the $2,500 reference

has apparently caused

misunderstanding and may have had an

effect on legal fees charged. SBA

believes legal fees should be determined

by the competitive market. Therefore,

proposed §§ 120.883(d) and 120.961(a),

omit any reference to amount.

(d) Eligible Use of Proceeds. In the

current regulations, airplanes are not

eligible for 504 loans, except that

Alaskan and Hawaiian Projects may

include airplanes not exceeding 20

percent of the Project cost, if they are

indispensable to the Project. SBA

proposes to eliminate this exception

(§ 120.884(d)(2)), previously justified

because of the great distances people

must travel in those states. But distances

are great in many mainland states, as

well, and airplanes simply are not

directly attributable and necessary for a

Project.

Also, in the current regulations there

is no direct reference to the eligibility of

construction equipment as a distinct

sub-category of equipment and

machinery. CDCs and SBA often receive

questions from potential Borrowers as to

whether construction equipment is

eligible for 504 financing. The proposed

rule in § 120.884(d)(3) clarifies that

construction equipment is ineligible for

504 financing unless it is heavy duty

equipment integral to the operation of a

business and meeting the IRS definition

of capital equipment. Note also that

§ 120.884(d)(1) clarifies SBA policy that

short term equipment is a permitted use

of loan proceeds if the equipment is

essential to the Project and reflects a

minor percentage of the loan. This is not

a change in policy.

(e) Definitions. SBA has created

several new definitions to help make the

regulation easier to understand.

Comments and suggestions will be

appreciated.

Several definitions clarify terms long

associated with the 504 program which

were included in the regulations, but

were not defined. These include ‘‘Area

of Operations,’’ ‘‘Certificate,’’

‘‘Debenture,’’ ‘‘Job Opportunity,’’ and

‘‘Substantial Increase in

Unemployment.’’

Finally, some key words have been

replaced with more useful and apt

words. A ‘‘Small Business Concern’’ is

now a ‘‘Small Business.’’ The term

‘‘Underwriter’’ has replaced ‘‘Pooler.’’

The term ‘‘Project’’ has replaced

‘‘Plant.’’ ‘‘Project Property’’ is a new

definition previously undefined in the

regulation.

(f) Minor Policy Changes. In proposed

§ 120.828, the minimum level of CDC

lending activity is no longer set at a

specific number; SBA will retain the

ability to change this number through

its program announcements based on

program performance and the economy.

In proposed § 120.939(b), CDCs will be

liable for SBA losses incurred by

‘‘wrongful CDC conduct’’ as well as in

cases of fraud and negligence.

Compliance With Executive Orders

12612, 12778, and 12866, the

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

et seq.), and the Paperwork Reduction

Act (44 U.S.C. Ch. 35)

SBA certifies that this proposed rule

involves internal administrative

procedures and would not be

considered a significant rule within the

meaning of Executive Order 12866 and

would not have a significant economic

impact on a substantial number of small

entities within the meaning of the

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

et seq. It is not likely to have an annual

economic effect of $100 million or more,

result in a major increase in costs or

prices, or have a significant adverse

effect on competition or the United

States economy.

For purposes of the Paperwork

Reduction Act, 44 U.S.C. Ch. 35, SBA

certifies that this proposed rule, if

adopted in final form, would contain no

new reporting or record keeping

requirements.

For purposes of Executive Order

12612, SBA certifies that this rule

would not have any federalism

implications warranting the preparation

of a Federalism Assessment.

For purposes of Executive Order

12778, SBA certifies that this rule is

drafted, to the extent practicable, in

accordance with the standards set forth

in Section 2 of that Order.

List of Subjects

13 CFR Part 108

Equal employment opportunity, Loan

programs-business, Reporting and

recordkeeping requirements, Small

businesses.

13 CFR Part 116

Coastal Zone, Flood insurance, Flood

plains, Lead poisoning, Small

businesses, Veterans.

13 CFR Part 120

Loan programs-business, Reporting

and recordkeeping requirements, Small

businesses.

13 CFR Part 122

Community development, Employee

benefit plans, Energy conservation,

Environmental protection, Exports,

Individuals with disabilities, Loan

programs-business, Loan programsenergy, Loan programs-veterans,

Microloans, Reporting and

recordkeeping requirements, Small

businesses, Solar energy, Trusts and

trustees, Veterans.

13 CFR Part 131

Loan programs-business, Small

businesses.

Accordingly, pursuant to the

authority set forth in sections 5 (b)(1)

and (b)(6) of the Small Business Act, 15

U.S.C. 634(b)(6) and 636 (a) and (h),

SBA hereby proposes to amend Chapter

I of Title 13, Code of Federal

Regulations (CFR), as follows:

1. Part 120 would be revised to read

as follows:

PART 120—BUSINESS LOANS

General Descriptions of SBA’s Business Loan

Programs

Sec.

120.1 Which loan programs does this part

cover?

120.2 Descriptions of the business loan

programs.

120.3 Pilot programs.

Definitions

120.10 Definitions.

Subpart A—Policies Applying to All

Business Loans

Eligibility Requirements

120.100 What are the basic requirements for

all Borrowers?

120.101 Credit not available elsewhere.

120.102 Funds not available from

alternative sources, including personal

resources of principals.

120.103 Are farm enterprises eligible?

120.104 Are businesses financed by SBICs

eligible?

120.105 Special consideration for veterans.

Ineligible Businesses and Eligible Passive

Companies

120.110 What businesses are ineligible for

SBA business loans?

120.111 What conditions must an Eligible

Passive Company satisfy?

Uses of Proceeds

120.120 What are eligible uses of proceeds?

120.130 Restrictions on uses of proceeds.

Ethical Requirements

120.140 What ethical requirements apply to

participants?

Credit Criteria for SBA Loans

120.150 What are SBA’s lending criteria?

120.151 What is the statutory limit for total

loans to a Borrower?

120.160 Loan conditions.
64372 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

120.161 Lending limits.

Requirements Imposed Under Other Laws

and Orders

120.170 Flood insurance.

120.171 Compliance with child support

obligations.

120.172 Flood-plain and wetlands

management.

120.173 Lead-based paint.

120.174 Earthquake hazards.

120.175 Coastal barrier islands.

120.176 Compliance with other laws.

Enforceability Despite Rule Changes

120.180 Are rules enforceable if they are

changed later?

Loan Applications

120.190 Where does an applicant apply for

a loan?

120.191 The contents of a business loan

application.

120.192 Approval or denial.

120.193 Reconsideration after denial.

Computerized SBA Forms

120.194 Use of computer forms.

120.195 Duty of Lender, CDC, Intermediary

Lender, and Borrower to report fees.

Subpart B—Policies Specific to 7(a) Loans

Bonding Requirements

120.200 What bonding requirements exist

during construction?

Limitations on Use of Proceeds

120.201 Refinancing unsecured or

undersecured loans.

120.202 Restrictions on loans for changes in

ownership.

120.203 Revolving credit.

Maturities; Interest Rates; Loan and

Guarantee Amounts

122.210 What percentage of a loan may

SBA guarantee?

120.211 What limits are there on the

amounts of direct loans?

120.212 What limits are there on loan

maturities?

120.213 What fixed interest rates may a

Lender charge?

120.214 What conditions apply for variable

interest rates?

Fees for Guaranteed Loans

120.220 Guarantee fees that Lender pays

SBA.

120.221 Fees which the Lender may collect

from a loan applicant.

120.222 Fees which the Lender or Associate

may not collect from the Borrower or

share with third parties.

Subpart C—Special Purpose Loans

120.300 Statutory Authority.

Disabled Assistance Loan Program (DAL)

120.310 What assistance is available for the

disabled?

120.311 Definitions.

120.312 DAL–1 use of proceeds and other

program conditions.

120.313 DAL–2 use of proceeds and other

program conditions.

120.314 Resolving doubts about

creditworthiness.

120.315 Interest rate and loan limit.

Businesses Owned by Low Income

Individuals

120.320 Policy.

Energy Conservation

120.330 Who is eligible for an energy

conservation loan?

120.331 What devices or techniques are

eligible for a loan?

120.332 What are the eligible uses of

proceeds?

120.333 Are there any special credit

criteria?

Export Working Capital Program (EWCP)

120.340 What is the Export Working Capital

Program?

120.341 Who is eligible?

120.342 What are eligible uses of proceeds?

120.343 Collateral.

120.344 Cash flow projections.

International Trade Loans

120.345 Policy.

120.346 Eligibility.

120.347 Use of proceeds.

120.348 Amount and percentage of

guarantee.

Qualified Employee Trusts (ESOP)

120.350 Policy.

120.351 Definitions.

120.352 Use of proceeds.

120.353 Eligibility.

120.354 Creditworthiness.

Veterans Loan Program

120.360 Which veterans are eligible?

120.361 Other conditions of eligibility.

Pollution Control Program

120.370 Policy.

Loans to Participants in the 8(a) Program

120.375 Policy.

120.376 Special requirements.

120.377 Use of proceeds.

Defense Economic Transition Assistance

120.380 Program.

120.381 Eligibility.

120.382 Repayment ability.

120.383 Restrictions on loan processing.

Caplines Program

120.390 Revolving credit.

Small General Contractors

120.391 What is the Small General

Contractor Program?

120.392 Who may apply?

120.393 Are there special application

requirements?

120.394 What are the eligible uses of

proceeds?

120.395 What is SBA’s collateral position?

120.396 What is the term of the loan?

120.397 Are there any special restrictions?

Subpart D—Lenders

120.400 Participation agreements.

Participation Criteria

120.410 Requirements for all participating

Lenders.

120.411 Preferences.

120.412 Other services Lenders may

provide Borrowers.

120.413 Advertisement of relationship with

SBA.

Pledging Notes or Transferring

Unguaranteed Portion

120.420 Financings by Nondepository

Lenders.

Miscellaneous Provisions

120.430 SBA access to Lender files.

120.431 Suspension or revocation of

eligibility to participate.

Certified Lenders Program (CLP)

120.440 What is the Certified Lenders

Program?

120.441 How does a Lender become a CLP

Lender?

120.442 Suspension or revocation of CLP

status.

Preferred Lenders Program (PLP)

120.450 What is the Preferred Lenders

Program?

120.451 How does a Lender become a PLP

Lender?

120.452 What are the requirements of PLP

loan processing?

120.453 What are the requirements of PLP

loan servicing and liquidation?

120.454 PLP performance review.

120.455 Suspension or revocation of PLP

status.

Small Business Lending Companies (SBLC)

120.470 What is an SBLC?

120.471 Records.

120.472 Reports to SBA.

120.473 Change of ownership or control.

120.474 Prohibited financing.

120.475 Suspension or revocation.

Subpart E—Loan Administration

120.500 General.

Servicing

120.510 Servicing direct and immediate

participation loans.

120.511 Servicing guaranteed loans.

120.512 Who services the loan after SBA

honors its guarantee?

120.513 What servicing actions require the

prior written consent of the SBA?

SBA’S Purchase of a Guaranteed Portion

120.520 When does SBA honor its

guarantee?

120.521 What interest rate applies after

SBA purchases its guaranteed portion?

120.522 How much accrued interest does

SBA pay to the Lender or Registered

Holder when SBA purchases the

guaranteed portion?

120.523 What is the ‘‘earliest uncured

default’’?

120.524 When is SBA released from

liability on its guarantee?
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64373

Deferment, Extension of Maturity and Loan

Moratorium

120.530 Deferment of payment.

120.531 Extension of maturity.

120.532 What is a loan Moratorium?

120.533 When will SBA grant a

Moratorium?

120.534 How long can a Moratorium

continue?

120.535 What are the repayment terms of a

Moratorium?

Liquidation of Collateral

120.540 What are SBA’s policies

concerning liquidation of collateral?

Homestead Protection for Farmers

120.550 What is homestead protection for

farmers?

120.551 Who is eligible for homestead

protection?

120.552 Lease.

120.553 Appeal.

Subpart F—Secondary Market

120.600 What is the SBA Secondary

Market?

120.601 Definitions.

Certificates

120.610 Description of Certificates.

120.611 Description of Pools backing Pool

Certificates.

120.612 What loans are eligible to back

Certificates?

120.613 What is a Secondary Participation

Guarantee Agreement?

The SBA Guarantee of a Certificate

120.620 The SBA guarantee of a Pool

Certificate.

120.621 The SBA guarantee of a Certificate

representing a individual guaranteed

portion.

Pool Assemblers

120.630 Qualifications to be a Pool

Assembler.

120.631 Suspension or termination of

eligibility of Pool Assembler.

Sale of Certificates

120.640 Administration of the Pool and

individual guaranteed portions.

120.641 Disclosure to purchasers.

120.642 Requirements before the FTA

issues Pool Certificates.

120.643 Requirements before the FTA

issues the Certificate for an individual

guaranteed portion.

120.644 Sale of individual SBA guaranteed

portion.

120.645 Transfers of Certificates.

Fiscal and Transfer Agent (FTA)

120.650 Registration duties of FTA in

Secondary Market.

120.651 Claim to FTA by Registered Holder

to replace Certificate.

120.652 FTA fees.

Suspension or Revocation of Participant in

Secondary Market

120.660 Suspension or revocation.

Subpart G—Microloan Demonstration

Program

120.700 What is the Microloan Program?

120.701 Definitions.

120.702 Are there limits on Intermediaries

or loans?

120.703 How do I apply to become an

Intermediary?

120.704 What is my financial contribution?

120.705 Microloan Revolving Fund.

120.706 Loan Loss Reserve Fund.

120.707 What are the terms and conditions

of my Intermediary SBA loan?

120.708 What conditions apply to my loans

to Microloan Borrowers?

120.709 What records and reports does SBA

require?

120.710 How does an Intermediary get a

grant to assist Microloan Borrowers?

120.711 Does SBA provide technical

assistance to Intermediaries?

120.712 How does a non-Intermediary get a

grant?

120.713 Does SBA guarantee any loans an

Intermediary obtains from another

source?

Subpart H—Development Company Loan

Program (504)

120.800 What is the purpose of the 504

program?

120.801 How is a 504 Project financed?

120.802 Definitions.

Certification Procedures to Become a CDC

120.810 Applications for certification as a

CDC.

120.811 Public notice of CDC certification

application.

120.812 Probationary period for newly

certified CDCs.

Requirements for CDC Certification and

Operation

120.820 CDC non-profit status.

120.821 CDC Area of Operations.

120.822 CDC membership.

120.823 CDC board of directors.

120.824 Professional management and staff.

120.825 Financial ability to operate.

120.826 Basic requirements for operating a

CDC.

120.827 Services a CDC provides to small

businesses.

120.828 The minimum level of CDC lending

activity.

120.829 The Job Opportunity average a CDC

must maintain.

120.830 Reports a CDC must submit.

120.831 Disclosure of referral fees or other

payments by or to a CDC

Extending a CDC’s Area of Operations

120.835 Application to extend an Area of

Operations.

120.836 Public notice of application for

extension.

120.837 Expiration of existing, temporary

expansions.

120.838 Case-by-case extensions.

Accredited Lenders Program

120.840 Accredited Lenders Program.

Premier Certified Lenders Program

120.845 Premier Certified Lenders Program.

Associate Development Companies (ADCs)

120.850 ADC functions.

120.851 ADC eligibility and operating

requirements.

120.852 Suspension and revocation of

ADCs.

Ethical Requirements

120.855 CDC and ADC ethical

requirements.

Project Economic Development Goals

120.860 Required objectives.

120.861 Job creation or retention.

120.862 Other economic development

objectives.

Leasing Policies Specific to 504 Loans

120.870 Leasing Project Property.

120.871 Leasing part of a new construction

Project to another business.

120.872 Leasing part of an existing building

to another business.

Loan-Making Policies Specific to 504 Loans

120.880 Basic eligibility requirements.

120.881 Ineligible Projects for 504 loans.

120.882 Eligible Project costs for 504 loans.

120.883 Eligible administrative costs for

504 loans.

120.884 Ineligible costs for 504 loans.

Interim Financing

120.890 Source of interim financing.

120.891 Certifications of disbursement and

completion.

120.892 Certifications of no adverse change.

Permanent Financing

120.900 What are the sources of permanent

financing?

The Borrower’s Contribution

120.910 How much must the Borrower

contribute?

120.911 Land contributions.

120.912 Borrowed contributions.

120.913 May an SBIC provide the

contribution?

Third Party Loans

120.920 The first lien position.

120.921 Terms of Third Party loans.

120.922 Pre-existing debt on the Project

Property.

120.923 What are the policies on

subordination?

120.924 Prepayment of subordinate

financing.

120.925 Preferences.

504 Loans and Debentures

120.930 Amount.

120.931 504 lending limits.

120.932 Interest rate.

120.933 Maturity.

120.934 Collateral.

120.935 Deposit.

120.936 Subordination to CDC.

120.937 Assumption.

120.938 Default.

120.939 Borrower prohibition.

120.940 Prepayment of the 504 loan or

Debenture.

120.941 Certificates.
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Debenture Sales and Service Agents

120.950 SBA and CDC must appoint agents.

120.951 Selling agent.

120.952 Fiscal agent.

120.953 Trustee.

120.954 Central Servicing Agent.

120.955 Agent bonds and records.

120.956 Suspension or revocation of

brokers and dealers.

Closings

120.960 Responsibility for closing.

120.961 CDC closing fees.

120.962 Construction escrow accounts.

Servicing and Post-Closing Fees

120.970 Servicing of 504 loans and

Debentures.

120.971 Post-closing fees paid by Borrower.

120.972 Oversight and evaluation of CDCs

and ADCs.

CDC Transfer, Suspension and Revocation

120.980 Transfer of CDC to ADC status.

120.981 Voluntary transfer and surrender of

CDC certification.

120.982 Correcting CDC servicing

deficiencies.

120.983 Transfer of CDC servicing to SBA

or another CDC.

120.984 Suspension or revocation of CDC

certification.

Enforceability of 501, 502 and 503 Loans and

Other Laws

120.990 501, 502 and 503 loans.

120.991 Effect of other laws.

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

and (h).

General Descriptions of SBA’s Business

Loan Programs

§ 120.1 Which loan programs does this

part cover?

This Part regulates SBA’s financial

assistance to small businesses under its

general business loan programs (‘‘7(a)

loans’’) authorized by section 7(a), 15

U.S.C. 636(a) of the Small Business Act

(‘‘the Act’’), its microloan demonstration

loan program (‘‘Microloans’’) authorized

by section 7(m), 15 U.S.C. 636(m) of the

Act, and its development company

program (‘‘504 loans’’) authorized by

Title V of the Small Business

Investment Act, 15 U.S.C. 695 to 697f

(‘‘Title V’’). These three programs

constitute the business loan programs of

the SBA.

§ 120.2 Descriptions of the business loan

programs.

(a) 7(a) loans. (1) 7(a) loans provide

financing for general business purposes

and may be:

(i) A direct loan by SBA;

(ii) An immediate participation loan

by a Lender and SBA; or

(iii) A guaranteed loan (deferred

participation) by which SBA guarantees

a portion of a loan made by a Lender.

(2) A guaranteed loan is initiated by

a Lender agreeing to make an SBA

guaranteed loan to a small business and

applying to SBA for SBA’s guarantee

under a blanket guarantee agreement

(participation agreement) between SBA

and the Lender. If SBA agrees to

guarantee (authorizes) a portion of the

loan, the Lender funds and services the

loan. If the small business defaults on

the loan, SBA’s guarantee requires SBA

to purchase its portion of the

outstanding balance, upon demand by

the Lender and subject to specific

conditions. Regulations specific to 7(a)

loans are found in subpart B of this part.

(b) Microloans. SBA makes loans and

loan guarantees to non-profit

Intermediaries that make short-term

loans up to $25,000 to eligible small

businesses for general business

purposes, except payment of debts. SBA

also gives grants to Intermediaries for

use in providing management assistance

and counseling to small businesses.

Regulations specific to these loans are

found in subpart G of this part.

(c) 504 loans. Projects involving 504

loans require long-term fixed-asset

financing for small businesses. A

Certified Development Company (CDC)

provides the final portion of this

financing with a 504 loan made from the

proceeds of a Debenture issued by the

CDC, guaranteed 100 percent by SBA

(with the full faith and credit of the

United States), and sold to investors.

The regulations specific to these loans

are found in subpart H of this part.

§ 120.3 Pilot programs.

The Administrator of SBA may from

time to time suspend, modify, or waive

rules for a limited period of time to test

new programs or ideas. The

Administrator shall publish a document

in the Federal Register explaining the

reasons for these actions.

Definitions

§ 120.10 Definitions.

The following terms have the same

meaning wherever they are used in this

part. Defined terms are capitalized

wherever they appear.

Associate. (1) An Associate of a

Lender or CDC is:

(i) An officer, director, member, or

key employee, or an agent involved in

the loan-making process;

(ii) A Close Relative of any individual

in paragraph (1)(i) of this definition; and

(iii) Any entity in which one or more

individuals referred to in paragraphs (1)

(i) and (ii) of this definition own or

control at least 10 percent.

(2) An Associate of a small business

is:

(i) An officer, director, member,

owner, principal, key employee, or

agent authorized to act on behalf of the

small business;

(ii) A Close Relative of any individual

in paragraph (2)(i) of this definition;

(iii) Any entity in which one or more

individuals referred to in paragraphs (2)

(i) and (ii) of this definition owns or

controls at least 10 percent; and

(iv) Any individual or entity in

control of or controlled by the small

business (except a Small Business

Investment Company (‘‘SBIC’’) licensed

by SBA).

(3) For purposes of this definition, the

time during which an Associate

relationship exists commences six

months before the following dates and

continues as long as the certification,

participation agreement, or loan is

outstanding:

(i) For a CDC, the date of certification

by SBA;

(ii) For a Lender, the date of

application for a loan guarantee on

behalf of an applicant; or

(iii) For a small business, the date of

the loan application to SBA, the CDC,

the Intermediary, or the Lender.

Authorization is SBA’s written

agreement providing the terms and

conditions under which SBA will make

or guarantee business loans. It is not a

contract to make a loan.

Borrower is the obligor of an SBA

business loan.

Certified Development Company

(‘‘CDC’’) is an entity authorized by SBA

to deliver 504 financing to small

businesses.

Close Relative is a spouse; a parent; or

a child or sibling, or the spouse of any

such person.

Eligible Passive Company is a small

entity which does not engage in regular

and continuous business activity, which

leases real or personal property to an

Operating Company for use in the

Operating Company’s business, and

which complies with the conditions set

forth in § 120.111.

Intermediary is the entity in the

Microloan program that receives SBA

financial assistance and makes loans to

small businesses in amounts up to

$25,000.

Lender is an institution that has

executed a participation agreement with

SBA under the guaranteed loan

program.

Loan Instruments are the

Authorization, note, instruments of

hypothecation, and all other agreements

and documents related to a loan.

Operating Company is an eligible

small business actively involved in

conducting business operations now or

about to be located on real property

owned by a Passive Company, or using

or about to use in its business
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operations personal property owned by

a Passive Company.

Preference is any arrangement giving

a Lender or a CDC a preferred position

compared to SBA relating to the making

of a business loan with respect to such

things as repayment, collateral,

guarantees, control, maintainance of a

compensating balance, purchase of a

Certificate of deposit or acceptance of a

separate or companion loan, without

SBA’s consent.

Rural Area is a political subdivision

or unincorporated area in a nonmetropolitan county (as defined by the

Department of Agriculture), or, if in a

metropolitan county, any such

subdivision or area with a resident

population under 20,000 which is

designated by SBA as rural.

Service Provider is an entity that

contracts with a Lender or CDC to

perform management, marketing, legal

or other services.

Subpart A—Policies Applying to All

Business Loans

Eligibility Requirements

§ 120.100 What are the basic requirements

for all Borrowers?

To be an eligible Borrower for an SBA

loan, a small business must:

(a) Be an operating business (except

for loans to Passive Companies);

(b) Be organized for profit;

(c) Be located in the United States;

(d) Be small under the size

requirements of Part 121 of this chapter

(including affiliates). See subpart H of

this part for the size standards of Part

121 of this chapter which apply only to

504 loans; and

(e) Must demonstrate a need for the

desired credit.

§ 120.101 Credit not available elsewhere.

SBA provides business loan

assistance only to applicants for whom

the desired credit is not otherwise

available on reasonable terms from nonFederal sources. SBA requires the

Lender or CDC to certify or otherwise

show that the desired credit is

unavailable to the applicant on

reasonable terms and conditions from

non-Federal sources without SBA

assistance, taking into consideration the

prevailing rates and terms in the

community in or near where the

applicant conducts business, for similar

purposes and periods of time.

Submission of an application to SBA by

a Lender or CDC constitutes certification

by the Lender or CDC that it has

examined the availability of credit to the

applicant, has based its certification

upon that examination, and has

documentation in its file to support the

certification.

§ 120.102 Funds not available from

alternative sources, including personal

resources of principals.

An applicant for a business loan must

show that the desired funds are not

available from the personal resources of

the applicant’s principals or other

sources such as the sale of the

applicant’s assets or securities. SBA

may require the use of personal

resources before a loan will be granted,

unless SBA determines that undue

hardship would result or if the loan is

to an employee trust.

§ 120.103 Are farm enterprises eligible?

Federal financial assistance to

agricultural enterprises is generally

made by the United States Department

of Agriculture (USDA), but may be made

by SBA under the Memorandum of

Understanding signed by SBA and

USDA. Farm-related businesses are

eligible businesses under SBA’s

business loan programs.

§ 120.104 Are businesses financed by

SBICs eligible?

SBA may make or guarantee loans to

a business financed by an SBIC if SBA’s

collateral position will be superior to

that of the SBIC. SBA may also make or

guarantee a loan to an otherwise eligible

small business which temporarily is

owned or controlled by an SBIC under

the regulations in part 107 of this

chapter. SBA neither guarantees SBIC

loans nor makes loans jointly with

SBICs.

§ 120.105 Special consideration for

veterans.

SBA will give special consideration to

a small business owned by a veteran or,

if the veteran chooses not to apply, to

a business owned or controlled by one

of the veteran’s dependents. If the

veteran is deceased or permanently

disabled, SBA will give special

consideration to one survivor or

dependent. SBA will process the

application of a business owned or

controlled by a veteran or dependent

promptly, resolve close questions in the

applicant’s favor, and pay particular

attention to maximum loan maturity.

For SBA loans, a veteran is a person

honorably discharged from active

military service.

Ineligible Businesses and Eligible

Passive Companies

§ 120.110 What businesses are ineligible

for SBA business loans?

The following types of businesses are

ineligible:

(a) Non-profit businesses (for-profit

subsidiaries are eligible);

(b) Financial businesses primarily

engaged in the business of lending, such

as banks, finance companies, and factors

(pawn shops, although engaged in

lending, may qualify in some

circumstances);

(c) Passive businesses owned by

developers and landlords that do not

actively use or occupy the assets

acquired or improved with the loan

proceeds (except Eligible Passive

Companies under § 120.111);

(d) Life insurance companies;

(e) Businesses located in a foreign

country (businesses in the U.S. owned

by aliens may qualify);

(f) Pyramid sale distribution plans;

(g) Businesses deriving more than

one-third of gross annual income from

legal gambling activities);

(h) Businesses engaged in any illegal

activity;

(i) Private clubs and businesses which

limit the number of memberships for

reasons other than capacity;

(j) Government-owned entities (except

for businesses owned or controlled by a

Native American tribe);

(k) Businesses principally engaged in

teaching, instructing, counseling or

indoctrinating religion or religious

beliefs, whether in a religious or secular

setting;

(l) Consumer and marketing

cooperatives (producer cooperatives are

eligible);

(m) Loan packagers earning 30

percent or more of their gross annual

revenue from packaging SBA loans;

(n) Businesses with an Associate

considered to have control under Part

121 who is incarcerated, on probation,

on parole, or subject to pending felony

charges;

(o) Businesses in which the Lender or

CDC, or any of its Associates owns an

equity interest (unless waived by SBA

for good cause in the case of minor

ownership interests);

(p) Businesses which:

(1) Present live performances of a

prurient sexual nature; or

(2) Derive significant gross revenue

through the sale of products or services,

or the presentation of depictions or

displays, of a prurient sexual nature;

(q) Unless waived by SBA for good

cause, businesses that have previously

defaulted on a Federal loan or Federally

assisted financing, resulting in the

Federal government or any of its

agencies or Departments sustaining a

loss in any of its programs, and

businesses owned or controlled by an

applicant or any of its Associates which

previously owned, operated, or

controlled a business which defaulted
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on a Federal loan and caused the

Federal government or any of its

agencies or Departments to sustain a

loss in any of its programs. For purposes

of this section, a compromise agreement

shall also be considered a loss; and

(r) Businesses primarily engaged in

political or lobbying activities.

§ 120.111 What conditions must an

Eligible Passive Company satisfy?

An Eligible Passive Company must

use loan proceeds to acquire or lease,

and/or improve or renovate real or

personal property (including eligible

refinancing) that it leases to an

Operating Company for the conduct of

the Operating Company’s business. Any

ownership structure or legal form may

qualify as a Eligible Passive Company,

except revocable trusts and other

grantor trusts.

(a) Conditions that apply to all legal

forms:

(1) The Operating Company is an

eligible small business, and the

proposed use of the proceeds would

have been an eligible use if the

Operating Company were obtaining the

financing directly;

(2) Both the Eligible Passive Company

and the Operating Company must be

small under the appropriate size

standards in part 121 of this chapter;

(3) The lease between the Eligible

Passive Company and the Operating

Company must be in writing and must

be subordinated to SBA’s mortgage,

trust deed lien, or security interest on

the property. Also, the Eligible Passive

Company (as landlord) must furnish as

collateral for the loan an assignment of

all rents paid under the lease;

(4) The lease, including options to

renew exercisable solely by the

Operating Company, must have a

remaining term at least equal to the term

of the loan;

(5) The Operating Company must be

a guarantor or a co-borrower (with the

Eligible Passive Company) of the loan;

and

(6) Each holder of an ownership

interest constituting at least 20 percent

of the Eligible Passive Company or the

Operating Company must guarantee the

loan (the trustee shall execute the

guarantee on behalf of any trust).

(b) Additional conditions that apply

to irrevocable trusts. A trust qualifying

as a Eligible Passive Company may

engage in other activities as authorized

by its trust agreement. For purposes of

this section, the trustee shall certify to

SBA that:

(1) The trustee has authority to act;

(2) The trust is irrevocable, and is not

regarded as a grantor trust for tax

purposes;

(3) The trust has the authority to

borrow funds, pledge trust assets, and

lease the property to the Operating

Company;

(4) The trustee has provided accurate,

pertinent language from the trust

agreement confirming the above; and

(5) The trustee has provided and will

continue to provide SBA with a true and

complete list of all trustors and donors.

Uses of Proceeds

§ 120.120 What are eligible uses of

proceeds?

A small business must use an SBA

loan for sound business purposes. The

uses of proceeds are prescribed in each

loan’s Authorization.

(a) A Borrower may use loan proceeds

from any SBA loan to:

(1) Acquire land (by purchase or

lease);

(2) Improve a site (grading, streets,

parking lots, landscaping);

(3) Purchase an existing building;

(4) Convert, expand or renovate an

existing building;

(5) Construct a new building; and/or

(6) Acquire (by purchase or lease) and

install machinery and equipment (in the

504 program, with a useful life of at

least 10 years and at a fixed location,

unless essential to the Project).

(b) A Borrower may also use 7(a) and

microloan proceeds for:

(1) Inventory;

(2) Supplies;

(3) Raw materials;

(4) Working capital; and

(5) Refinancing certain outstanding

debts.

§ 120.130 Restrictions on uses of

proceeds.

SBA will not authorize nor may a

Borrower use loan proceeds for the

following purposes (including the

replacement of funds used for any such

purpose):

(a) Payments, distributions or loans to

Associates of the applicant (except for

ordinary compensation for services

rendered);

(b) Refinancing a debt owed to a

Small Business Investment Company

(‘‘SBIC’’);

(c) Speculation in any kind of real or

personal property;

(d) Floor plan financing or other

revolving line credit, except under

§ 120.390;

(e) Investments in real or personal

property acquired and held primarily

for sale, lease, or investment and not

used within 3 years in an otherwise

eligible business (except for a loan to an

Eligible Passive Company or to a small

contractor under § 120.310);

(f) A purpose which does not benefit

the small business; or

(g) Any use restricted by §§ 120.201–

120.203 and 120.884 (specific to 7(a)

loans and 504 loans respectively).

Ethical Requirements

§ 120.140 What ethical requirements apply

to participants?

Lenders, Intermediaries, CDCs,

Associate Development Companies

(‘‘ADCs’’) and their Associates (in this

section ‘‘Participants’’) must act

ethically and exhibit good character.

Ethical indiscretion of an Associate

shall be attributed to the Participant. A

Participant must promptly notify SBA if

it obtains information concerning the

unethical behavior of an Associate. The

following are examples of such

unethical behavior. A Participant may

not:

(a) Self-deal;

(b) Have a real or apparent conflict of

interest with a small business with

which it is dealing (including any of its

Associates) or SBA;

(c) Own an equity interest in a

business that has received or is applying

to receive SBA financing (during the

term of the loan or within 6 months

prior to the loan application);

(d) Be incarcerated, on parole, or on

probation;

(e) Knowingly misrepresent or make a

false statement to SBA;

(f) Engage in conduct reflecting a lack

of business integrity or honesty;

(g) Be a convicted felon, or have an

adverse final civil judgment (in a case

involving fraud, breach of trust, or other

conduct) that would cause the public to

question the Participant’s business

integrity, taking into consideration such

factors as the magnitude, repetition,

harm caused, and remoteness in time of

the activity or activities in question;

(h) Accept funding from any source

that restricts, prioritizes, or conditions

the types of small businesses that the

CDC, ADC, or Intermediary may assist

under an SBA program or that imposes

any conditions or requirements upon

recipients of SBA assistance

inconsistent with SBA’s loan programs

or regulations;

(i) Fail to disclose to SBA all

relationships between the small

business and its Associates, the

Participant, and/or the lenders financing

the Project;

(j) Fail to disclose to SBA whether the

loan will:

(1) Reduce the exposure of a Lender

in a position to sustain a loss;

(2) Directly or indirectly finance the

purchase of real estate, personal

property or services (including

insurance) from the Participant;

(3) Repay or refinance a debt due a

Participant;
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64377

(4) Require the small business, or an

Associate, to invest in the Participant

(except for institutions which require an

investment from all members as a

condition of membership, such as a

Production Credit Association); or

(5) Involve a Lender, CDC or

Associate that has issued a commitment

to make or consider the loan prior to

receipt of the loan application,

including a forward commitment to a

builder or developer; or

(k) Engage in any activity which taints

its objective judgment in evaluating the

loan.

Credit Criteria for SBA Loans

§ 120.150 What are SBA’s lending criteria?

The Borrower (and the Operating

Company) must be creditworthy. Loans

must be so sound as to assure

repayment. SBA will consider:

(a) Character, reputation, and credit

history of the Borrower (and the

Operating Company, if applicable), its

Associates, and guarantors;

(b) Experience and depth of

management;

(c) Strength of the business;

(d) Past earnings, projected cash flow,

and future prospects;

(e) Ability to repay the loan with

earnings from the business;

(f) Sufficient invested equity to

operate on a sound financial basis;

(g) Potential for long-term success;

and

(h) Nature and value of collateral.

(Inadequate colateral will not be the sole

reason for denial of a loan request.)

§ 120.151 What is the statutory limit for

total loans to a Borrower?

The aggregate amount of the SBA

portions of all loans to a single

Borrower, including the Borrower’s

affiliates as defined in part 121 of this

chapter, shall not exceed $750,000,

except as otherwise authorized by

statute for a specific loan program.

§ 120.160 Loan conditions.

The following requirements are

normally required by SBA for all

business loans:

(a) Personal guarantees. Associates

and holders of at least a 20 percent

ownership interest generally must

guarantee the loan. SBA, in its

discretion, may require holders of

interests of less than 20 percent to

guarantee the loan.

(b) Appraisals. SBA may require

professional appraisals of the

applicant’s and principals’ assets, a

survey, or a feasibility study.

(c) Hazard Insurance. SBA requires

hazard insurance on all collateral.

(d) Taxes. If any portion of the loan

proceeds will be used for working

capital, the applicant may not use any

of the proceeds to pay past-due Federal

and state payroll taxes.

§ 120.161 Lending limits.

The outstanding balance of all SBA

financial assistance to a Borrower and

its affiliates under the business loan

programs covered by this Part must not

exceed $750,000 (except as otherwise

authorized for a specific loan program).

Requirements Imposed Under Other

Laws and Orders

§ 120.170 Flood insurance.

Under the Flood Disaster Protection

Act of 1973 (Sec. 205(b) of Public Law

93–234; 87 Stat. 983 (42 U.S.C. 4000 et

seq.)), a loan recipient must obtain flood

insurance if any building (including

mobile homes), machinery, or

equipment acquired, installed,

improved, constructed, or renovated

with the proceeds of SBA financial

assistance is located in a special flood

hazard area. The requirement applies

also to any inventory (business loan

program), fixtures or furnishings

contained or to be contained in the

building. Mobile homes on a foundation

are buildings. SBA, Lenders, CDCs, and

Intermediaries must notify Borrowers

that flood insurance must be

maintained.

§ 120.171 Compliance with child support

obligations.

Any holder of 50% or more of the

ownership interest in the recipient of an

SBA loan must certify that he or she is

not more than 60 days delinquent on

any obligation to pay child support

arising under:

(a) An administrative order;

(b) A court order;

(c) A repayment agreement between

the recipient and the custodial parent;

or

(d) A repayment agreement between

the recipient and a State agency

providing child support enforcement

services.

§ 120.172 Flood-plain and wetlands

management.

(a) All loans must conform to

requirements of Executive Orders

11988, ‘‘Flood Plain Management’’ (3

CFR, 1977 Comp., p. 117) and 11990,

‘‘Protection of Wetlands’’ (3 CFR, 1977

Comp., p. 121). Lenders, Intermediaries,

CDCs, and SBA must comply with

requirements applicable to them.

Applicants must show:

(1) Whether the location for which

financial assistance is proposed is in a

floodplain or wetland;

(2) If it is in a floodplain, that the

assistance is in compliance with local

land use plans; and

(3) That any necessary construction or

use permits will be issued.

(b) Generally, there is an 8-step

decision making process with respect to:

(1) Construction or acquisition of

anything, other than a building;

(2) Repair and restoration equal to

more than 50% of the market value of

a building; or

(3) Replacement of destroyed

structures.

(c) SBA may determine for the

following types of actions, on a case-bycase basis, that the full 8-step process is

not warranted and that only the first

step (determining if a proposed action is

in the base floodplain) need be

completed:

(1) Actions located outside the base

floodplain;

(2) Repairs, other than to buildings,

that are less than 50% of the market

value;

(3) Replacement of building contents,

materials, and equipment;

(4) Hazard mitigation measures;

(5) Working capital loans; and

(6) SBA loan assistance of $1,500,000

or less.

§ 120.173 Lead-based paint.

If loan proceeds are for the

construction or rehabilitation of a

residential structure, lead-based paint

may not be used on any interior surface,

or on any exterior surface that is readily

accessible to children under the age of

7.

§ 120.174 Earthquake hazards.

When loan proceeds are used to

construct a new building or an addition

to an existing building, the construction

must conform with the ‘‘National

Earthquake Hazards Reduction Program

(NEHRP) Recommended Provisions for

the Development of Seismic Regulations

for New Buildings,’’ obtainable from the

Interagency Committee on Seismic

Safety in Construction.

§ 120.175 Coastal barrier islands.

SBA and Intermediaries may not

make or guarantee any loan within the

Coastal Barrier Resource System.

§ 120.176 Compliance with other laws.

All SBA loans are subject to all

applicable laws, including (without

limitation) the civil rights laws (see

Parts 112, 113, 117 and 136 of this

chapter), prohibiting discrimination on

the grounds of race, color, national

origin, religion, sex, marital status,

disability or age. SBA requests

agreements or evidence to support or

document compliance with these laws,

including reports required by applicable

statutes or the regulations in this

chapter.
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Enforceability Despite Rule Changes

§ 120.180 Are rules enforceable if they are

changed later?

Regulations and contractual

provisions in effect at the time of a

transaction govern an SBA loan

financing transaction, notwithstanding

subsequent rule or contract changes.

SBA may conduct an enforcement

action regarding any violation of

provisions of regulations or contracts

applicable at the time, but no longer in

effect or in use.

Loan Applications

120.190 Where does an applicant apply for

a loan?

An applicant for a loan should apply

to:

(a) A Lender for a guaranteed or

immediate participation loan;

(b) A CDC for a 504 loan;

(c) An Intermediary for a Microloan;

or

(d) SBA for a direct loan.

§ 120.191 The contents of a business loan

application.

SBA requires that an application for a

business loan contain, among other

things, a description of the history and

nature of the business, the amount and

purpose of the loan, the collateral

offered for the loan, current financial

statements, historical financial

statements (or tax returns if appropriate)

for the past three years, and a business

plan, when applicable. Personal

histories and financial statements will

be required from principals of the

applicant (and the Operating Company,

if applicable).

§ 120.192 Approval or denial.

Applicants receive notice of approval

or denial by the Lender, CDC,

Intermediary, or SBA, as appropriate.

Notice of denial will include the

reasons. If a loan is approved, an

Authorization will be issued.

§ 120.193 Reconsideration after denial.

An applicant or recipient of a

business loan may request

reconsideration of a denied loan or loan

modification request within 6 months of

denial. Applicants denied due to a size

determination can appeal that

determination under part 121 of this

chapter. All others, including those

requesting modification of an existing

loan condition, can only appeal to the

office that denied the initial loan

application or request. To prevail, the

applicant must demonstrate that it has

overcome all legitimate reasons for

denial. Six months after denial, a new

application is required. If the

reconsideration is denied, an applicant

may request a final reconsideration by

the AA/FA, whose decision is final.

Computerized SBA Forms

§ 120.194 Use of computer forms.

Any applicant or other party involved

in SBA Business Loan Programs may

use computer generated SBA

application forms, closing forms, and

other forms designated by SBA if the

forms are exact reproductions of SBA

forms.

§ 120.195 Duty of Lender, CDC,

Intermediary Lender, and Borrower to

report fees.

(a) A Lender, CDC, or Intermediary

Lender must report to SBA all fees of

which it has knowledge or which it

charges the applicant, including

insurance fees. It must refund to the

applicant any fees that SBA considers

excessive. Failure to do so may result in

an action by SBA to suspend or revoke

the Lender’s participation status.

(b) An applicant for a business loan

must certify to SBA the name of each

individual or entity (attorney, loan

packager, broker, accountant, Service

Provider, Lender) that helped the

applicant obtain the loan, describing the

services performed, and disclosing the

amount of each fee.

Subpart B—Policies Specific to 7(a)

Loans

Bonding Requirements

§ 120.200 What bonding requirements

exist during construction?

On 7(a) loans where the SBA

guarantee covers a period of

construction, the Borrower must supply

a 100 percent payment and performance

bond and builder’s risk insurance,

unless waived by SBA.

Limitations on Use of Proceeds

§ 120.201 Refinancing unsecured or

undersecured loans.

A Borrower may not use 7(a) loan

proceeds to pay off an inadequately

secured creditor, including a Lender,

causing a shift to SBA of all or part of

a potential loss from an existing debt.

§ 120.202 Restrictions on loans for

changes in ownership.

A Borrower may not use loan

proceeds to purchase a portion of a

business or a portion of another owner’s

interest. One or more current owners

may use loan proceeds to purchase the

entire interest of another current owner,

or a Borrower can purchase ownership

of an entire business.

§ 120.203 Revolving credit.

SBA may not use its regular 7(a)

program for a revolving line of credit,

such as ‘‘floor plan’’ financing. (See

§ 120.390 for special Caplines program.)

Maturities; Interest Rates; Loan and

Guarantee Amounts

§ 120.210 What percentage of a loan may

SBA guarantee?

SBA’s guarantee percentage must not

exceed the applicable percentage

established in section 7(a) of the Act.

The maximum allowable guarantee

percentage on a loan will be determined

by the loan amount. As of October 31,

1995, the percentages are: Loans of

$100,000 or less may receive a

maximum guarantee of 80 percent. All

other loans may receive a maximum

guarantee of 75 percent, not to exceed

$750,000.

§ 120.211 What limits are there on the

amounts of direct loans?

(a) The statutory limit for direct loans

made under the authority of section

7(a)(1)–(19) of the Small Business Act is

$350,000. SBA has established an

administrative limit of $150,000 for

direct loans. The Associate

Administrator for Financial Assistance

(AA/FA) may authorize acceptance of

an application up to the statutory limit.

(b) The statutory limit for direct loans

made under the authority of section

7(a)(20) is $750,000. SBA has

established an administrative limit of

$150,000. The Associate Administrator

for Minority Enterprise Development

may authorize the acceptance of an

application that exceeds the

administrative limit.

(c) The statutory limit on SBA’s

portion of an immediate participation

loan is the lesser of 90 percent of the

loan or $350,000. The administrative

limit is the lesser of 75 percent of the

loan or $150,000. The AA/FA may

authorize exceptions to the

administrative limit up to $350,000.

§ 120.212 What limits are there on loan

maturities?

The term of a loan shall be:

(a) The shortest appropriate term,

depending upon the Borrower’s ability

to repay;

(b) Ten years or less, unless it

finances or refinances real estate or

equipment with a useful life exceeding

ten years; and

(c) A maximum of 25 years, including

extensions. (A portion of a loan used to

acquire or improve real property may

have a term of 25 years plus an

additional period needed to complete

the construction or improvements.)
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64379

§ 120.213 What fixed interest rates may a

Lender charge?

(a) Fixed Rates for Guaranteed Loans.

A loan may have a reasonable fixed

interest rate. SBA periodically publishes

the maximum allowable rate in the

Federal Register.

(b) Direct loans. A statutory formula

based on the cost of money to the

Federal government determines the

interest rate on direct loans. SBA

publishes the rate periodically in the

Federal Register.

§ 120.214 What conditions apply for

variable interest rates?

A Lender may use a variable rate of

interest, upon SBA’s approval. SBA’s

maximum allowable rates apply only to

the initial rate on the date SBA received

the loan application. SBA shall approve

the use of a variable interest rate under

the following conditions:

(a) Frequency. The first change may

occur on the first calendar day of the

month following initial disbursement,

using the base rate (see paragraph (c) of

this section) in effect on the first

business day of the month. After that,

changes may occur no more often than

monthly.

(b) Range of fluctuation. The amount

of fluctuation shall be equal to the

movement in the base rate. The

difference between the initial rate and

the ceiling rate may be no greater than

the difference between the initial rate

and the floor rate.

(c) Base rate. The base rate shall be

the prime rate in effect on the first

business day of the month, printed in a

national financial newspaper published

each business day, or the SBA Optional

Peg Rate which SBA publishes quarterly

in the Federal Register.

(d) Maturities under 7 years. For loans

with maturities under seven years, the

maximum interest rate shall not exceed

two and one-quarter (21⁄4) percentage

points over the base rate.

(e) Maturities of 7 years or more. For

loans with maturities of seven or more

years, the maximum interest rate shall

not exceed two and three-quarters (23⁄4)

percentage points over the base rate.

(f) Higher interest rates for smaller

loans. For a variable rate loan over

$25,000 but not exceeding $50,000, the

interest rate may be one percent more

than the maximum interest rate

described above. For a variable rate loan

of $25,000 or less, the maximum interest

rate described above may be increased

by two percentage points.

(g) Amortization. Initial amortization

of principal and interest may be

recomputed as interest rates fluctuate,

as directed by SBA. With prior approval

of SBA, the Lender may use certain

other amortization methods.

Fees for Guaranteed Loans

§ 120.220 Guarantee fees that Lender pays

SBA.

(a) The Lender pays a guarantee fee to

SBA for each loan as follows:

Guaranteed portion of loan

Fee measured as

percentage of

guaranteed portion

When payable Lender may get

fee from borrower

When SBA refunds

fee from borrower

Under 12 months ................................................................. .25% ..................... With guarantee application.When SBA approves loan.If application withdrawn or denied 1

More than 12 months and total guaranteed portion is

$80,000 or less.

2.0% of guaranteed portion.Within 90 days of

SBA approval.

After First disbursement.If loan cancelled

and never disbursed

More than 12 months and amount of guaranteed portion of

loan that is $250,000 or less.

3% ........................ Within 90 days of

SBA approval.

After first disbursement.If loan cancelled

and never disbursed

More than 12 months and amount of guaranteed portion of

loan between $250,000 and $500,000.

3.0% of 1st

$250,000 plus

3.5% of balance.

Within 90 days of

SBA approval.

After first disbursement.If loan cancelled

and never disbursed

More than 12 months and amount of guaranteed portion of

loan exceeding $500,000.

3.0% of 1st

$250,000 plus

3.5% of next

$250,000 plus

3.875% of the

amount exceeding $500,000.

Within 90 days of

SBA approval.

After first disbursement.If loan cancelled

and never disbursed.

1Also, if SBA substantially changes the Lender’s loan terms and approves the loan, but the modified terms are unacceptable to the Borrower

or Lender. (The Lender must request refund in writing within 30 calendar days of the approval).

(b) The Lender shall also pay SBA an

annual fee equal to 0.5 percent of the

outstanding balance of the guaranteed

portion of each loan.

(c) If the guarantee fee is not paid,

SBA may terminate the guarantee. The

Borrower may use loan proceeds to

reimburse the Lender for the guarantee

fee. Acceptance of the guarantee fee by

SBA shall not waive any right of SBA

arising from the Lender’s misconduct or

violation of any provision of this part,

the guarantee agreement, the

Authorization, or other loan documents.

§ 120.221 Fees which the Lender may

collect from a loan applicant.

(a) Service and packaging fees. The

Lender may charge an applicant

reasonable fees (customary for similar

Lenders in the geographic area where

the loan is being made) for packaging

and other services. The Lender must

advise the applicant in writing that the

applicant is not required to obtain or

pay for unwanted services. The

applicant is responsible for deciding

whether fees are reasonable. SBA may

review these fees at any time. Lender

must refund any such fee considered

unreasonable by SBA.

(b) Commitment fee for Export

Working Capital loan. After SBA

approves a loan under the Export

Working Capital Program, the Lender

may charge the borrower a commitment

fee of 1⁄4 of 1 percent (or $200

minimum) of the loan.

(c) Extraordinary servicing. Subject to

prior written SBA approval, if all or part

of a loan will have extraordinary

servicing needs, the Lender may charge

the applicant a service fee not to exceed

2 percent per year on the outstanding

balance of the part requiring special

servicing.

(d) Out-of-pocket expenses. The

Lender may collect from the applicant
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necessary out-of-pocket expenses such

as filing or recording fees.

(e) Late payment fee. The Lender may

charge the Borrower a late payment fee

not to exceed 5 percent of the regular

loan payment.

(f) No prepayment fee. The Lender

may not charge a fee for full or partial

prepayment of a loan.

§ 120.222 Fees which the Lender or

Associate may not collect from the

Borrower or share with third parties.

The Lender or its Associate may not:

(a) Require the applicant or Borrower

to pay the Lender, an Associate, or any

party designated by either, any fees or

charges for goods or services, including

insurance, as a condition for obtaining

an SBA guaranteed loan (unless

permitted by this part);

(b) Charge an applicant any

commitment, bonus, broker,

commission, or similar fee;

(c) Charge points or add-on interest;

(d) Share any premium received from

the sale of an SBA guaranteed loan in

the secondary market with either a

packager or other loan-referral source; or

(e) Charge the Borrower for legal

services, unless they are hourly charges

for requested services actually rendered.

Subpart C—Special Purpose Loans

§ 120.300 Statutory authority.

In addition to the general 7(a)

business loan program, Congress has

authorized several special purpose

programs in various subsections of the

Act. Generally, the regular 7(a) loan

policies, eligibility requirements and

credit criteria apply. The sections of this

subpart prescribe the special conditions

applying to each special purpose

program. As with other business loans,

special purpose loans are available only

to the extent funded by annual

appropriations.

Disabled Assistance Loan Program

(DAL)

§ 120.310 What assistance is available for

the disabled?

Section 7(a)(10) of the Act authorizes

SBA to guarantee or make direct loans

to the disabled. SBA distinguishes two

kinds of assistance:

(a) DAL–1. DAL–1 Financial

Assistance is available to non-profit

public or private organizations for the

disabled that employ the disabled; or

(b) DAL–2. DAL–2 Financial

Assistance is available to:

(1) Small businesses wholly owned by

the disabled; and

(2) Disabled individuals to establish,

acquire, or operate a small business.

§ 120.311 Definitions.

(a) Organization for the disabled

means one which:

(1) Is organized under federal or state

law to operate in the interest of the

disabled;

(2) Is non-profit;

(3) Employs disabled individuals for

seventy-five percent of the time needed

to produce commodities or services for

sale; and

(4) Complies with occupational and

safety standards prescribed by the

Department of Labor.

(b) Disabled individual means a

person who has a permanent physical,

mental or emotional impairment, defect,

ailment, disease or disability which

limits the type of employment for which

the person would otherwise be

qualified.

§ 120.312 DAL–1 use of proceeds and

other program conditions.

(a) DAL–1 applicants must submit

appropriate documents to establish

program eligibility.

(b) Generally, applicants may use loan

proceeds for any 7(a) loan purposes.

Loan proceeds may not be used:

(1) To purchase or construct facilities

if construction grants and mortgage

assistance are available from another

Federal source; or

(2) For supportive services (expenses

incurred by a DAL–1 organization to

subsidize wages of low producers health

and rehabilitation services,

management, training, education, and

housing of disabled workers).

(c) SBA does not consider a DAL–1

organization to have a conflict of

interest if one or more of its Associates

is an Associate of the Lender.

§ 120.313 DAL–2 use of proceeds and

other program conditions.

(a) The DAL–2 loan proceeds may be

used for normal 7(a) loan purposes.

(b) An applicant may use DAL–2 loan

proceeds to acquire an eligible small

business without complying with the

change of ownership conditions in

§ 120.206.

(c) A DAL–2 applicant must submit

evidence from a physician, psychiatrist,

or other qualified professional as to the

permanent nature of the disability and

the limitation it places on the applicant.

§ 120.314 Resolving doubts about

creditworthiness.

For the purpose of the DAL Program,

SBA shall resolve doubts concerning the

creditworthiness of an applicant in

favor of the applicant. However, the

applicant must present satisfactory

evidence of repayment ability. Personal

guarantees of Associates are not

required.

§ 120.315 Interest rate and loan limit.

The interest rate on direct DAL loans

is three percent. There is an

administrative limit of $150,000 on a

direct DAL loan.

Businesses Owned by Low Income

Individuals

§ 120.320 Policy.

Section 7(a)(11) of the Act authorizes

SBA to make or guarantee loans to

establish, preserve or strengthen small

business concerns:

(a) Located in an area having high

unemployment according to the

Department of Labor;

(b) Located in an area in which a high

percentage of individuals have a low

income inadequate to satisfy basic

family needs; and

(c) More than 50 percent owned by

low income individuals.

Energy Conservation

§ 120.330 Who is eligible for an energy

conservation loan?

SBA may make or guarantee loans to

assist a small business to design,

engineer, manufacture, distribute,

market, install, or service energy devices

or techniques designed to conserve the

Nation’s energy resources.

§ 120.331 What devices or techniques are

eligible for a loan?

Eligible energy conservation devices

or techniques include:

(a) Solar thermal equipment;

(b) Photovoltaic cells and related

equipment;

(c) A product or service which

increases the energy efficiency of

existing equipment, methods of

operation or systems which use fossil

fuels, and which is on the Energy

Conservation Measures list of the

Secretary of Energy;

(d) Equipment producing energy from

wood, biological waste, grain or other

biomass energy sources;

(e) Equipment for cogeneration of

energy, district heating or production of

energy from industrial waste;

(f) Hydroelectric power equipment;

(g) Wind energy conversion

equipment; and

(h) Engineering, architectural,

consulting, or other professional

services necessary or appropriate for

any of the devices or techniques in

paragraphs (a) through (g) of this

section.

§ 120.332 What are the eligible uses of

proceeds?

(a) Acquire property. The Borrower

may use the loan proceeds to acquire

land necessary for imminent plant

construction, buildings, machinery,
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64381

equipment, furniture, fixtures, facilities,

supplies, and material needed to

accomplish any of the eligible program

purposes in § 120.330.

(b) Research and development. Up to

30% of loan proceeds may be used for

research and development:

(1) Of an existing product or service;

or

(2) A new product or service.

(c) Working capital. The Borrower

may use proceeds for working capital

for entering or expanding in the energy

conservation market.

§ 120.333 Are there any special credit

criteria?

In addition to regular credit

evaluation criteria, SBA shall weigh the

greater risk associated with energy

projects. SBA shall consider such

factors as quality of the product or

service, technical qualifications of the

applicant’s management, sales

projections, and financial status.

Export Working Capital Program

(EWCP)

§ 120.340 What is the Export Working

Capital Program?

Under the EWCP, SBA guarantees a

revolving line of credit for export

purposes (section 7(a)(14) of the Act).

Loan maturities may be for up to three

years with annual renewals. Proceeds

can be used only to finance export

transactions. Loans can be for single or

multiple export sales.

§ 120.341 Who is eligible?

In addition to the criteria applicable

to all 7(a) loans, an applicant must be

in business for one full year at the time

of application, but not necessarily in the

exporting business. SBA may waive this

requirement if the applicant has

sufficient export trade experience or

other managerial experience.

§ 120.342 What are eligible uses of

proceeds?

Loan proceeds may be used:

(a) To acquire inventory;

(b) To pay the manufacturing costs of

goods for export;

(c) To purchase goods or services for

export;

(d) To support standby letters of

credit;

(e) To develop or penetrate foreign

markets;

(f) For pre-shipment working capital;

and

(g) For post-shipment exposure

coverage.

§ 120.343 Collateral.

A Borrower must give SBA a first

security interest sufficient to cover 100

percent of the EWCP loan amount (such

as insured accounts receivable or letters

of credit). Collateral must be located in

the United States, its territories or

possessions.

§ 120.344 Cash flow projections.

An applicant must submit cash flow

projections to support the need for the

loan and the ability to repay. After the

loan is made, the loan recipient must

submit monthly progress reports.

International Trade Loans

§ 120.345 Policy.

Section 7(a)(16) of the Act authorizes

SBA to guarantee loans to small

businesses that are:

(a) Engaged or preparing to engage in

international trade; or

(b) Adversely affected by import

competition.

§ 120.346 Eligibility.

(a) An applicant must establish that:

(1) The loan proceeds will

significantly expand an existing export

market or develop new export markets;

or

(2) The applicant business is

adversely affected by import

competition; and

(3) Upgrading facilities or equipment

will improve the applicant’s

competitive position.

(b) The applicant must have a

business plan reasonably supporting its

projected export sales.

§ 120.347 Use of proceeds.

The Borrower may use loan proceeds

to acquire, construct, renovate,

modernize, improve, or expand facilities

and equipment to be used in the United

States to produce goods or services

involved in international trade.

§ 120.348 Amount and percentage of

guarantee.

SBA can guarantee up to $1,250,000

for a combination of fixed-asset

financing and working capital, supplies

and EWCP assistance. The non-fixedasset portion cannot exceed $750,000.

Qualified Employee Trusts (ESOP)

§ 120.350 Policy.

Section 7(a)(15) of the Act authorizes

SBA to guarantee a loan to a qualified

employee trust (‘‘ESOP’’) to:

(a) Help finance the growth of its

employer’s small business; or

(b) Purchase ownership or voting

control of the employer.

§ 120.351 Definitions.

All terms specific to ESOPs have the

same definition for purposes of this

section as in the Internal Revenue

Service (IRS) Code (title 26 of the

United States Code) or regulations (26

CFR chapter I).

§ 120.352 Use of proceeds.

Loan proceeds may be used for two

purposes.

(a) Qualified employer securities. A

qualified employee trust may relend

loan proceeds to the employer by

purchasing qualified employer

securities. The small business concern

may use these funds for any general 7(a)

purpose.

(b) Control of employer. A qualified

employee trust may use loan proceeds

to purchase a controlling interest (51

percent) in the employer. Ownership

and control must vest in the trust by the

time the loan is repaid.

§ 120.353 Eligibility.

SBA may assist a qualified employee

trust (or equivalent trust) that meets the

requirements and conditions for an

ESOP prescribed in all applicable IRS,

Treasury and DOL regulations. In

addition, the following conditions

apply:

(a) The small business must provide

the funds needed by the trust to repay

the loan; and

(b) The small business must provide

adequate collateral.

§ 120.354 Creditworthiness.

In determining repayment ability,

SBA shall not consider the personal

assets of the employee-owners of the

trust. SBA shall consider the earnings

history and projected future earnings of

the employer small business. SBA may

consider the business and management

experience of the employee-owners.

SBA must have evidence that financial

assistance is not otherwise available by

utilizing:

(a) The personal resources and credit

of the principals of the small business;

(b) The resources and credit of the

small business; or

(c) The sale of the assets of the small

business.

Veterans Loan Program

§ 120.360 Which veterans are eligible?

SBA may make a direct loan to a

small business 51 percent owned by one

or more of the following eligible

veterans:

(a) Vietnam-era veterans who served

for a period of more than 180 days

between August 5, 1964, and May 7,

1975, and were discharged other than

dishonorably;

(b) Disabled veterans of any era with

a minimum compensable disability of

30 percent; or

(c) A veteran of any era who was

discharged for disability.
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§ 120.361 Other conditions of eligibility.

(a) Management and daily operations

of the business must be directed by one

or more of the veteran owners whose

veteran status was used to qualify for

the loan.

(b) This direct loan program is

available only if private sector financing

and guaranteed loans are not available.

(c) A veteran may qualify only once

for this direct loan program.

Pollution Control Program

§ 120.370 Policy.

Section 7(a)(12) of the Act authorizes

SBA to guarantee loans up to $1,000,000

to an eligible small business to plan,

design or install a pollution control

facility. An applicant must meet the

eligibility requirements for 7(a) loans.

Loans to Participants in the 8(a)

Program

§ 120.375 Policy.

Section 7(a)(20) of the Act authorizes

SBA to provide direct (unilaterally or

together with Lenders) or guaranteed

loans to firms participating in the 8(a)

Program.

§ 120.376 Special requirements.

The following special conditions

apply (otherwise, the general 7(a)

eligibility criteria apply):

(a) The Associate Administrator of

Minority Enterprise Development

(‘‘MED’’) may waive the direct loan

administrative ceiling of $150,000, and

raise it to $750,000.

(b) The SBA portion on a guaranteed

loan must not exceed $750,000.

(c) The interest rate on a guaranteed

loan shall be the same as on regular 7(a)

guarantee loans. The interest rate on a

direct loan shall be one percent less

than on a regular direct loan.

(d) For a direct loan or SBA’s portion

of an immediate participation loan, SBA

shall subordinate its security interest on

all collateral to other debt of the

applicant.

§ 120.377 Use of proceeds.

The loan proceeds shall not be used

for debt refinancing. A manufacturing

concern may use loan proceeds for

working capital.

Defense Economic Transition

Assistance

§ 120.380 Program.

Section 7(a)(21) of the Act authorizes

SBA to guarantee loans to help eligible

small businesses transition from defense

to civilian markets, or eligible

individuals adversely impacted by base

closures or defense cutbacks to acquire

or open and operate a small business.

§ 120.381 Eligibility.

(a) Eligible small businesses. A small

business is eligible if it has been

detrimentally impacted by the closure

(or substantial reduction) of a

Department of Defense installation, or

the termination (or substantial

reduction) of a Department of Defense

Program on which the small business

was a prime contractor, subcontractor,

or supplier at any tier.

(b) Eligible individual. An eligible

individual, for purposes of this program,

includes the following persons

involuntarily separated from their

position or voluntarily terminated under

a program offering inducements to

encourage early retirement:

(1) A member of the Armed Forces of

the United States (honorably

discharged);

(2) A civilian employee of the

Department of Defense; or

(3) An employee of a prime

contractor, sub-contractor, or supplier at

any tier of a Department of Defense

program.

§ 120.382 Repayment ability.

SBA shall resolve reasonable doubts

concerning the small business’ proposed

business plan for transition to nondefense-related markets in favor of the

loan applicant in determining the sound

value of the proposed loan.

§ 120.383 Restrictions on loan processing.

Since greater risk may be associated

with a loan to an applicant under this

program, a Certified Lender or Preferred

Lender shall not make a defense

economic assistance loan.

CapLines Program

§ 120.390 Revolving credit.

CapLines finances small businesses’

short-term, revolving working-capital

needs. Generally, SBA regulations

governing the 7(a) program also govern

this program. Under CapLines, SBA

generally can guarantee up to $750,000.

Small General Contractors

§ 120.391 What is the Small General

Contractor Program?

SBA may make or guarantee loans to

finance small general contractors to

construct or rehabilitate residential or

commercial property for resale (section

7(a)(9) of the Act). This program

provides an exception under specified

conditions to the general rule against

financing investment property.

‘‘Construct’’ and ‘‘rehabilitate’’ mean

only work done on-site to the structure,

utility connections and landscaping.

§ 120.392 Who may apply?

A construction contractor or homebuilder with a past history of profitable

construction or rehabilitation projects of

comparable type and size may apply.

An applicant may subcontract a portion

of the work. Subcontracts in excess of

$25,000 may require 100 percent

payment and performance bonds.

§ 120.393 Are there special application

requirements?

(a) An applicant must submit letters

from:

(1) A mortgage lender indicating that

permanent mortgage money is available

to qualified purchasers to buy such

properties;

(2) A real estate broker indicating that

a market exists for the proposed

building and that it will be compatible

with its neighborhood; and

(3) An architect, appraiser or engineer

agreeing to make inspections and

certifications to support interim

disbursements.

(b) The Borrower may substitute a

letter from a Lender for one or more of

the letters.

§ 120.394 What are the eligible uses of

proceeds?

A Borrower must use the loan

proceeds solely to acquire, construct or

substantially rehabilitate an individual

residential or commercial building for

sale. ‘‘Substantial’’ means rehabilitation

expenses of more than one-third of the

purchase price or fair market value at

the time of the application. A Borrower

may use up to 20 percent of the

proceeds to acquire land, and up to 5

percent for community improvements

such as curbs and sidewalks.

§ 120.395 What is SBA’s collateral

position?

SBA will require a lien on the

building which must be in no less than

a second position.

§ 120.396 What is the term of the loan?

The loan must not exceed thirty-six

months plus the estimated time to

complete construction or rehabilitation.

§ 120.397 Are there any special

restrictions?

The borrower must not use loan

proceeds to purchase vacant land for

possible future construction or to

operate or hold rental property for

future rehabilitation. SBA may allow

rental of the property only if the rental

will improve the ability to sell the

property. The sale must be a legitimate

change of ownership.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64383

Subpart D—Lenders

§ 120.400 Participation agreements.

SBA may enter into participation

agreements with Lenders to make

deferred participation (guaranteed)

loans. Participation agreements do not

obligate SBA to participate in any

specific proposed loan that a Lender

may submit. The existence of a

participation agreement does not limit

SBA’s rights to deny a specific loan or

establish general policies.

Participation Criteria

§ 120.410 Requirements for all

participating Lenders.

A Lender must:

(a) Have a continuing ability to

evaluate, process, close, disburse, and

service small business loans;

(b) Be open to the public for the

making of such loans (not be a financing

subsidiary, engaged primarily in

financing the operations of an affiliate);

(c) Have continuing good character

and reputation, and otherwise meet and

maintain the ethical requirements of

§ 120.140; and

(d) Be supervised and examined by a

State or Federal regulatory authority,

satisfactory to SBA.

§ 120.411 Preferences.

No agreement to participate under the

Act shall establish any Preferences in

favor of the Lender.

§ 120.412 Other services Lenders may

provide Borrowers.

Subject to the conflict of interest

provision in subpart A of this part,

Lenders, their Associates or the

designees of either may provide services

to and contract for goods with a

Borrower only after full disbursement of

the loan to the small business or to an

account not controlled by the Lender, its

Associate, or the designee. A Lender, an

Associate, or a designee providing such

services must do so under a written

contract with the small business, based

on time and hourly charges, and must

maintain time and billing records for

examination by SBA. Charges made

cannot exceed those charged by

established professional consultants

providing similar services.

§ 120.413 Advertisement of relationship

with SBA.

A Lender may refer in its advertising

to its participation with SBA. The

advertising may not:

(a) State or imply that the Lender, or

any of its Borrowers, has or will receive

preferential treatment from SBA;

(b) Be false or misleading; or

(c) Make use of SBA’s seal.

Pledging Notes or Transferring

Unguaranteed Portion

§ 120.420 Financings by Nondepository

Lenders.

(a) A Small Business Lending

Company regulated by SBA or a

Business and Industrial Development

Company (‘‘Nondepository Lender’’)

may pledge the notes evidencing SBA

guaranteed loans or sell the

unguaranteed portions of such loans if

SBA, in its sole discretion, gives its

prior written consent. The Lender must

be secure financially and have a history

of compliance with SBA’s regulations

and any other applicable state or

Federal statutory and regulatory

requirements.

(b) The Nondepository Lender, SBA,

and any third party involved in the

transaction, as determined by SBA in its

sole discretion, must enter into a written

agreement satisfactory to SBA

acknowledging SBA’s interest as

guarantor of the subject loans and

accepting that all relevant third parties

agree to recognize and uphold those

interests under the Act, this part, and

the contractual provisions of SBA’s

blanket Guarantee Agreement. In any

such agreement, the parties must agree

to the following conditions:

(1) The Nondepository Lender, SBA,

or a third party custodian agreeable to

SBA, will hold all pertinent Loan

Instruments, and the Nondepository

Lender will continue to service the

loans after the pledge or transfer is

made;

(2) The Nondepository Lender must

continue to retain an economic risk in

and bear the ultimate risk of loss on the

unguaranteed portions. The

Nondepository Lender must

demonstrate to SBA’s satisfaction and in

SBA’s sole discretion the retention of

economic risk by:

(i) In the case of the sale of

unguaranteed portions:

(A) Establishing a sufficient reserve

fund at time of sale;

(B) Retaining a sufficient level of

insurance; and/or

(C) Agreeing to reacquire the

unguaranteed portion of a guaranteed

loan or the note evidencing a guaranteed

loan if the loan goes into default; or

(ii) In the case of the pledge of notes,

retaining all of the economic interest in

the unguaranteed portion of any loans

which the notes evidence.

(c) The Nondepository Lender may

not use SBA guaranteed loans or the

collateral supporting such loans as

collateral for the borrowing of any

related enterprise or for any other

purpose inconsistent with this part.

Miscellaneous Provisions

§ 120.430 SBA access to Lender files.

A Lender must allow SBA’s

authorized representatives, during

normal business hours, access to its files

to review, inspect and copy all records

and documents relating to SBA

guaranteed loans.

§ 120.431 Suspension and revocation of

eligibility to participate.

SBA may suspend or revoke the

eligibility of a Lender to participate in

the 7(a) program because of a violation

of SBA regulations, a breach of any

agreement with SBA, a change of

circumstance resulting in the Lender’s

inability to meet operational

requirements, or a failure to engage in

prudent lending practices. Proceedings

for such purposes will be conducted in

accordance with the provisions of part

134 of this chapter. A suspension or

revocation will not invalidate a

guarantee previously provided by SBA.

Certified Lenders Program (CLP)

§ 120.440 What is the Certified Lenders

Program?

Under the Certified Lenders Program

(CLP), designated Lenders process,

close, and service, and may liquidate,

SBA guaranteed loans. SBA gives

priority to applications and servicing

actions submitted by Lenders under this

program. All other rules in this part 120

relating to the operations of Lenders

apply to CLP Lenders.

§ 120.441 How does a Lender become a

CLP Lender?

(a) An SBA field office may nominate

a Lender or a Lender may request a field

office to consider it for CLP status. SBA

district directors may approve and

renew a Lender’s CLP status. The

district director will consider whether

the Lender:

(1) Has the ability to process, close,

service and liquidate loans; and

(2) Has a satisfactory performance

history with SBA, including the

submission of complete and accurate

loan guarantee application packages;

(3) Has an acceptable SBA purchase

rate; and

(4) Has shown the ability to work well

with the local SBA office.

(b) If the district director does not

approve a request for CLP status, the

Lender may appeal to the AA/FA,

whose decision will be final. If SBA

grants CLP status, it applies only in the

field office that approved the CLP

designation. A CLP Lender must execute

a Supplemental Guarantee Agreement

that will specify a term not to exceed

two years.
64384 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

§ 120.442 Suspension or revocation of

CLP status.

The AA/FA may suspend or revoke

CLP status upon written notice

providing the reasons at least 10

business days prior to the effective date

of the suspension or revocation. Reasons

for suspension or revocation may

include a loan performance record

unacceptable to SBA, failure to make

the required number of loans under the

expedited procedures,or violations of

applicable statutes, regulations or

published SBA policies and procedures.

A CLP Lender may appeal the

suspension or revocation made under

this section under procedures found in

part 134 of this chapter. The action of

the AA/FA shall remain in effect

pending resolution of the appeal.

Preferred Lenders Program (PLP)

§ 120.450 What is the Preferred Lenders

Program?

Under the Preferred Lenders Program

(PLP), designated Lenders process,

close, service, and liquidate SBA

guaranteed loans with reduced

requirements for documentation to and

prior approval by SBA.

§ 120.451 How does a Lender become a

PLP Lender?

(a) An SBA field office serving the

area where a CLP Lender’s office is

located can nominate a CLP Lender or

a CLP Lender can request a field office

to consider it for PLP status. The SBA

field office will forward its

recommendation to an SBA centralized

loan processing center which will

submit its recommendation and

supporting documentation to the AA/

FA for final decision.

(b) In making its decision, SBA will

consider whether the CLP Lender:

(1) Has the required ability to process,

close, service and liquidate loans; and

(2) Has the ability to develop and

analyze complete loan packages; and

(3) Has a satisfactory performance

history with SBA.

(c) If the Lender is approved, the AA/

FA will designate the area in which it

can make PLP loans.

(d) Before it can operate as a PLP

Lender, the approved CLP Lender must

execute a Supplemental Loan Guarantee

Agreement, which will specify a term

not to exceed two years.

(e) When a PLP’s Supplemental Loan

Guarantee Agreement expires, SBA may

recertify it as a PLP Lender for an

additional term not to exceed two years.

Prior to recertification, SBA will review

a PLP Lender’s loans, policies and

procedures. The recertification decision

of the AA/FA is final.

(f) A PLP Lender may request an

expansion of the territory in which it

can process PLP loans by submitting its

request to a loan processing center. The

center shall obtain the recommendation

of each SBA office in the area into

which the PLP Lender would like to

expand its PLP operations. The center

shall forward the recommendations to

the AA/FA for final decision. If a PLP

Lender is not already a CLP Lender in

a territory into which it seeks to expand

its PLP status, it will automatically

obtain CLP status in the territory

without approval from the District

Office when it is granted its extension

of PLP status into that territory .

§ 120.452 What are the requirements of

PLP loan processing?

(a) Subparts A and B of this part

govern the making of PLP loans, except

for the following:

(1) Certain types of businesses, loans,

and loan programs are not eligible for

PLP, as detailed in published SBA

policy and procedures.

(2) A Lender may not use the PLP

procedure to reduce its existing credit

exposure for any Borrower.

(3) SBA will guarantee no more than

the specified statutory percentage of any

PLP loan. (b) A PLP Lender notifies SBA

of its approval of a PLP loan by

submitting to SBA’s loan processing

center appropriate documentation

signed by two of the PLP’s authorized

representatives. SBA will attach the

SBA guarantee and notify the PLP

Lender of the SBA Loan Number (if it

does not identify a problem with

eligibility, and funds are available).

(c) The PLP Lender is responsible for

the correctness of all PLP loan decisions

regarding eligibility (including size),

creditworthiness, loan closing, and

compliance with all requirements of law

or SBA regulations.

§ 120.453 What are the requirements of

PLP loan servicing and liquidation?

The PLP Lender must service and

liquidate its SBA guaranteed loan

portfolio (including its non-PLP loans)

using generally accepted commercial

banking standards employed by prudent

lenders. The PLP Lender must liquidate

any defaulted SBA guaranteed loan in

its portfolio unless SBA advises in

writing that SBA will liquidate the loan.

The PLP Lender must submit a

liquidation plan to SBA prior to

commencing liquidation action, if

possible. The PLP Lender may take any

necessary servicing action, or

liquidation action consistent with a

plan, for any SBA guaranteed loan in its

portfolio, except it may not:

(a) Take any action that confers a

Preference on the Lender;

(b) Accept a compromise settlement

without prior written SBA consent; and

(c) Sell or pledge more than 90

percent of a PLP loan.

§ 120.454 PLP performance review.

SBA may review the performance of

a PLP Lender. SBA may charge the PLP

Lender a fee for this review.

§ 120.455 Suspension or revocation of

PLP status.

The AA/FA may suspend or revoke

PLP status upon written notice

providing the reasons at least 10

business days prior to the effective date

of the suspension or revocation. Reasons

for suspension or revocation may

include loan performance unacceptable

to SBA, failure to make the required

number of loans under the expedited

procedures, or violations of applicable

statutes, regulations or published SBA

policies and procedures. A PLP Lender

may appeal the suspension or

revocation made under this section

under procedures found in Part 134 of

this chapter. The action of the AA/FA

shall remain in effect pending

resolution of the appeal.

Small Business Lending Companies

(SBLC)

§ 120.470 What is an SBLC?

A Small Business Lending Company

(SBLC) is a nondepository lending

institution engaged solely in the making

of loans under section 7(a) (except

section 7(a)(13)) of the Act in

participation with SBA. SBA supervises,

examines, and regulates SBLCs. An

SBLC is subject to all applicable SBA

regulations, including those governing

Lenders. This program has been closed

to new licenses since January, l982. In

addition to complying with § 120.400–

120.413, an SBLC must meet the

following requirements:

(a) Business structure. It must be a

corporation (profit or non-profit).

(b) Written agreement. It must sign a

written agreement with SBA with terms

satisfactory to SBA.

(c) Capital structure. It must have

unencumbered paid-in capital and paidin surplus of at least $1,000,000, or ten

percent of the aggregate of its share of

all outstanding loans, whichever shall

be more.

(d) Capital impairment. It must avoid

capital impairment at all times.

Impairment exists if the retained

earnings deficit of an SBLC exceeds 50

percent of combined paid-in capital and

paid-in-surplus, excluding treasury

stock. An SBLC must give SBA prompt

written notice of any capital impairment
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64385

within 30 calendar days of the monthend financial report that first reflects the

impairment. Until the impairment is

cured, an SBLC may not present any

loans to SBA for guarantee.

(e) Issuance of securities. Without

prior written SBA approval, it must not

issue any securities (including stock

options and debt securities) except stock

dividends and common stock issued for

cash or direct obligations of, or

obligations fully guaranteed as to

principal and interest by, the United

States.

(f) Voluntary capital reduction.

Without prior written SBA approval, it

must not voluntarily reduce its capital,

or purchase and hold more than 2

percent of any class or combination of

classes of its stock.

(g) Reserves for losses. It must

maintain a reserve in the amount of

anticipated losses on loans and

receivables.

(h) Internal control. It must adopt a

plan designed to safeguard its funds and

other assets, to assure the reliability of

its personnel, and to maintain the

accuracy of its financial data.

(i) Dual control. It must maintain dual

control over disbursement of funds and

withdrawal of securities. An SBLC may

disburse funds only by checks or wire

transfers authorized by signatures of two

or more officers covered by the SBLC’s

fidelity bond, except that checks in an

amount of $1,000 or less may be signed

by one bonded officer. There must be

two or more bonded officers, or one

bonded officer and a bonded employee

to open safe deposit boxes or withdraw

securities from safekeeping. The SBLC

shall furnish to each depository bank,

custodian, or entity providing safe

deposit boxes a certified copy of the

resolution implementing these control

procedures.

(j) Fidelity insurance. It must

maintain a Brokers Blanket Bond,

Standard Form 14, or Finance

Companies Blanket Bond, Standard

Form 15, or such other form of coverage

as SBA may approve, in a minimum

amount of $25,000 executed by a surety

holding a Certificate of authority from

the Secretary of the Treasury pursuant

to 6 U.S.C. 6–13.

(k) Common control. It must not

control, be controlled by, or under

common control with, another SBLC.

Without prior written SBA approval, an

Associate of one SBLC shall not be an

Associate of another SBLC or of any

entity which directly or indirectly

controls or is under common control

with another SBLC.

(l) Management services. An SBLC

must employ full time professional

management.

(m) Borrowed funds. Without SBA’s

prior written approval, it must not be

capitalized with borrowed funds.

Shareholders owning 10 percent or

more of any class of its stock shall not

use borrowed funds to purchase the

stock unless the net worth of the

shareholders is at least twice the

amount borrowed or unless the

shareholders receive SBA’s prior written

approval for a lower ratio.

§ 120.471 Records.

Each SBLC must comply with the

following requirements concerning

records:

(a) Maintenance of Records. It must

maintain accurate and current financial

records, including books of account,

minutes of stockholder, directors, or

executive committee meetings, and all

documents and supporting materials

relating to the SBLC’s transactions at its

principal business office. Securities

held by a custodian pursuant to a

written agreement shall be exempt from

this requirement.

(b) Preservation of records.

(1) It must preserve in a manner

permitting immediate retrieval the

following documentation for the

financial statements required by

§ 120.472 (and of the accompanying

independent public accountant’s

opinion), for the following specified

periods:

(i) Preserve permanently:

(A) All general and subsidiary ledgers

(or other records) reflecting asset,

liability, capital stock and surplus,

income, and expense accounts;

(B) All general and special journals

(or other records forming the basis for

entries in such ledgers); and

(C) The corporate charter, bylaws,

application for determination of

eligibility to participate with SBA, and

all minutes books, capital stock

Certificates or stubs, stock ledgers, and

stock transfer registers;

(ii) Preserve for at least 6 years

following final disposition of the related

loan:

(A) All applications for financing;

(B) Lending, participation, and escrow

agreements;

(C) Financing instruments; and

(D) All other documents and

supporting material relating to such

loans, including correspondence.

(2) Records and other documents

referred to in this section may be

preserved electronically or by

reproduction if the SBLC makes and

stores duplicate originals separately

from the original for the time required.

§ 120.472 Reports to SBA.

An SBLC must submit the following

to the AA/FA:

(a) An audited financial statement

prepared by an independent public

accountant within three months after

the close of each fiscal year, and interim

financial reports when requested by

SBA;

(b) A report of any legal or

administrative proceeding, by or against

the SBLC, or against an officer, director,

or employee of the SBLC for an alleged

breach of official duty, within 10 days

after initiating or learning of the

proceeding, as well as notification of the

terms of any settlement or final

judgment (in addition to any reporting

under applicable SBA Forms);

(c) Copies of any report furnished to

its stockholders (including any

prospectus, letter, or other publication

concerning the financial operations of

the SBLC);

(d) A summary of any changes in the

SBLC’s organization or financing, such

as:

(1) Any change in its name, address

or telephone number;

(2) Any change in its charter, bylaws,

or its officers or directors (to be

accompanied by a statement of personal

history on an approved SBA form);

(3) Any changes in capitalization not

otherwise required by § 120.470 to be

reported to SBA;

(4) Any changes affecting the

eligibility of the SBLC to continue to

participate as an SBLC; and

(5) Notice of a pledge of stock within

30 calendar days of the transaction if 10

percent or more of the stock is pledged

by any person (or group of persons

acting in concert) as collateral for

indebtedness, and such pledge does not

involve a transfer for which prior

written approval of SBA is required

under § 120.473; and

(e) Such other reports as SBA may

require from time to time by written

directive.

§ 120.473 Change of ownership or control.

(a) Any change of ownership or

control without prior written approval

of SBA is prohibited. An SBLC must

request approval of any such change

from the AA/FA. Pending the approval,

the SBLC may not register the proposed

new owners on its transfer books nor

permit them to participate in any

manner in the conduct of the SBLC’s

affairs. Change of ownership or control

shall include:

(1) Any transfer of 10 percent or more

of any class of the SBLC’s stock, and any

agreement providing for such transfer;

(2) Any transfer that could result in

the beneficial ownership by any person

or group of persons acting in concert of

10 percent or more of any class of its
64386 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

stock, and any agreement providing for

such transfer;

(3) Any merger, consolidation, or

reorganization; or

(4) Any other transaction or

agreement that transfers control of the

SBLC.

(b) If transfer of ownership or control

is subject to the approval of any State

or Federal chartering, licensing, or other

regulatory authority, copies of any

documents filed with such authority

shall, at the same time, be transmitted

to the SBA District Office serving the

area in which the SBLC’s principal

office is located.

§ 120.474 Prohibited financing.

An SBLC may not make a loan to a

small business that has received

financing (or a commitment for

financing) from an SBIC that is an

Associate of the SBLC.

§ 120.475 Suspension or revocation.

SBA may revoke or suspend an SBLC

for a violation of law, these regulations,

or any agreement with SBA. An appeal

can be made following the procedures

set forth in part 134 of this chapter.

Subpart E—Loan Administration

§ 120.500 General.

This subpart outlines the general loan

administration policies applicable to

SBA financial assistance.

Servicing

§ 120.510 Servicing direct and immediate

participation loans.

SBA services the direct loans that it

makes. Generally, the Lender services

immediate participation loans that it

makes and in which SBA participates.

§ 120.511 Servicing guaranteed loans.

The Lender services guaranteed loans,

holds the Loan Instruments and receives

the Borrower’s payments of principal

and interest.

§ 120.512 Who services the loan after SBA

honors its guarantee?

Generally, after SBA honors its

guarantee, the Lender must continue to

hold the Loan Instruments and service

the loan, and the Lender must execute

a Certificate of interest showing SBA’s

percentage of the loan. If SBA elects to

service the loan, the Lender must assign

the Loan Instruments to SBA.

§ 120.513 What servicing actions require

the prior written consent of the SBA?

SBA must give its prior written

consent before the Lender takes any of

the following actions:

(a) Alter substantially the terms or

conditions of any Loan Instrument (for

example, any increase in the principal

amount or change in the interest rate, or

conferring a Preference on the Lender);

(b) Release collateral having a

cumulative value in excess of 20 percent

of the original loan amount;

(c) Accelerate the maturity of the note;

(d) Sue upon any Loan Instrument;

(e) Compromise or waive any claim

against any Borrower, guarantor, obligor

or standby creditor arising out of any

Loan Instrument; or

(f) Increase the amount of any prior

lien held by the Lender on the collateral

securing the loan.

SBA’S Purchase of a Guaranteed

Portion

§ 120.520 When does SBA honor its

guarantee?

(a) SBA, in its sole discretion, may

purchase a guaranteed portion of a loan

at any time. A Lender may demand in

writing that SBA honor its guarantee if

the Borrower is in default on any

installment for more than 60 calendar

days (or less if SBA agrees) and the

default has not been cured. If a

Borrower cures a default before a Lender

requests purchase by SBA, the Lender’s

right to request purchase on that default

lapses.

(b) When SBA purchases the

guaranteed portion, it does not waive

any of its rights to recover money paid

on the guaranty, based upon the

Lender’s negligence, misconduct, or

violation of this part, including the

those actions listed in § 120.524(a), the

guarantee agreement or the Loan

Instruments.

§ 120.521 What interest rate applies after

SBA purchases its guaranteed portion?

When SBA honors its guarantee for a

fixed interest rate loan, the rate of

interest remains as stated in the note.

On loans with a fluctuating interest rate,

the interest rate that the Borrower owes

will be at the rate in effect at the time

of the earliest uncured default (where a

default has occurred), or the rate in

effect at the time of purchase (where no

default has occurred).

§ 120.522 How much accrued interest does

SBA pay to the Lender or Registered Holder

when SBA purchases the guaranteed

portion?

(a) Rate of interest. If SBA purchases

the guaranteed portion from a Lender or

from a Registered Holder (if sold in the

Secondary market), it will pay accrued

interest at:

(1) The rate in the note if it is a fixed

rate loan; or

(2) The rate in effect on the date of the

earliest uncured default (if a default has

occurred) or of SBA’s purchase (if there

has been no default).

(b) Payment to Lender. SBA calculates

the accrued interest due a Lender from

the date of the Borrower’s earliest

uncured default, but interest may not

accrue for more than 120 days (plus any

deferment period which SBA had

approved). In addition, if a Lender

requests SBA to purchase within 120

days of the earliest uncured default,

SBA will pay accrued interest to the

Lender for any SBA time spent in

making payment in excess of 120 days,

plus interest from the last paid-to date

to the earliest uncured default date.

(c) Payment to Registered Holder.

SBA will pay a Registered Holder all

accrued interest up to the date of

payment.

(d) Extension of the 120 day period.

Before the 120 days expire, the SBA

field office may extend the period if the

Lender and SBA agree that the Borrower

can cure the default within a reasonable

and definite period of time or that the

benefits from doing so otherwise will

exceed the costs of SBA paying

additional interest. If the 120 days have

passed, only SBA’s AA/FA or his

designee can extend the period.

§ 120.523 What is the ‘‘earliest uncured

default’’?

Default occurs when a Borrower

violates any provision in the Loan

Instruments. The default date is the date

the violation occurred. The ‘‘earliest

uncured default’’ is the earliest violation

not yet cured. If the violation is the

failure by a Borrower to pay a regular

installment of principal and interest

when due, payments made by the

Borrower before a Lender makes its

request to SBA to purchase are applied

to the earliest uncured default. If the

installment is paid in full, the earliest

uncured default date will advance to the

next unpaid installment date. If a

Borrower makes any payment after a

Lender makes its request to SBA to

purchase, the earliest uncured default

date does not change because the

Lender has already exercised its right to

request purchase.

§ 120.524 When is SBA released from

liability on its guarantee?

(a) SBA is released from liability on

a loan guarantee (in whole or in part,

within SBA’s exclusive discretion), if

any of the events below occur:

(1) The Lender has failed to comply

with any of the provisions of these

regulations, the Loan Guarantee

Agreement, or the Authorization;

(2) The Lender has failed to make,

close, service, or liquidate a loan in a

prudent manner;

(3) The Lender’s improper action or

inaction has placed SBA at risk;
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(4) The Lender has failed to disclose

a material fact to SBA regarding a

guaranteed loan in a timely manner;

(5) The Lender has misrepresented a

material fact to SBA regarding a

guaranteed loan;

(6) SBA has received a written request

from the Lender to terminate the

guarantee;

(7) The Lender has not paid the

guarantee fee within the period required

under SBA rules and regulations;

(8) The Lender has failed to request

that SBA purchase a guarantee within

120 days after maturity of the loan;

(9) The Lender has failed to use

required SBA forms or exact electronic

copies; or

(10) The Borrower has paid the loan

in full.

(b) If SBA determines, after

purchasing its guaranteed portion of a

loan, 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 money paid on

the guaranty plus interest from the

Lender responsible for those events.

(c) If the Lender’s loan documentation

indicates that one or more of the events

in paragraph (a) of this section may have

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

prior to Lender’s request for SBA to

honor its guarantee shall not prejudice

SBA’s right to deny liability for a

guarantee if one or more of the events

listed in paragraph (a) of this section

occur.

(e) Unless SBA provides written

notice to the contrary, the Lender

remains responsible for all loan

servicing and liquidation actions until

SBA honors its guarantee in full.

Deferment, Extension of Maturity and

Loan Moratorium

§ 120.530 Deferment of payment.

SBA may agree to defer payments for

a stated period of time, and use such

other methods as it considers necessary

and appropriate to help in the

successful establishment and operation

of the Borrower. This policy applies to

all business loan programs, including

504 loans.

§ 120.531 Extension of maturity.

SBA may agree to extend the maturity

of a loan for up to 10 years beyond its

original maturity if the extension will

aid in the orderly repayment of the loan.

§ 120.532 What is a loan Moratorium?

SBA may assume a Borrower’s

obligation to repay principal and

interest on a loan by agreeing to make

the payments to the Participating

Lender on behalf of the Borrower. This

relief is called a ‘‘Moratorium.’’

§ 120.533 When will SBA grant a

Moratorium?

SBA normally will grant a

Moratorium if:

(a) Without it, the small business will

become or remain insolvent;

(b) With it, the small business will

become or remain viable;

(c) Alternative remedies, such as a

deferment, are not available;

(d) The Lender has already granted

deferments equal to at least six (6)

monthly installments, and the Lender

and SBA agree that the deferments have

been beneficial;

(e) The Borrower, Lender, obligors,

and guarantors execute a ‘‘Moratorium

Agreement’’ giving SBA absolute

discretion to discontinue making the

payments at any time;

(f) The Borrower (and co-Borrowers)

execute a demand note to repay SBA’s

Moratorium advances;

(g) All guarantors or other obligors of

the guaranteed loan execute guarantee

agreements and any other instruments

required by SBA to protect its interests

under the demand note;

(h) The Borrower and other obligors

provide such security as SBA considers

necessary or appropriate; and

(i) The collateral securing the demand

note includes at least the collateral

securing the guaranteed loan, and the

collateral position for the demand note

is subject only to the lien position on

the guaranteed loan.

§ 120.534 How long can a Moratorium

continue?

Generally, SBA will continue a

Moratorium for six months, although

SBA may authorize an initial

Moratorium for up to one year. SBA

may continue a Moratorium for

additional periods (to a maximum total

of five (5) years) only if the Borrower

can demonstrate the eventual ability to

repay from earnings the original note

and the demand note.

§ 120.535 What are the repayment terms of

a Moratorium?

(a) The interest rate for the demand

note is the same as for the guaranteed

loan. SBA advances to a Participating

Lender during the Moratorium period

accrue interest from the date of each

disbursement.

(b) SBA has the right to demand

payment at any time. If not previously

demanded, payment in full will be due

immediately after the Borrower has fully

paid the guaranteed loan.

(c) SBA may demand payment in full

under the demand note or SBA may

accept a repayment schedule. If the loan

has been paid, the frequency and

amount of the repayments must be at

least equal to the amount and frequency

that were due under the loan.

(d) SBA will apply repayments first to

accrued interest and then to principal.

(e) A loan may be extended beyond

the statutory limit for a period of time

corresponding to the time of the

Moratorium.

Liquidation of Collateral

§ 120.540 What are SBA’s policies

concerning liquidation of collateral?

(a) Liquidation policy. SBA or the

Lender may liquidate collateral securing

a loan if there is no reasonable prospect

that the Borrower or a guarantor (other

than SBA) can repay the loan within a

reasonable period.

(b) Sale and conversion of loans.

Without the consent of the Borrower,

SBA may:

(1) Sell a direct loan;

(2) Convert a guaranteed or immediate

participation loan to a direct loan; or

(3) Convert an immediate

participation loan to a guaranteed loan

or a loan owned solely by the Lender.

(c) Dispose of collateral and assets

acquired through foreclosure or

conveyance. SBA or the Lender may sell

real and personal property (including

contracts and claims) pledged to secure

a loan that is in default in accordance

with the provisions of the related

security instrument (see § 120.550 for

Homestead Protection for Farmers).

(1) Competitive bids or negotiated

sale. Generally, SBA or the Lender will

offer loan collateral and acquired assets

for public sale through competitive bids

at an auction or a sealed bid sale,

although a negotiated sale may be

utilized under appropriate

circumstances.

(2) Lease of acquired property.

Normally, neither SBA nor a Lender

will rent or lease acquired property or

grant options to purchase. SBA will

consider proposals for a lease if it

appears a property cannot be sold

advantageously and it is in the

government’s interest, but SBA may

terminate the lease upon receipt of a

favorable purchase offer.

(d) Recoveries and security interests

shared. SBA and the Participating

Lender will share pro rata (in

accordance with their respective

interests in a loan) all loan payments or

recoveries, all reasonable expenses
64388 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

(including advances for the care,

preservation, and maintenance of

collateral securing the loan), and any

security interest or guarantee (excluding

SBA’s guarantee) which the Lender or

SBA may hold or receive in connection

with a loan.

(e) Guarantors. Guarantors of

financial assistance have no rights of

contribution against SBA on an SBA

guaranteed or direct loan. SBA is not

deemed to be a co-guarantor with any

other guarantors.

Homestead Protection for Farmers

§ 120.550 What is homestead protection

for farmers?

SBA may lease to a farmer-Borrower

the farm residence occupied by the

Borrower and a reasonable amount of

adjoining property (no more than 10

acres and seven farm buildings), if they

were acquired by SBA as a result of a

defaulted farm loan made or guaranteed

by SBA (see the Consolidated Farm and

Rural Development Act, 7 U.S.C. 1921,

for qualifying loan purposes).

§ 120.551 Who is eligible for homestead

protection?

SBA must notify the Borrower in

possession of the availability of these

homestead protection rights within 30

days after SBA acquires the property. A

farmer-Borrower must:

(a) Apply for the homestead

occupancy to the SBA field office which

serviced the loan within 90 days after

SBA acquires the property;

(b) Provide evidence that the farm

produces farm income reasonable for

the area and economic conditions;

(c) Show that at least 60 percent of

Borrower’s gross annual income came

from farm or ranch operations in at least

any two out of the last six calendar

years;

(d) Have resided on the property

during the previous six years; and

(e) Be personally liable for the debt.

§ 120.552 Lease.

If approved, the applicant must

personally occupy the residence during

the term of the lease and pay a

reasonable rent to SBA. The lease shall

be for a period not to exceed 5 years,

renewable for up to another 5 years.

During or at the end of the lease period,

the lessee has a right of first refusal to

reacquire the homestead property under

terms and conditions no less favorable

than those offered to any other

purchaser.

§ 120.553 Appeal.

If the application is denied, the

Borrower may appeal the decision to the

Regional Administrator in the region in

which the field office which denied the

application is located. Until the

conclusion of any appeal, the Borrower

may retain possession of the homestead

property. If there is a conflict between

state law and this section, state law

prevails.

Subpart F—Secondary Market

§ 120.600 What is the SBA Secondary

Market?

The SBA secondary market

(‘‘Secondary Market’’) consists of the

sale of Certificates, representing either

the entire guaranteed portion of an

individual 7(a) guaranteed loan or an

undivided interest in a Pool consisting

of the SBA guaranteed portions of a

number of 7(a) guaranteed loans. By the

terms of the Certificate, SBA guarantees

a Registered Holder timely payment of

principal and interest to which the

Registered Holder is entitled from the

loan or loans underlying the Certificate.

Transactions involving interests in

Pools or the sale of individual

guaranteed portions are governed by the

contracts entered into by the parties,

SBA’s Secondary Market Program

Guide, and this subpart. See sections 5

(f), (g) and (h) of the Small Business Act

(15 U.S.C. 634 (f), (g) and (h)).

§ 120.601 Definitions.

The definitions in this section apply

throughout this subpart.

(a) Certificate is the document the

FTA issues representing a beneficial

fractional interest in a Pool (Pool

Certificate), or an undivided interest in

the entire guaranteed portion of an

individual 7(a) guaranteed loan that is

sold separately.

(b) Current means that no repayment

from a Borrower to a Lender is over 29

days late measured from the due date of

the payment on the records of the FTA’s

central registry (Pools) or the entity

servicing the loan (individual

guaranteed portion).

(c) FTA is the SBA’s fiscal and

transfer agent.

(d) Note Rate is the interest rate on

the Borrower’s note.

(e) Net Rate means the interest rate on

an individual guaranteed portion in a

Pool.

(f) Payment date is the date that the

FTA deposits checks in the U.S. mail.

SBA may change the date or method of

payment by publishing a document in

the Federal Register.

(g) Pool is an aggregation of SBA

guaranteed portions of loans made by

Lenders.

(h) Pool Assembler is a financial

institution that:

(1) Organizes and packages a Pool by

acquiring the SBA guaranteed portions

of loans from Lenders;

(2) Resells fractional interests in the

Pool to Registered Holders; and

(3) Directs the FTA to issue

Certificates.

(i) Pool Rate means the interest rate

on a Certificate.

(j) Registered Holder is the Certificate

owner listed in FTA’s records.

Certificates

§ 120.610 Description of Certificates.

(a) General form and content. Each

Certificate must be registered with the

FTA (no bearer Certificates). SBA must

approve the terms of the Certificate.

(b) Face amount of Pool Certificate.

The face amount of a Pool Certificate

cannot be less than a specified

minimum amount and must be in

increments which SBA may specify

(except for one Certificate in each Pool).

SBA may change these requirements by

issuing a document in the Federal

Register after analyzing market

conditions and program experience.

(c) Payment Terms for Pool

Certificates. Principal installments and

interest payments are based on the

unpaid principal balance of the portion

of the Pool represented by a Pool

Certificate. All prepayments on loans in

the Pool must be passed through to the

Registered Holders on the payment date.

(d) Payment Terms for Certificates

which represent individual guaranteed

portions. Principal installments and

interest payments are based on the

unpaid principal balance of the entire

SBA guaranteed portion of the loan. The

Certificate must provide for a pro rata

pass through to the Registered Holder of

payments which the FTA receives from

a Lender or any entity servicing the

loan.

§ 120.611 Description of Pools backing

Pool Certificates.

(a) Pool characteristics. (1) When the

FTA issues a Pool Certificate, each Pool

must have:

(i) A minimum number of guaranteed

portions of loans;

(ii) A minimum aggregate principal

balance of the guaranteed portions;

(iii) A maximum percentage of the

Pool which an individual guaranteed

portion may constitute;

(iv) A maximum allowable difference

between the highest and lowest note

interest rates;

(v) A maximum allowable difference

between the remaining terms to

maturity of the loans in the Pool; and

(vi) A minimum weighted average

maturity at Pool formation.

(2) SBA may adjust the Pool

characteristics periodically based upon
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64389

program experience and market

conditions.

(b) Interest rate on Pool Certificate.

The interest rate on a pool Certificate

must be equal to the lowest net rate on

any individual guaranteed portion in

the pool.

(c) Redemption of Certificate. The

FTA and SBA may redeem a pool

Certificate because of prepayment or

default of all loans constituting the pool.

§ 120.612 What loans are eligible to back

Certificates?

(a) Pool Certificates are backed by the

SBA guaranteed portions of loans

comprising the Pool. An individual

Certificate is backed by the entire SBA

guaranteed portion of a single loan.

Each such loan must:

(1) Be current as of the date the Pool

is formed or the individual loan is

initially sold in the Secondary Market;

(2) Be guaranteed under the Act; and

(3) Meet such other standards as SBA

may determine to be necessary for the

successful operation of the pooling

program.

(b) With respect to any Pool, the loans

must meet the SBA standards in effect

at the time the Pool is formed.

§ 120.613 What is a Secondary

Participation Guarantee Agreement?

When a Lender wants to sell the

guaranteed portion of a loan, it enters

into a Secondary Participation

Guarantee Agreement (‘‘SPGA’’) with

SBA and the purchaser of the

guaranteed portion. The terms of sale

between the Lender and the purchaser

cannot require the Lender or SBA to

repurchase except in accordance with

the terms of the SPGA. Before execution

of the agreement, the Lender must:

(a) Documents. Submit to SBA a copy

of the SPGA, the note, and such other

documents as SBA may require;

(b) Full Disbursement. Disburse to the

Borrower the full amount of the loan;

and

(c) Guarantee Fees Paid. Pay SBA all

guarantee fees in full.

The SBA Guarantee of a Certificate

§ 120.620 The SBA guarantee of a Pool

Certificate.

(a) Extent of Guarantee. SBA

guarantees to a Registered Holder the

timely payment of principal and interest

installments and any prepayment or

other recovery of principal on the

underlying loans to which the

Registered Holder is entitled. If the

Borrower of a loan in a Pool backing the

Certificates does not make a required

installment payment, SBA through the

FTA must make advances to maintain

the schedule of interest and principal

payments to the Registered Holders

until SBA purchases the guaranteed

portion.

(b) SBA guarantee backed by full faith

and credit. SBA’s guarantee of the Pool

Certificate is backed by the full faith and

credit of the United States.

§ 120.621 The SBA guarantee of a

Certificate representing an individual

guaranteed portion.

(a) Extent of SBA guarantee. With

respect to individual SBA guaranteed

portions sold in the Secondary Market,

SBA guarantees to purchase from the

Registered Holder the guaranteed

portion for an amount equal to the

unpaid principal and accrued interest

due on the guaranteed portion of the

note as of the date of SBA’s purchase,

less deductions for applicable fees. As

opposed to the SBA guarantee with

respect to pooled loans, SBA does not

guarantee timely payment on individual

guaranteed portions.

(b) What triggers the SBA guarantee.

SBA’s guarantee to the Registered

Holder may be called upon when:

(1) The Borrower remains in uncured

default for 60 days on payments of

principal or interest due on the note;

(2) The Lender fails to send to the

FTA payments it received from the

Borrower; or

(3) The FTA fails to send to the

Registered Holder any payments it has

received from the Lender.

(c) Full faith and credit. SBA’s

guarantee to the Registered Holder is

unconditional and is backed by the full

faith and credit of the United States.

Pool Assemblers

§ 120.630 Qualifications to be a Pool

Assembler.

(a) Application to become Pool

Assembler. The application to become a

Pool Assembler is available from the

AA/FA. In order to qualify as a Pool

Assembler, an entity must send the

application to the AA/FA, with an

application fee, and certify that it:

(1) Is regulated by the appropriate

agency as defined in section 3(a)(34)(G)

of the Securities Exchange Act of 1934

(15 U.S.C. 78c(a)(34)(G));

(2) Meets all financial and other

applicable requirements of its regulatory

authority and the Government

Securities Act of l986, as amended (Pub.

L. 99–571, 100 Stat. 3208);

(3) Has the financial capability to

assemble acceptable and eligible

guaranteed loan portions in sufficient

quantity to support the issuance of Pool

Certificates; and

(4) Is in good standing with SBA (as

the AA/FA determines), the Office of

the Comptroller of the Currency

(‘‘OCC’’) if it is a national bank, the

Federal Deposit Insurance Corporation

if it is not a national bank, or the

National Association of Securities

Dealers.

(b) Approval by SBA. After SBA

approves the application to become a

Pool Assembler, the entity may submit

Pool applications to the FTA.

(c) Conduct of business by Pool

Assembler. An entity continues to

qualify as a Pool Assembler so long as

it:

(1) Meets the eligibility standards in

paragraph (a) of this section;

(2) Conducts its business in

accordance with SBA regulations and

accepted securities or banking industry

practices, ethics, and standards; and

(3) Maintains its books and records in

accordance with generally accepted

accounting principles or in accordance

with the guidelines of the regulatory

body governing its activities.

§ 120.631 Suspension or termination of

eligibility of Pool Assembler.

(a) Suspension or termination. The

AA/FA may suspend a Pool Assembler

from operating in the Secondary Market

for up to 18 months or terminate its

eligibility, if the Pool Assembler (and/or

its Associates):

(1) Does not comply with any of the

requirements in § 120.630(a) and (c);

(2) Has been indicted or otherwise

formally charged with, or convicted of,

a misdemeanor or felony;

(3) Has received an adverse final civil

judgment that it has committed a breach

of trust or a violation of a law or

regulation protecting the integrity of

business transactions or relationships;

(4) Has not formed a Pool for at least

3 years; or

(5) Is under investigation by its

regulating authority for activities which

may affect its ability to participate in the

Secondary Market.

(b) Suspension procedures. The AA/

FA shall notify a Pool Assembler by

certified mail, return receipt requested,

of the decision to suspend and the

reasons therefore at least 10 business

days prior to the effective date of the

suspension. The Pool Assembler may

appeal the suspension made under this

section pursuant to the procedures set

forth in part 134 of this chapter. The

action of the AA/FA shall remain in

effect pending resolution of the appeal.

(c) Notice of termination. In order to

terminate a Pool Assembler’s eligibility,

the AA/FA must issue an order to show

cause why the SBA should not

terminate the Pool Assembler’s

participation in the Secondary Market.

The Pool Assembler may appeal the

termination made under this section
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pursuant to procedures set forth in part

134 of this chapter. The action of the

AA/FA shall remain in effect pending

resolution of the appeal.

Sale of Certificates

§ 120.640 Administration of the Pool and

individual guaranteed portions.

(a) FTA responsibility. The FTA has

the responsibility to administer each

Pool or individual guaranteed portion. It

shall maintain a registry of Registered

Holders and other information as SBA

requires.

(b) Self-liquidating. Each Pool or

individual guaranteed portion in the

Secondary Market is self-liquidating

because of Borrower payments or

prepayments, redemption by SBA, and/

or payments by SBA or the Lender after

default by the Borrower. There is no

substitution of the guaranteed portions

of existing loans for defaulted loans.

(c) SBA’s right to subrogation. If SBA

pays a claim under a guarantee with

respect to a Certificate issued under this

subpart, it must be subrogated fully to

the rights satisfied by such payment.

(d) SBA ownership rights not limited.

No Federal, State or local law can

preclude or limit the exercise by SBA of

its ownership rights in the portions of

loans constituting the Pool against

which the Certificates are issued.

§ 120.641 Disclosure to purchasers.

(a) Information to purchaser. Prior to

any sale, the Pool Assembler, Registered

Holder of a Certificate representing an

individual guaranteed portion, or any

subsequent seller must disclose to the

purchaser, either orally or in writing,

information on the terms, conditions,

and yield as described in the SBA

Secondary Market Program Guide.

(b) Information on transfer document.

The seller must provide the same

information described in paragraph (a)

of this section in writing on the transfer

document when the seller submits it to

the FTA. After the sale of an individual

Certificate, the FTA will provide the

disclosure information in writing to the

purchaser.

(c) Information in prospectus. If the

Registered Holder is a trust, investment

Pool, mutual fund or other security, it

must disclose the information in (a)

above to investors through a prospectus

and other promotional material if a

Certificate or Pool Certificate is placed

into or used as the backing for the

investment vehicle.

§ 120.642 Requirements before the FTA

issues Pool Certificates.

Before the FTA issues any Pool

Certificate, the Pool Assembler must

deliver to it the following documents:

(a) A properly completed Pool

application form;

(b) Either:

(1) Certificates evidencing the

guaranteed portions comprising the

Pool; or

(2) An executed SPGA and related

documentation for the loans whose

guaranteed portions are to be part of the

Pool; and

(c) Any other documentation which

SBA may require.

§ 120.643 Requirements before the FTA

issues the Certificate for an individual

guaranteed portion.

(a) FTA issuance of initial Certificate.

Before the FTA can issue the initial

Certificate for a particular guaranteed

portion, the original seller must provide

the following documents to the FTA:

(1) An executed SPGA;

(2) A copy of the note representing the

guaranteed loan; and

(3) Any other documentation which

SBA may require.

(b) Review of documentation. SBA

may review or require the FTA to

review any documentation before the

FTA issues a Certificate.

§ 120.644 Sale of individual SBA

guaranteed portion.

(a) Amount of Certificate. Each

Certificate which represents the

guaranteed portion of a single loan must

be for the entire amount of the

guaranteed portion.

(b) General rule on transferability of

Certificate. Each such Certificate is

transferable only on the books and

records of the FTA or SBA.

(c) Lender cannot purchase

guaranteed portion of loan it made. The

Lender (or its Associate) that made the

loan cannot purchase the guaranteed

portion in the Secondary Market. If a

Lender does purchase the guaranteed

portion of one of its own loans, it shall

not have the unconditional guarantee of

SBA.

(d) Prepayment or default. The

prepayment of the underlying loan or a

default on such loan will trigger the

redemption of the Certificate by FTA/

SBA in accordance with the procedures

prescribed in the SPGA.

§ 120.645 Transfers of Certificates.

(a) General rule. Certificates are

transferable. Transfers in the Secondary

Market must comply with Article 8 of

the Uniform Commercial Code of the

State of New York. The seller must use

the detached form of assignment (SBA

Form 1088), unless the seller and

purchaser choose to use another form

which the SBA approves. The FTA may

refuse to issue a Certificate until it is

satisfied that the documents of transfer

are complete.

(b) Transfer on FTA records. In order

for the transfer of a Certificate to be

effective the FTA or SBA must reflect it

on their records.

(c) Contents of letter of transmittal

accompanying the transfer of

Certificates. (1) A letter of transmittal

must accompany each Certificate which

a Registered Holder submits to the FTA

for transfer. The Registered Holder must

supply the following information:

(i) Pool number, if applicable;

(ii) Certificate number;

(iii) Name of purchaser of Certificate;

(iv) Address and tax identification

number of the purchaser;

(v) Name and telephone number of

the person handling or facilitating the

transfer;

(vi) Instructions for the delivery of the

new Certificate.

(2) With this information, the seller of

the Certificate must send the fee which

the FTA charges for this service. The

FTA will supply fee information to the

seller.

Fiscal and Transfer Agent (FTA)

§ 120.650 Registration duties of FTA in

Secondary Market.

The FTA registers all Certificates.

This means it issues, transfers title to,

and redeems them. All financial

transactions relating to a guaranteed

portion of a loan flow through the FTA.

The FTA must keep the central registry

current, using the following information

required for each registration:

(a) The Lender that made and sold the

loan;

(b) The interest rate paid by the

Borrower to the Lender (including

whether the rate is fixed or variable);

(c) The Lender’s servicing fee;

(d) The purchaser;

(e) The price paid by the purchaser;

(f) The interest rate paid on the

Certificate or Pool Certificate;

(g) The fees which the FTA charges to

register and issue Certificates; and

(h) Any other information which SBA

requires.

§ 120.651 Claim to FTA by Registered

Holder to replace Certificate.

(a) To replace a Certificate because of

loss, theft, destruction, mutilation, or

defacement, the Registered Holder must:

(1) Give the FTA information about

the Certificate and the facts relating to

the claim;

(2) File an indemnity bond acceptable

to SBA and the FTA with a surety to

protect the interests of SBA and the

FTA;

(3) Pay the FTA its fee to replace a

Certificate; and
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(4) Use an affidavit of loss (form

available from the FTA) to report:

(i) The name and address of the

Registered Holder (and the name and

capacity of any representative actually

filing the claim);

(ii) The Certificate by Pool number, if

applicable;

(iii) The Certificate number;

(iv) The original principal amount;

(v) The name in which the Certificate

was registered;

(vi) Any assignment, endorsement or

other writing on the Certificate; and

(vii) A statement of the circumstances

of the theft or loss.

(b) When the FTA receives notice of

the theft or loss, it will stop any transfer

of the Certificate. The Registered Holder

must send to the FTA all available

portions of a mutilated or defaced

Certificate. When the Registered Holder

completes these steps, the FTA will

replace the Certificate.

§ 120.652 FTA fees.

The FTA may charge reasonable

servicing fees, transfer fees, and other

fees as the SBA and FTA may negotiate

under contract.

Suspension or Revocation of

Participant in Secondary Market

§ 120.660 Suspension or revocation.

(a) Suspension or revocation of

Lender, broker, dealer, or Registered

Holder for violation of Secondary

Market rules and regulations. The AA/

FA may suspend or revoke the privilege

of a Lender, broker, dealer, or Registered

Holder to sell, purchase, broker, or deal

in loans or Certificates for:

(1) Committing a serious violation, in

SBA’s discretion, of:

(i) The rules and regulations of the

Secondary Market; or

(ii) Any provisions in the contracts

entered into by the parties, including

SBA Forms 1085, 1086, 1088 and 1454;

or

(2) Knowingly submitting false or

fraudulent information to the SBA or

FTA.

(b) Additional rules for suspension or

revocation of broker or dealer. In

addition to acting under paragraph (a) of

this section, the AA/FA may suspend or

revoke any broker or dealer from selling

or otherwise dealing in Certificates in

the Secondary Market if:

(1) Its supervisory agency has revoked

or suspended the broker or dealer from

engaging in the securities business, or is

investigating the firm or broker for a

practice which SBA considers, in its

sole discretion, to be relevant to the

broker’s or dealer’s fitness to participate

in the Secondary Market;

(2) The broker or dealer has been

indicted or otherwise formally charged

with a misdemeanor or felony which

bears on its fitness to participate in the

Secondary Market; or

(3) A final civil judgment is entered

holding that the broker or dealer has

committed a breach of trust or a

violation of any law or regulation

protecting the integrity of business

transactions or relationships.

(c) Notice to suspend or revoke. The

AA/FA shall notify the affected party in

writing, providing the reasons therefore,

at least 10 business days prior to the

effective date of the suspension or

revocation. The affected party may

appeal the suspension or revocation

made under this section pursuant to the

procedures set forth in part 134 of this

chapter. The action of the AA/FA shall

remain in effect pending resolution of

the appeal. Revocation shall last a

minimum of 5 years.

Subpart G—Microloan Demonstration

Program

§ 120.700 What is the Microloan Program?

(a) The Microloan Demonstration

Program assists women, low income

individuals, minority entrepreneurs,

and other small businesses (‘‘Microloan

Borrowers’’) who need smaller amounts

of financial assistance, but still have

limited access to credit. The program

has been authorized through September

30, 1997.

(b) Under this program, SBA makes

direct and guaranteed loans to

Intermediaries (as defined below) who

use the proceeds to make loans to

Microloan Borrowers. SBA also may

make grants to these Intermediaries to

be used for marketing, management, and

technical assistance to the Microloan

Borrowers.

(c) SBA also may make grants to

qualified non-profit entities, who are

not Intermediaries, to provide

marketing, management and technical

assistance to Microloan Borrowers

seeking to start or enlarge small

businesses.

(d) An Intermediary cannot operate in

more than one state unless the AA/FA

determines that it would be in the best

interests of the small business

community to operate across state lines.

§ 120.701 Definitions.

(a) Deposit account is a demand, time,

savings, passbook, or similar account

maintained with an insured depository

institution (not including an account

evidenced by a Certificate of Deposit).

(b) Economically Distressed Area is a

county or equivalent division of local

government of a state in which,

according to the most recent available

data from the United States Bureau of

the Census, 40 percent or more of the

residents have an annual income that is

at or below the poverty level.

(c) Grant is a Federal award of money,

or property in lieu of money (including

cooperative agreements) to an eligible

grantee that must account for its use.

The term does not include the provision

of technical assistance, revenue sharing,

loans, loan guarantees, interest

subsidies, insurance, direct

appropriations, or any fellowship or

other lump sum award.

(d) Insured depository institution has

the same meaning as in section 3(c) of

the Federal Deposit Insurance Act, 12

U.S.C. 1813(c).

(e) Intermediary is an entity

participating in the Microloan

Demonstration Program which has made

and serviced microloans to small

businesses for at least one year, and

which provides marketing,

management, and technical assistance to

its Microloan Borrowers. It may be:

(1) A private, nonprofit community

development corporation or other

entity;

(2) A consortium of private, nonprofit

community development corporations

or other entities;

(3) A quasi-governmental economic

development entity, other than a State,

county, municipal government or any

agency thereof; or

(4) An agency of or a non-profit entity

established by a Native American Tribal

Government.

(f) Microloan is a short-term, fixed

interest rate loan of not more than

$25,000 made by an Intermediary to an

eligible small business.

(g) Non-Federal sources are funds

acquired from sources other than the

Federal Government and may include

indirect costs or in-kind contributions

paid for under non-Federal programs.

(h) Specialized Intermediary means

an Intermediary which maintains a

portfolio of microloans averaging $7,500

or less.

§ 120.702 Are there limits on

Intermediaries or loans?

(a) SBA will not allow a quasigovernmental Intermediary to

participate in the program unless:

(1) No otherwise eligible organization

applies; or

(2) SBA determines that participation

by a quasi-governmental Intermediary is

in the public interest.

(b) In selecting Intermediaries, SBA

will give priority to Specialized

Intermediaries.

(c) SBA will not loan more than $2.5

million collectively per year to the
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Intermediaries operating in any one

State.

§ 120.703 How do I apply to become an

Intermediary?

(a) Application Process. SBA

periodically will solicit applications

from prospective Intermediaries in a

Program Announcement or Request For

Proposal informing you:

(1) Where to obtain an application

package;

(2) The deadline for submitting your

application;

(3) Where to deliver your completed

application.

(b) Documentation in support of your

application. Your application must

include a detailed narrative statement

describing:

(1) The types of businesses which you

have assisted in the past and those you

intend to assist with Microloans;

(2) The average size of the loans

which you have made in the past and

the average size of your intended

Microloans;

(3) The extent to which you will make

loans to small businesses in rural areas;

(4) The geographic area in which you

intend to operate, including a

description of the economic and

demographic conditions existing in your

intended area of operations;

(5) The availability and cost of

obtaining credit for small businesses in

your area;

(6) Your experience and qualifications

in providing marketing, management,

and technical assistance to small

businesses;

(7) Any plan you may have to use

other technical assistance (such as

counselors from the Service Corps of

Retired Executives) to help your

microloan borrowers.

(c) Evaluation. In evaluating

applications to become Intermediaries,

SBA shall select applicants that ensure

the appropriate availability of

Microloans for small businesses in all

industry and business sectors located in

both rural and urban areas.

§ 120.704 What is my financial

contribution?

You must contribute from nonFederal sources an amount equal to 15%

of any loan that you receive from SBA.

The contribution may not be borrowed.

§ 120.705 Microloan Revolving Fund.

You must establish a Microloan

Revolving Fund (‘‘MRF’’) in an interestbearing Deposit Account into which you

must deposit your contributions from

non-Federal sources, the proceeds from

SBA loans, and payments from your

Microloan Borrowers. You may only

withdraw from this account the money

needed to establish the Loan Loss

Reserve Fund (§ 120.706), proceeds for

each Microloan you make, and any

payments which you owe to SBA.

§ 120.706 Loan Loss Reserve Fund.

(a) General. You must establish a

Loan Loss Reserve Fund (‘‘LLRF’’) in an

interest-bearing Deposit Account. The

purpose of the LLRF is to account for

any shortage in the MRF caused by

delinquencies or losses on your

microloans. You must maintain the

LLRF until you have repaid all

obligations which you owe to SBA.

(b) Level of Loan Loss Reserve Fund

in first year. In your first year as an

Intermediary, the balance on deposit in

the LLRF must equal not less than 15%

of the total outstanding balance of all

notes receivable owed by your

Microloan Borrowers.

(c) Level of Loan Loss Reserve Fund in

subsequent years. In subsequent years as

an Intermediary, you must maintain a

balance on deposit in the LLRF at a

level which reflects your loss

experience as determined by SBA. The

maximum amount is 15% of the total

outstanding balance owed by your

Microloan Borrowers.

§ 120.707 What are the terms and

conditions of my Intermediary SBA loan?

(a) Loan Amount. You, together with

your affiliates, cannot borrow more than

$750,000 in the first year of your

participation in this program. In

subsequent years, your obligations owed

to SBA cannot exceed an aggregate of

$2,500,000.

(b) Repayment terms. During the first

year of your loan, you do not have to

make any payments, but interest accrues

from the date that SBA disburses the

loan proceeds to you. After that, SBA

will determine your periodic payments.

The loan must be repaid within 10

years.

(c) Interest rate. If you are a

Specialized Intermediary, your interest

rate is equal to the rate applicable to 5-

year obligations of the United States

Treasury, adjusted to the nearest oneeighth percent, less 2 percent;

otherwise, your interest rate is equal to

the rate applicable to 5-year obligations

of the United States Treasury, adjusted

to the nearest one-eighth percent, less

1.25 percent.

(1) In determining the applicable

interest rate, SBA will measure the

average size of the microloans for each

of your sites or offices. For purposes of

this section, the terms ‘‘office’’ or ‘‘site’’

shall mean a fixed, existing, geographic

location established at a specific

address.

(2) At the end of your first year of

participation in this program, SBA

determines whether your actual lending

practices qualify you as a Specialized

Intermediary. SBA then applies the

applicable interest rate retroactively

(making adjustments to interest accrued

on your loan).

(3) On the anniversary date of the first

year interest rate calculation (second

and all later years), SBA will determine

whether your cumulative actual lending

practices qualify you as a Specialized

Intermediary. SBA will apply the

applicable rate for that year.

(d) Collateral. As security for

repayment of your SBA loan, you must

pledge to SBA a first lien position in

your MRF, LLRF, and all notes

receivable from your Microloans.

(e) Default. If for any reason you are

unable to pay SBA when due, SBA may

accelerate maturity of your loan and

demand payment in full. In this event,

or if you violate this part or the terms

of your loan agreement, you must

surrender possession of all collateral

described in paragraph (d) of this

section to SBA. You are not obligated to

pay SBA any loss or deficiency which

may remain after liquidation of the

collateral unless the loss was caused by

your fraud, negligence, violation of any

of the ethical requirements of § 120.140,

or violation of any other provision of

this part.

(f) Fees. SBA does not charge you any

fees for a loan under this program. You

may, however, pay minimal closing

costs to third parties, such as filing and

recording fees.

§ 120.708 What conditions apply to my

loans to Microloan Borrowers?

(a) General. You may make

Microloans to any small business

eligible to receive financial assistance

under this Part. You may allow your

Borrower to use loan proceeds only for

working capital and acquisition of

materials, supplies, furniture, fixtures,

and equipment. You must exercise

prudent lending practices because SBA

will not review your Microloans for

creditworthiness.

(b) Amount and maturity. Generally,

you should not loan more than $10,000

to any Borrower. You may loan more

than $10,000 only if you are satisfied

that your Borrower is unable to obtain

financing on comparable terms

elsewhere and has good prospects for

success. You must not loan more than

$25,000 to any Borrower, including

affiliates. Each of your Microloans must

be repaid within 6 years.

(c) Interest rate. (1) The maximum

interest rate that you can charge your

Microloan Borrowers is:
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64393

(i) On loans of more than $7,500, the

interest rate charged on your SBA loan,

plus 7.75 percentage points;

(ii) On loans of $7,500 or less, the

interest rate charged on your SBA loan,

plus 8.5 percentage points.

(2) Until the determination of your

interest rate by SBA at the end of the

first year, you should quote Microloan

Borrowers two possible interest rates.

You may collect interest at the higher

rate. After your interest rate is

established at the end of your first year,

the actual interest rate for your

borrowers’ loans will be set and their

interest payments during the first year

adjusted.

§ 120.709 What records and reports does

SBA require?

You must operate in accordance with

applicable statutes, regulations, policy

notices, SBA’s Standard Operating

Procedures (SOPs), and the information

in your application. You must supply to

SBA current and accurate information

about all operational requirements, and

maintain records as required by SBA.

§ 120.710 How does an Intermediary get a

grant to assist Microloan Borrowers?

(a) General. If you receive a loan from

SBA, you are eligible to receive a grant

from SBA equal to 25 percent of the

outstanding balance of all loans made to

you by SBA. You must contribute,

solely from non-Federal sources, an

amount equal to 25 percent of the grant,

unless you make at least 50 percent of

your loans to small businesses located

in or owned by residents of an

Economically Distressed Area. If you

make at least 25 percent of your loans

to small businesses located in or owned

by residents of an Economically

Distressed Area, you will be eligible to

receive an additional grant from SBA

equal to 5 percent of the outstanding

balance of all loans which you have

received from SBA (with no obligation

to contribute additional matching

funds). You may not borrow your

contribution. You may only use grant

funds to provide your Microloan

Borrowers with marketing, management,

and technical assistance, except that

you may use up to 15 percent of the

grant funds to provide information and

technical assistance to prospective

Microloan Borrowers. You may not

contract to have any other person or

entity provide these services.

(b) Specialized Intermediary. If you

are a Specialized Intermediary, you are

eligible for an additional grant equal to

5 percent of the total outstanding

balance of all loans which you have

received from SBA. You are not

required to contribute additional

matching funds. You must use the grant

proceeds only for marketing,

management and technical assistance.

(c) Determining eligibility. SBA will

determine your eligibility for a grant

under this section separately for each

loan-making office or site. SBA will

measure the average size of your

Microloans for each site to see if you

qualify for the extra 5 percent.

§ 120.711 Does SBA provide technical

assistance to Intermediaries?

SBA may procure technical assistance

for an Intermediary to improve its

knowledge, skill, and understanding of

microlending by awarding a grant to a

more experienced Intermediary. SBA

may also obtain such assistance for

prospective Intermediaries in areas of

the country that are either underserved

or not served by an existing

Intermediary.

§ 120.712 How does a non-Intermediary

get a grant?

(a) Grant procedure for nonIntermediaries. Any nonprofit entity

that is not an Intermediary may apply to

SBA for a grant. To qualify, it must

submit information regarding its ability

to provide marketing, management, and

technical assistance to Microloan

Borrowers. If approved, the grant

agreement will establish the terms and

conditions of the grant.

(b) Number and amounts of grants. In

each year of the Microloan program,

SBA may make no more than 25 grants

to non-Intermediaries for terms of up to

5 years. A grant may not exceed

$125,000.

(c) Contribution by nonprofit entity.

The nonprofit entity must contribute an

amount equal to 20 percent of the grant.

The contribution from the nonprofit

entity shall come solely from nonFederal sources, and may include direct

costs or in-kind contributions paid for

under non-Federal programs.

§ 120.713 Does SBA guarantee any loans

an Intermediary obtains from another

source?

(a) SBA may guarantee not less than

90 percent of no more than 10 loans by

for-profit or non-profit entities (or an

alliance of such entities) to

intermediaries in urban areas and no

more than 10 loans by such entities to

intermediaries in Rural Areas.

(b) Any loan under this section shall

have a term of 10 years. If you receive

such a loan, you will not need to repay

any principal or interest during the first

year, although the interest will accrue.

During the second through fifth years,

you will pay interest only. During the

sixth through tenth years you will pay

interest and fully amortize the principal.

(c) The interest rate on any loan under

this section shall be calculated as

described in § 120.707.

Subpart H—Development Company

Loan Program (504)

§ 120.800 What is the purpose of the 504

program?

As authorized by Congress, SBA has

established this program to foster

economic development, create or

preserve job opportunities, and

stimulate growth, expansion, and

modernization of small businesses.

§ 120.801 How is a 504 Project financed?

A small business may apply for 504

financing through the CDC servicing the

area in which the business is located.

SBA issues an Authorization if it agrees

to guarantee part of the funding for a

Project. Usually, a Project requires

interim (construction) financing from an

interim lender (often the same lender

that later provides a portion of the

permanent financing). Generally,

permanent financing of the Project

consists of a private sector loan in the

amount of 50 percent of the Project costs

which is collateralized by a first lien on

the Project Property, a loan made with

the proceeds of a CDC Debenture in the

amount of 40 percent of the Project

costs, collateralized by a second lien on

the Project Property, and a contribution

by the small business in the amount of

10 percent of the Project costs. The

Debenture is guaranteed 100 percent by

SBA (with the full faith and credit of the

United States), and sold to Underwriters

who form Debenture Pools. Investors

purchase interests in Debenture Pools

and receive Certificates representing

ownership of all or part of a Debenture

Pool. SBA and CDCs use various agents

to facilitate the sale and service of the

Certificates and the orderly flow of

funds among the parties.

§ 120.802 Definitions.

The following terms have the same

meaning wherever they are used in this

subpart. Defined terms are capitalized

wherever they appear.

Area of Operations is a geographic

area in which a CDC conducts its

activities.

Associate Development Company

(ADC) is an entity approved by SBA to

assist CDCs to deliver 504 financing.

Central Servicing Agent (CSA) is an

entity that receives and disburses funds

among the various parties involved in

504 financing under a master servicing

agent agreement with SBA.

Certificate is a document issued by

SBA or its agent representing ownership

of all or part of a Debenture Pool.
64394 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

Debenture is an obligation issued by

a CDC and guaranteed 100 percent by

SBA, the proceeds of which are used to

fund a 504 loan.

Debenture Pool is an aggregation of

Debentures formed by an Underwriter.

Job Opportunity is a full time (or

equivalent) permanent job created

within two years of receipt of 504 funds,

or retained in the community because of

a 504 loan.

Net Debenture Proceeds are the

portion of Debenture proceeds that

finance eligible Project costs (excluding

administrative costs).

Project is the purchase or lease, and/

or improvement or renovation of longterm fixed assets by a small business,

with 504 financing, for use in its

business operations.

Project Property is one or more longterm fixed assets, such as land,

buildings, machinery, and equipment,

acquired or improved by a small

business, with 504 financing, for use in

its business operations.

Substantial Increase in

Unemployment is:

(1) A reduction of one-third or more

in the workforce of a relocating small

business; or

(2) An increase in unemployment in

a redevelopment area (as designated by

the Department of Commerce), a Labor

Surplus Area (designated by the

Department of Labor), or in an area

which has an unemployment rate at

least 20 percent higher than the national

average.

Third Party Loan is a loan from a

commercial or private lender, investor,

or Federal (non-SBA), State or local

government source obtained by the

Borrower as part of the Project

financing.

Underwriter is an entity approved by

SBA to form Debenture Pools and

arrange for the sale of Certificates.

Certificaiton Procedures To Become a

CDC

§ 120.810 Applications for certification as

a CDC.

(a) Applicants for certification as a

CDC must apply to the SBA District

Office serving a proposed Area of

Operations. An applicant must

demonstrate that it satisfies the

certification and operating criteria in

§§ 120.820–120.829, as well as:

(1) The need for 504 services (if there

is already a CDC in the Area of

Operations, the applicant must justify

the need for another and present a plan

to avoid duplication or overlap);

(2) A budget, approved by its Board of

Directors; and

(3) A plan to meet CDC operating

requirements (without specializing in a

particular industry).

(b) The AA/FA, with the

recommendation of each District Office

in the applicant’s proposed Area of

Operations, shall make the certification

decision.

§ 120.811 Public notice of CDC

certification application.

(a) As part of the application process,

the applicant must publish a notice in

a general circulation newspaper in the

proposed Area of Operations, including

the name and location of the proposed

CDC, its purpose and Area of

Operations, and the names of its officers

and directors. The applicant shall send

a copy of the notice to SBA. The notice

shall provide the public at least 30 days

to submit written comments to the

District Office. The SBA shall consider

the comments in making its decision on

the application.

(b) CDCs serving the proposed Area of

Operations shall be directly notified and

given at least 30 days to comment.

§ 120.812 Probationary period for newly

certified CDCs.

(a) Newly certified CDCs will be on

probation for a period of two years, at

the end of which the CDC must petition

for:

(1) Permanent CDC status;

(2) A single, one-year extension of

probation; or

(3) ADC status.

(b) SBA shall consider failure to file

a petition before the end of the

probationary period as a withdrawal

from the 504 program. If the CDC elects

ADC status or withdrawal, it must

transfer all funded and/or approved

loans to another CDC, SBA, or another

servicer approved by SBA.

Requirements for CDC Certification and

Operation

§ 120.820 CDC non-profit status.

A CDC must be a non-profit

corporation (or limited liability

company) in good standing. (For-profit

CDCs certified by SBA prior to January

1, 1987 may retain their certifications.)

An SBIC may not become a CDC.

§ 120.821 CDC Area of Operations.

A CDC must have a designated Area

of Operations, specified by the CDC and

approved by SBA. There can be only

one statewide CDC in each state, which

must foster economic development

throughout the state and provide 504

assistance to areas not adequately

served by other CDCs.

§ 120.822 CDC membership.

A CDC must have at least 25 members

(or stockholders for for-profit CDCs

approved prior to January 1, 1987). No

person or entity may own or control

more than 10 percent of the CDC’s

voting membership (or stock). Members

must be representative of and provide

evidence of active support in the Area

of Operations. Members must be from

each of the following groups:

(a) Government organizations

responsible for economic development

in the Area of Operations and

acceptable to SBA;

(b) Financial institutions that provide

commercial long-term fixed asset

financing in the Area of Operations;

(c) Community organizations

dedicated to economic development in

the Area of Operations such as

chambers of commerce, foundations,

trade associations, colleges, or

universities; and

(d) Businesses in the Area of

Operations.

§ 120.823 CDC board of directors.

The CDC must have a Board of

Directors chosen from the membership

by the members, and representing at

least three of the four membership

groups. No single group shall control.

The Board members must be responsible

officials of the organizations they

represent, and at least one must possess

commercial lending experience. The

Board must meet at least quarterly and

shall be responsible for CDC staff

decisions and actions. A quorum shall

require at least 5 Directors. If there is a

vote on loan approval or servicing

actions, at least one Board member with

commercial loan experience approved

by SBA must be present and vote. As an

alternative, the Board may obtain the

recommendation of another person

approved by SBA and possessing

commercial lending experience.

§ 120.824 Professional management and

staff.

A CDC must have full-time

professional management, including an

Executive Director (or the equivalent)

managing daily operations. It must also

have a full-time professional staff

qualified by training and experience to

market the 504 Program, package and

process loan applications, close loans,

service the loan portfolio, and sustain a

sufficient level of service and activity in

the Area of Operations.

(a) Contracting out to third parties.

CDCs may obtain, under contract,

marketing, packaging, processing, and

servicing services from qualified Service

Providers located in the Area of

Operations, subject to SBA’s prior
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written approval. CDCs may contract for

outside legal and accounting services

without SBA approval. Compensation

under all such contracts must be

reasonable and customary for similar

services in the Area of Operations. SBA

may audit the contracts.

(b) Contracting out to other CDCs.

CDCs may contract with other CDCs for

specific services, subject to SBA’s prior

written approval.

§ 120.825 Financial ability to operate.

A CDC must be able to sustain its

operations continuously, with reliable

sources of funds (such as income from

services rendered and contributions

from government or other sponsors).

§ 120.826 Basic requirements for

operating a CDC.

A CDC must operate in accordance

with applicable statutes, regulations,

policy notices, SBA’s Standard

Operating Procedures (SOPs), and the

information in its application. 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.

§ 120.827 Services a CDC provides to

small businesses.

(a) A CDC must operate in and

adequately service its Area of

Operations. It must market the 504

program, package and process 504 loan

applications, and close and service 504

loans. A CDC’s loan portfolio must be

diversified by business sector.

(b) A CDC may help small businesses

obtain financial and technical assistance

from other sources, including preparing,

closing, and servicing loans under

contract with Lenders in SBA’s 7(a)

program.

(c) A CDC also may loan amounts to

the Borrower equal to the value of all or

part of the Borrower’s contribution to a

Project in the form of cash or land,

including site improvements, previously

acquired by the CDC.

§ 120.828 The minimum level of CDC

lending activity.

Each full fiscal year, a CDC must

provide at least the minimum number of

504 Loans set by SBA in an annual

program announcement.

§ 120.829 The Job Opportunity average a

CDC must maintain.

(a) A CDC’s portfolio must reflect an

average of one Job Opportunity per

$35,000 of 504 loan funding. The AA/

FA may permit a CDC to average up to

one per $45,000 for good cause in:

(1) Alaska;

(2) Hawaii;

(3) Redevelopment areas as defined in

42 U.S.C. 3161;

(4) State designated urban jobs and

enterprise zones;

(5) Empowerment Zones and

Enterprise Communities; and

(6) Labor Surplus Areas listed in the

Department of Labor’s publication

‘‘Area Trends’’.

(b) A CDC must indicate in its annual

report the Job Opportunities actually or

estimated to be provided by each

Project.

(c) If a CDC does not maintain the

required average, it may retain its

certification if it justifies to SBA’s

satisfaction its failure to do so in its

annual report and shows how it intends

to attain the required average.

§ 120.830 Reports a CDC must submit.

A CDC must submit the following

reports to SBA:

(a) An annual report within 90 days

after the end of the CDC’s fiscal year,

and such interim reports as SBA may

require;

(b) Resumes for all new Associates

and staff;

(c) Reports of involvement in any

legal proceeding;

(d) Changes in organizational status;

(e) Changes in any condition that

affects its eligibility to continue to

participate in the 504 program; and

(f) Quarterly service reports on each

loan in its portfolio which is 60 days or

more past due (and interim reports upon

request by SBA).

§ 120.831 Disclosure of referral fees or

other payments by or to a CDC.

The CDC must disclose to SBA and

the Borrower any referral fees,

remuneration, or payment made by the

CDC to or received by the CDC from the

Lender or any other party to the 504

transaction.

Extending a CDC’s Area of Operations

§ 120.835 Application to extend an Area of

Operations.

SBA may expand a CDC’s Area of

Operations for good cause shown

including a showing that the proposed

Area of Operations is not being served

adequately by the existing CDCs and

that the expanding CDC is wellqualified to serve it. SBA shall not

consider an Area of Operations

adequately served if the existing CDCs

in the Area of Operation have not

averaged, over the last two fiscal years,

sufficient loan approvals for the

population in the CDC’s Area of

Operations, as set by SBA in an annual

program announcement. The CDC must

apply in writing to the SBA District

Office serving the geographic area in

which the CDC proposes to expand. The

District Office shall submit its

recommendation to the AA/FA for final

decision.

§ 120.836 Public notice of application for

extension.

SBA must notify all CDCs servicing

the proposed area of expansion,

allowing at least 30 days for comment.

The CDC also must publish a notice in

a general circulation newspaper in the

proposed area of expansion, giving the

public at least 30 days to comment.

§ 120.837 Expiration of existing, temporary

expansions.

All existing, temporary expansions of

Areas of Operation shall expire 6

months after the effective date of the

final regulations, unless a CDC applies

for permanent expansion before the

expiration date.

§ 120.838 Case by case extensions.

(a) A CDC may apply to make an

individual loan for a Project outside its

Area of Operations in an area not

adequately served by other CDCs to the

District Office serving the area in which

the Project will be located. The District

Director may approve the request for

good cause shown.

(b) A Borrower may request the

services of a CDC not presently

servicing its area by writing to the AA/

FA.

Accredited Lenders Program (ALP)

§ 120.840 Accredited Lenders Program.

The SBA may designate a CDC as an

Accredited Lender. SBA will provide an

Accredited Lender with expedited loan

processing or servicing action (within

three days of receiving a completed

application).

(a) Applications. CDCs may apply to

the SBA field office with which it is

most active. The SBA office will send its

recommendation and the application to

the AA/FA.

(b) Eligibility. SBA will consider the

CDC’s ability to work with the local

SBA office and the quality of past

performance.

(c) Term of designation. CDCs will be

designated as ALPs for a two year

period, and are eligible to renew the

designation for additional two year

periods.

(d) Suspension and revocation. The

AA/FA may suspend or revoke ALP

designation upon written notice stating

the reasons therefore at least 10 business

days prior to the effective date of the

suspension or revocation. Reasons for

suspension or revocation may include

loan performance unacceptable to SBA

or violations of applicable statutes,
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regulations or published SBA policies

and procedures. An ALP may appeal the

suspension or revocation made under

this section pursuant to the procedures

set forth in part 134 of this chapter. The

action of the AA/FA shall remain in

effect pending resolution of the appeal.

Premier Certified Lenders Program

§ 120.845 Premier Certified Lenders

Program.

The SBA has established a pilot

program to designate a number of CDCs

as Premier Certified Lenders (‘‘PCLPs’’),

which will be able to process, approve,

close and service 504 loans.

(a) Characteristics. Loans processed

through the PCL Program will be subject

to the same provisions as other 504

loans, including final approval by SBA.

(b) Applications. A CDC may obtain

information concerning this program

from SBA’s Office of Pilot Operations in

Washington, D.C. A CDC may apply to

the SBA field office with which it is

most active. The SBA office will send

the application with a recommendation

to the AA/FA.

(c) Eligibility. SBA will consider the

CDC’s ability to work with the local

SBA office and the quality of past

performance.

(d) Loss reserve. A PCLP must

establish a loss reserve, secured by its

segregated assets in favor of SBA, in the

amount of the PCLP’s historic loss rate

or 10 percent of its exposure under the

PCLP program, whichever is greater.

The PCLP must contribute to the loss

reserve every time a Debenture is

issued, in intervals set by SBA.

(e) Review. The SBA shall review a

PCLP’s financings at least annually.

(f) Suspension and revocation. The

AA/FA may suspend or revoke PCLP

designation upon written notice stating

the reasons therefore at least 10 business

days prior to the effective date of the

suspension or revocation. Reasons for

suspension or revocation may include

loan performance unacceptable to SBA,

failure to meet loss reserve or eligibility

criteria, or violations of applicable

statutes, regulations or published SBA

policies and procedures. A PCLP may

appeal the suspension or revocation

made under this section pursuant to the

procedures set forth in part 134 of this

title. The action of the AA/FA shall

remain in effect pending resolution of

the appeal.

(g) Program period. On October 1,

1997, the PCLP pilot program ends.

Associate Development Companies

(ADCs)

§ 120.850 ADC functions.

(a) An ADC must support local

economic development efforts. An ADC

may package, close, and service loans

for a CDC under a written contract

approved by SBA. Such contracts must

meet Service Provider criteria, and

specify the rights and responsibilities of

the parties (including payment terms).

The CDC remains solely responsible to

SBA for the processing, closing, and

servicing of the loan. It may not charge

the Borrower a higher fee because it is

using the ADC’s services.

(b) An ADC must operate in

accordance with statutes, regulations,

policy notices, SBA’s Standard

Operating Procedures (SOPs), and the

information in its application. It must

supply to SBA current and accurate

information about all certification and

operational requirements, and maintain

the records required by SBA.

§ 120.851 ADC eligibility and operating

requirements.

(a) An ADC must demonstrate to SBA

and maintain the following:

(1) Adequate management ability;

(2) A Board of Directors meeting at

least quarterly and chosen from the

membership by the members;

(3) A professional staff, including at

least one qualified full-time professional

with small business lending experience

available during regular business hours;

and

(4) A budget or financial statements

showing the financial capability and

funding to sustain continuing

operations.

(b) An ADC may contract out for staff

services only if SBA gives prior

approval. The contract, subject to SBA

audit, may not be self-serving, and

compensation must be reasonable and

customary.

§ 120.852 Suspension and revocation of

ADCs.

SBA may require corrective action, or

the AA/FA may suspend or revoke ADC

status upon written notice stating the

reasons therefore at least 10 business

days prior to the effective date of the

suspension or revocation. Reasons for

suspension or revocation may include

violations of applicable statutes,

regulations or published SBA policies

and procedures. An ADC may appeal

the suspension or revocation made

under this section pursuant to the

procedures set forth in part 134 of this

chapter. The action of the AA/FA shall

remain in effect pending resolution of

the appeal.

Ethical Requirements

§ 120.855 CDC and ADC ethical

requirements.

CDCs and ADCs and their Associates

must act ethically and exhibit good

character. They must meet all of the

ethical requirements of § 120.140. In

addition, they are subject to the

following:

(a) Any benefit flowing to an

Associate or the Associate’s employer

from the Associate’s activities as an

Associate shall be merely incidental

(this requirement does not prevent an

Associate or an Associate’s employer

from engaging in a business relationship

with the CDC and/or the Borrower in

the regular course of business, including

providing interim financing or ThirdParty loans); and

(b) Unless waived by SBA, an

Associate may not be an officer,

director, or manager of more than one

CDC or ADC (except that the

membership or Board of Directors of a

broader-based CDC may include a

member or director of a local CDC

within its Area of Operations).

Project Economic Development Goals

§ 120.860 Required objectives.

A Project must achieve at least one of

the economic development objectives

set forth in § 120.861 or § 120.862.

§ 120.861 Job creation or retention.

A Project must create or retain one Job

Opportunity for every $35,000

guaranteed by SBA.

§ 120.862 Other economic development

objectives.

A Project that achieves any of the

following community development or

public policy goals is eligible if the

CDC’s overall portfolio of 504 loans,

including the subject loan, meets or

exceeds the CDC’s required Job

Opportunity average. Applications for

assistance must indicate how the Project

will meet the specified economic

development objective.

(a) Community Development goals:

(1) Improving, diversifying or

stabilizing the economy of the locality;

(2) Stimulating other business

development;

(3) Bringing new income into the

community; or

(4) Assisting manufacturing firms

(Standard Industrial Classification

Manual (SIC) Codes 20–49).

(b) Public Policy goals:

(1) Revitalizing a business district of

a community with a written

redevelopment plan;

(2) Expanding exports;

(3) Expanding Minority Enterprise

development (See § 124.103(b) of this

chapter.);

(4) Aiding rural development;

(5) Increasing productivity and

competitiveness (retooling, robotics,

modernization, competition with

imports);
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(6) Modernizing or upgrading

facilities to meet health, safety, and

environmental requirements;

(7) Assisting businesses affected by

Federal budget reductions, such as base

closings; or

(8) Assisting businesses in Labor

Surplus Areas as defined by the

Department of Labor.

Leasing Policies Specific to 504 Loans

§ 120.870 Leasing Project Property.

(a) A Borrower may use the proceeds

of a 504 loan to acquire, construct, or

modify buildings and improvements,

and/or to purchase and install

machinery and equipment located on

land leased to the Borrower by the CDC

or an unrelated lessor if:

(1) The remaining term of the lease,

including options to renew, exercisable

solely by the lessee, equals or exceeds

the term of the Debenture, or, in the case

of machinery or equipment, equals or

exceeds the useful life of the property or

the term of the Debenture, whichever is

lesser;

(2) The Borrower assigns its interest

in the lease to the CDC with right of

reassignment to SBA; and

(3) The 504 loan is secured by a

recorded lien against the leasehold

estate and other collateral as necessary.

(b) If a CDC leases property to a small

business, the rent paid by the small

business during the term of the

Debenture must be enough to pay

principal and interest on all debt

incurred by the CDC to finance the

Project, and all related expenses. The

rent also may include a reasonable

return on the CDC’s investment.

§ 120.871 Leasing part of a new

construction Project to another business.

If a Project is the construction of a

new building, a Borrower may lease up

to 33% of the square footage of the

rentable property (total square footage of

all buildings or facilities used for

business operations) for a short term to

any third party if reasonable growth

projections show that the Borrower will

need additional space within three years

and will use all of the additional space

within ten years. If the Borrower is an

Eligible Passive Company leasing 100

percent of the Project space to an

Operating Company, the Operating

Company may sublease up to 33 percent

to a third party under the same

conditions.

§ 120.872 Leasing part of an existing

building to another business.

If a Project involves the acquisition,

renovation, or reconstruction of an

existing building, the Borrower (or

Operating Company) must occupy at

least 51 percent of the Rentable

Property. The balance of the Rentable

Property may be leased out to any third

party, if the 504 loan proceeds were not

used to remodel or convert the space to

be leased out. The costs of interior

finishing of the space to be leased out

are not eligible Project costs, and thirdparty loan proceeds used to renovate the

leased space shall not count towards the

504 first mortgage requirement or the

Borrower’s contribution.

Loan-Making Policies Specific to 504

Loans

§ 120.880 Basic eligibility requirements.

In addition to the eligibility

requirements specified in subpart A, to

be an eligible Borrower for a 504 loan,

a small business must:

(a) Use the Project Property (except

for loans to Passive Companies); and

(b) Together with its affiliates, meet

one of the following size standards:

(1) It does not have a net worth in

excess of $6 million, and does not have

an average net income after Federal

income taxes (excluding any carry-over

losses) for the preceding two years in

excess of $2 million; or

(2) It meets the size standards in Part

121 of this chapter for the industry in

which it is primarily engaged.

§ 120.881 Ineligible Projects for 504 loans.

In addition to the ineligible

businesses and uses of proceeds

specified in subpart A of this part, the

following Projects are ineligible for 504

financing:

(a) Relocation of any of the operations

of a small business which will cause a

Substantial Increase in Unemployment,

unless the CDC can justify the loan

because:

(1) The relocation is for key economic

reasons and crucial to the continued

existence, economic wellbeing, and/or

competitiveness of the applicant; and

(2) The economic development

benefits to the applicant and the

receiving community outweigh the

negative impact on the community from

which the applicant is moving;

(b) Projects in foreign countries (loans

financing real or personal property

located outside the United States or its

possessions); and

(c) Speculative Projects (such as oil

wildcatting).

§ 120.882 Eligible Project costs for 504

loans.

Eligible Project costs which may be

paid with the proceeds of 504 loans are:

(a) Costs directly attributable to the

Project including expenditures incurred

by the Borrower (with its own funds or

from a loan):

(1) To acquire land used in the Project

prior to applying to SBA for the 504

loan; or

(2) For any other expense toward a

Project within six months of receipt by

SBA of a complete loan application;

(b) In construction Projects, a

contingency reserve for cost overruns

not to exceed 10 percent of construction

cost;

(c) Professional fees directly

attributable and essential to the Project,

such as title insurance, architecture,

engineering, accounting, legal fees and

environmental studies; and

(d) Repayment of interim financing

including points, fees and interest.

§ 120.883 Eligible administrative costs for

504 loans.

The following costs and fees are not

part of Project costs but may be paid

with the proceeds of the 504 loan and

the Debenture:

(a) SBA guarantee fee;

(b) Funding fee (to cover cost of

public issuance of securities);

(c) CDC processing fee;

(d) Closing costs, including legal fees;

and

(e) Underwriters fee.

§ 120.884 Ineligible costs for 504 loans.

Costs not directly attributable and

necessary for the Project may not be

paid with proceeds of the 504 loan.

These include, but are not limited to,

the following:

(a) Debt refinancing (other than

interim financing);

(b) Third-Party Loan fees

(commitment, broker, finders,

origination, processing fees of

permanent financing);

(c) Ancillary business expenses, such

as:

(1) Working capital;

(2) Counseling or management

services fees;

(3) Incorporation/organization costs;

(4) Franchise fees; and

(5) Advertising;

(d) Non fixed-asset project

components, such as:

(1) Short-term equipment, furniture,

and furnishings (unless essential to and

a minor portion of the Project);

(2) Automobiles, trucks, and

airplanes; and

(3) Construction equipment (except

for heavy duty construction equipment

integral to a business’ operations and

meeting the IRS definition of capital

equipment).

Interim Financing

§ 120.890 Source of interim financing.

A Project may use interim financing

for all Project costs except the
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Borrower’s contribution. Any source

(including a CDC) may supply interim

financing provided:

(a) The financing is not derived from

any SBA program, directly or indirectly;

(b) The terms and conditions of the

financing are acceptable to SBA;

(c) The source is not the Borrower or

an Associate of the Borrower; and

(d) The source has the experience and

qualifications to monitor properly all

construction and progress payments. (If

the source lacks such experience or

qualifications, SBA may require the

interim loan to be managed by a third

party such as a bank or professional

construction manager.)

§ 120.891 Certifications of disbursement

and completion.

Before the Debenture is issued, the

interim lender must certify that the

interim financing has been disbursed in

a manner consistent with the terms of

the Authorization. Also, the CDC must

certify that the Project was completed in

accordance with the final plans and

specifications (except as provided in

§ 120.962).

§ 120.892 Certifications of no adverse

change.

Following completion of the Project,

the following certifications must be

made before the 504 loan closing:

(a) The interim lender must certify to

the CDC that it has no knowledge of any

adverse change in the condition of the

small business since the application;

(b) The Borrower (or Operating

Company) must certify to the CDC that

there has been no adverse change in its

financial condition or its ability to repay

the 504 loan since the date of

application, and must furnish interim

financial statements, current within 90

days of closing; and

(c) The CDC must issue an opinion to

the best of its knowledge that there has

been no adverse change in the

Borrower’s (or Operating Company’s)

ability to repay the 504 loan since SBA’s

approval of the loan application.

Permanent Financing

§ 120.900 What are the sources of

permanent financing?

Permanent financing for each Project

must come from three sources: the

Borrower’s contribution, Third-Party

Loans, and the 504 loan. Typically, the

Borrower contributes 10 percent of the

permanent financing, Third-Party Loans

50 percent and the 504 loan 40 percent.

The Borrower’s Contribution

§ 120.910 How much must the Borrower

contribute?

The Borrower must contribute to the

Project cash (or property acceptable to

SBA obtained with the cash) or land

(that is part of the Project Property)

valued at 10 percent or more of the

Project cost (exclusive of administrative

cost). The source of the contribution

may be a CDC or any other source

except an SBA business loan program

(see § 120.913 for SBIC exception).

§ 120.911 Land contributions.

The Borrower’s contribution may be

land, including site improvements,

previously acquired by the Borrower or

the CDC. The amount of the

contribution shall be the value of the

contributor’s equity in the land,

excluding the value of any structures,

under SBA’s policy guidelines.

§ 120.912 Borrowed contributions.

The Borrower may borrow its cash

contribution from the CDC or a third

party. If any of the contribution is

borrowed, the interest rate must be

reasonable. If the loan is secured by any

of the Project assets, the loan must be

subordinate to the liens securing the 504

Loan, and the loan may not be repaid at

a faster rate than the 504 Loan unless

SBA gives prior written approval. A

third party lender may not receive

voting rights, stock options, or any other

actual or potential voting interest in the

small business.

§ 120.913 May an SBIC provide the

contribution?

Subject to part 107 of this chapter,

SBIC’s may provide financing for all or

part of the Borrower’s contribution to

the project. SBA shall consider SBIC

funds to be derived from federal sources

if the SBIC has leverage (as defined in

part 107 of this chapter). If the SBIC

does not have leverage, the investment

will be considered to be from private

funds. SBIC financing must be

subordinated to the 504 loan and may

not be repaid at a faster rate than the

Debenture.

Third Party Loans

§ 120.920 The first lien position.

The Borrower must obtain one or

more Third Party Loans totaling at least

as much as the 504 loan. Third Party

Loans usually have the first lien

position. They cannot be guaranteed by

SBA.

§ 120.921 Terms of Third Party loans.

(a) Maturity. A Third Party Loan must

have a term of at least 7 years when the

504 loan is for a term of 10 years and

10 years when the 504 loan is for 20

years. If there is more than one Third

Party Loan, an overall loan maturity

must be calculated, taking into account

the maturities and amounts of each

loan. If there is a balloon payment, it

must be justified in the loan report and

clearly identified in the Loan

Authorization.

(b) Interest rates. Interest rates must

be reasonable. SBA must establish and

publish in the Federal Register a

maximum interest rate for any Third

Party Loan from commercial financial

institutions. The rate shall remain in

effect until changed.

(c) Other terms. The Third Party Loan

must not have any early call feature or

contain any demand provisions unless

the loan is in default. By participating,

a Third Party Loan lender waives, as to

the CDC/SBA financing, any provision

in its deed of trust, or mortgage, or other

documents prohibiting further

encumbrances or subordinate debt. In

the event of default, the Third Party

Lender must give the CDC and SBA

written notice of default within 30 days

of the event of default and at least 60

days prior to foreclosure.

§ 120.922 Pre-existing debt on the Project

Property.

In addition to its share of Project cost,

a Third Party Loan may include

consolidation of existing debt on the

Project Property. The consolidation

must not improve the lien position of

the Lender on the pre-existing debt,

unless the debt is a previous Third Party

Loan.

§ 120.923 What are the policies on

subordination?

(a) Financing provided by the seller of

Project Property must be subordinate to

the 504 loan. SBA may waive the

subordination requirement if the

property is classified as ‘‘other real

estate owned’’ by a national bank or

other Federally regulated lender and

SBA considers the property to be of

sufficient value to support the 504 loan.

(b) By participating, Third Party Loan

lienholders subordinate to the CDC/SBA

lien future advances in excess of the

Third Party Loans except expenditures

for collection, maintenance, and

protection of the Third Party Loan

lienholder’s lien position.

(c) A Borrower is eligible for a 504

loan even if part of the Project financing

is tax-exempt. SBA’s lien position must

not be subordinate to loans made from

the proceeds of the tax-exempt

obligation.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64399

§ 120.924 Prepayment of subordinate

financing.

The Borrower must not prepay any

Project financing subordinate to the 504

loan without SBA’s prior written

consent.

§ 120.925 Preferences.

No Third Party Lender shall establish

a Preference.

504 Loans and Debentures

§ 120.930 Amount.

(a) Generally, a 504 loan may not

exceed 40 percent of total Project cost

plus 100 percent of eligible

administrative costs. For good cause

shown, SBA may authorize an increase

in the percentage of Project costs

covered up to 50 percent. No more than

50 percent of eligible Project costs can

be from Federal sources, whether

received directly or indirectly through

an intermediary.

(b) Generally, the minimum 504 loan

must be $50,000, although, upon good

cause shown, SBA may permit a 504

loan as small as $25,000. The amount of

the Debenture must equal the amount of

the 504 Loan. If the cost of the

completed Project is less than 98

percent of the authorized Debenture

amount, the amount of the Debenture to

be issued shall be reduced by the

difference. If the cost of the completed

project is at least 98 percent of the

authorized Debenture amount, the full

authorized amount of the Debenture

shall be disbursed.

§ 120.931 504 lending limits.

The outstanding balance of all SBA

financial assistance to a Borrower and

its affiliates under the 504 program

covered by this Part must not exceed

$750,000 ($1,000,000 if one or more of

the public policy goals enumerated in

§ 120.861(b) applies to the Project).

§ 120.932 Interest rate.

The interest rate of the 504 Loan and

the Debenture which funds it is set by

the Underwriter and approved by the

Secretary of the Treasury. Each 504 loan

must have a fixed interest rate.

§ 120.933 Maturity.

The term of a 504 Loan and the

Debenture which funds it shall be either

10 or 20 years.

§ 120.934 Collateral.

The CDC/SBA takes at least a second

lien position on the Project collateral. In

rare circumstances, collateral other than

the Project collateral may be accepted

by SBA. Sometimes secondary collateral

is required. All collateral must be

insured against such hazards and risks

as SBA may require, with provisions for

notice to SBA and the CDC in the event

of impending lapse of coverage.

§ 120.935 Deposit.

At the time of application for a 504

loan, the CDC may require a deposit

from the Borrower of $2,500 or 1

percent of the Net Debenture Proceeds,

whichever is less. The deposit may be

applied to the loan processing fee if the

application is accepted, but must be

refunded if the application is denied. If

the small business withdraws its

application, the CDC may deduct from

the deposit reasonable costs incurred in

packaging and processing the

application.

§ 120.936 Subordination to CDC.

SBA, in its sole discretion, may

permit subordination of the Debenture

to any other obligation of the CDC,

except debt incurred by the CDC to

obtain funds to loan to the Borrower for

the Borrower’s required contribution to

the Project financing.

§ 120.937 Assumption.

A 504 loan may be assumed with

SBA’s prior written approval.

§ 120.938 Default.

(a) Upon occurrence of an event of

default specified in the 504 note which

requires automatic acceleration, the note

becomes due and payable. Upon

occurrence of an event of default which

does not require automatic acceleration,

SBA may forbear acceleration of the

note and attempt to resolve the default.

If the default is not cured subsequently,

the note shall be accelerated. In either

case, upon acceleration of the note, the

Debenture which funded it is also due

immediately, and SBA must honor its

guarantee of the Debenture. SBA shall

not reimburse the investor for any

premium paid.

(b) If a CDC defaults on a Debenture,

SBA generally shall limit its recovery to

the payments made by the small

business to the CDC on the loan made

from the Debenture proceeds, and the

collateral securing the defaulted loan.

However, SBA will look to the CDC for

the entire amount of the Debenture in

the case of fraud or negligence by the

CDC.

§ 120.939 Borrower prohibition.

Neither a 504 loan recipient nor its

Small Business Associate may purchase

the Debenture that funded its 504 loan.

§ 120.940 Prepayment of the 504 loan or

Debenture.

The Borrower may prepay its 504

loan, if it pays the entire principal

balance, unpaid interest, any unpaid

fees, and any prepayment premium

established in the note. If the Borrower

prepays, the CDC must prepay the

corresponding Debenture with interest

and premium. If one of the Debentures

in a Debenture Pool is prepaid,

Certificate holders must be paid pro

rata, and SBA’s guarantee on the entire

Debenture Pool must be proportionately

reduced. If the entire Debenture Pool is

paid off, SBA may call all Certificates

backed by the Pool for redemption.

§ 120.941 Certificates.

(a) The face value of a Certificates

must be at least $25,000. Certificates are

issued in registered form and transferred

only by entry on the central registry

maintained by the Trustee. No transfer

may take place within 10 business days

of a payment date. SBA guarantees the

timely payment of principal and interest

on the Certificates.

(b) Before the sale of a Certificate, the

seller, or the broker or dealer acting as

the seller’s agent, must disclose to the

purchaser the terms, conditions, yield,

and premium and other characteristics

not guaranteed by SBA.

Debenture Sales and Service Agents

§ 120.950 SBA and CDC must appoint

agents.

SBA and the CDC must appoint the

following agents to facilitate the sale

and service of the Certificates and

disbursement of the proceeds.

§ 120.951 Selling agent.

The CDC, with SBA approval, shall

appoint a Selling Agent to select

underwriters, negotiate the terms and

conditions of Debenture offerings with

the underwriters, and direct and

coordinate Debenture sales.

§ 120.952 Fiscal agent.

SBA shall appoint a Fiscal Agent to

assess the financial markets, minimize

the cost of sales, arrange for the

production of the Offering Circular,

Debenture Certificates, and other

required documents, and monitor the

performance of the transfer agent and

the underwriters.

§ 120.953 Trustee.

SBA must appoint a Trustee (known

as a Transfer Agent for the December

l986 Debenture sale) to:

(a) Issue Certificates;

(b) Transfer the Certificates upon

resale in the secondary market;

(c) Maintain physical possession of

the Debentures for SBA and the

Certificate holders;

(d) Establish and maintain a central

registry of:
64400 Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules

(1) Debenture Pools, including the

CDC obligors and the interest rate

payable on the Debentures in each Pool;

(2) Certificates issued or transferred,

including the Debenture Pool backing

the Certificate, name and address of the

purchaser, price paid, the interest rate

on the Certificate, and fees or charges

assessed by the transferror; and

(3) Brokers and dealers in Certificates,

and the commissions, fees or discounts

granted to the brokers and dealers;

(e) Receive semi-annual Debenture

payments and prepayments;

(f) Make regularly scheduled and

prepayment payments to Registered

Holders of Debentures or Certificates;

and

(g) Assure before any resale of a

Debenture or Certificate is recorded in

the registry that the seller has provided

the purchaser a written disclosure

statement approved by SBA.

§ 120.954 Central Servicing Agent.

(a) SBA has entered into a Master

Servicing Agreement designating a

Central Servicing Agent (CSA) to

support the orderly flow of funds among

Borrowers, investors, CDCs, and SBA.

The CDC and Borrower must enter into

an individual Servicing Agent

Agreement with the CSA for each 504

loan, constituting acceptance by the

CDC and the Borrower of the terms of

the Master Servicing Agreement.

(b) The CSA has established a master

reserve account. All funds related to the

504 loans and Debentures flow through

the master reserve account under the

provisions of the Master Servicing

Agreement. The master reserve account

shall be funded by a reserve deposit, a

funding fee to be published from time

to time in the Federal Register, and by

principal and interest payments of 504

loans. At SBA’s direction, the CSA uses

the funds in the master reserve account

to defray program expenses. In the event

a Borrower defaults and the 504 note is

accelerated, SBA shall add funds under

its guarantee to ensure the full and

timely payment of the Debenture which

funded the 504 loan. The CSA shall pay

to the CDC servicing each loan the

interest accruing in the master reserve

account on loan payments made by each

Borrower between the date of receipt of

each monthly payment and the date of

disbursement to investors. The CSA

may disburse such interest periodically

to CDCs on a pro rata basis. SBA may

use interest accruals in the account

earned prior to October 1991 on such

payments (not previously distributed to

the CDCs) for 504 program

administration.

§ 120.955 Agent bonds and records.

(a) Each agent (in §§ 120.951–120.955)

must provide a fidelity bond or

insurance in such amount as necessary

to fully protect the interest of the

government.

(b) SBA must have access at the

agent’s place of business to all books,

records and other documents relating to

Debenture activities.

§ 120.956 Suspension or revocation of

brokers and dealers.

The AA/FA may suspend or revoke

the privilege of any broker or dealer to

participate in the sale or marketing of

Debentures and Certificates for actions

or conduct bearing negatively on the

broker’s fitness to participate in the

securities market. SBA must give the

broker or dealer written notice, stating

the reasons therefore, at least 10

business days prior to the effective date

of the suspension or revocation of ADC

status. A broker or dealer may appeal

the suspension or revocation made

under this section pursuant to the

procedures set forth in part 134 of this

chapter. The action of the AA/FA shall

remain in effect pending resolution of

the appeal. SBA may suspend or revoke

of the opportunity for a hearing under

part 134 of this chapter.

Closings

§ 120.960 Responsibility for closing.

The CDC is responsible for the 504

Loan closing. The Debenture closing is

the joint responsibility of the CDC and

SBA.

§ 120.961 CDC closing fees.

(a) The CDC may charge the Borrower

an amount sufficient to reimburse it for

reasonable legal fees related to closing

the 504 loan. The legal fees and other

professional fees and closing costs are

administrative costs eligible for

reimbursement from the debenture

proceeds.

(b) The CDC may charge a finder’s fee

of up to 1.5 percent of the 504 loan if

the CDC secured the lender for the

Borrower under a written contract.

Either the Borrower or the lender may

pay the fee. It may not be reimbursed

from the Debenture proceeds.

§ 120.962 Construction escrow accounts.

The CSA, title company, or bank may

hold Debenture proceeds in escrow to

complete Project components such as

landscaping and parking lots, and

acquire machinery and equipment if the

component or acquisition is a minor

portion of the total Project and has been

contracted for completion or delivery at

a specified price and specific future

date. The escrow agent must disburse

funds upon approval by the CDC and

the SBA, supported by invoices and

payable jointly to the small business

and the designated contractor.

Servicing and Post-Closing Fees

§ 120.970 Servicing of 504 loans and

Debentures.

The CDC must service the 504 loan in

accordance with the Loan

Authorization, these regulations, SBA

policies and procedures, and prudent

lending standards until paid in full,

including review of the small business’s

financial statements, tax filings,

insurance, and security filings. CDCs

must comply with the provisions of

§ 120.513. In addition, the CDC must

comply with the servicing requirements

set forth in SBA’s SOP. The CDC must

report promptly to SBA any adverse

trend, condition or information. Upon

request by a CDC, SBA may agree to

defer a Borrower’s monthly payment.

SBA may negotiate agreements with

CDCs to liquidate loans.

§ 120.971 Post-closing fees paid by

Borrower.

(a) CDC fees. CDCs may charge the

following fees to the Borrower:

(1) Service fee. A service charge of not

less than 0.5 percent nor more than 2

percent per annum on the outstanding

balance of the 504 loan measured at 5

year anniversary intervals. A service

charge in excess of 1.5 percent in a

Rural Area and 1 percent everywhere

else requires SBA’s prior written

approval, based on evidence of

substantial need. The CDC’s monthly

service fee shall be paid only from loan

payments received. The fees may be

accrued without interest and collected

from the CSA when the payments are

made;

(2) Late fees. Payments received after

the 15th of each month may be subject

to a late payment fee of 5 percent of the

late payment or $100, whichever is

greater, collected by the CSA on behalf

of the CDC; and

(3) Assumption fee. Upon SBA’s

written approval, a CDC may charge an

assumption fee equal to no more than 1

percent of the outstanding principal

balance of the loan being assumed.

(b) CSA fees. The CSA may charge an

initiation fee on each loan and a

monthly service fee under the terms of

the Master Servicing Agreement.

(c) Other agent fees. Agent fees and

charges necessary to market and service

Debentures and Certificates may be

assessed to the Borrower or the investor.

The fees must be approved by SBA and

published periodically in the Federal

Register.
Federal Register / Vol. 60, No. 241 / Friday, December 15, 1995 / Proposed Rules 64401

(d) SBA fees. The Borrower shall pay

SBA an annual fee of 0.125 percent of

the outstanding balance of each 504

loan approved after October 1, 1995.

§ 120.972 Oversight and evaluation of

CDCs and ADCs.

SBA may conduct an operational

review of a CDC or ADC. The SBA

Office of Inspector General may

conduct, supervise or coordinate

compliance audits pursuant to the

Inspector General Act. The CDC or ADC

must cooperate and make its staff,

records, and facilities available.

CDC Transfer, Suspension and

Revocation

§ 120.980 Transfer of CDC to ADC status.

SBA shall transfer to ADC status any

CDC that fails to meet the activity level

required by SBA, on average over two

consecutive fiscal years. SBA shall

notify the CDC in writing of the action

and of the opportunity for a hearing

pursuant to part 134 of this chapter at

least 10 business days prior to the

transfer. During the pendency of a

hearing, SBA’s action will remain in

effect.

§ 120.981 Voluntary transfer and surrender

of CDC certification.

A CDC may not transfer its

certification or withdraw from the 504

program without SBA’s consent. The

CDC must provide a plan to SBA to

transfer its portfolio. The portfolio may

only be transferred with SBA’s written

consent. If a CDC desires to withdraw

from the 504 program, it must forfeit its

portfolio to SBA. SBA may conduct an

audit of the transferring or withdrawing

CDC.

§ 120.982 Correcting CDC servicing

deficiencies.

SBA may require corrective action,

including the transfer of existing or

pending financings to another CDC in

good standing. SBA must notify the CDC

in writing of any servicing, reporting or

collection deficiencies and the

corrective actions to be taken. SBA may

instruct the CSA to withhold service

and late fees and may assess the CDC up

to $250 per day for expenses incurred

by SBA to correct the deficiencies. If

non-compliance continues for 90 days,

SBA may take the fees as compensation

for its efforts to obtain compliance.

§ 120.983 Transfer of CDC servicing to

SBA or another CDC.

If a CDC fails to correct servicing

deficiencies, or is unable or unwilling to

service its portfolio, SBA may assume

the servicing or require the transfer of

all or part of the CDC’s portfolio to

another CDC within or adjoining the

deficient CDC’s Area of Operations. If

there is no suitable CDC, SBA may

approve a transfer to another entity.

Future service fees from transferred

loans will be paid to the transferee. In

addition, the CDC’s processing authority

will be temporarily suspended.

§ 120.984 Suspension or revocation of

CDC certification.

(a) Suspend or revoke. SBA may

suspend or revoke the CDC’s

certification if a CDC:

(1) Violates a statute, an SBA

regulation, or the terms of a Debenture,

authorization, or agreement with SBA;

(2) Makes a material false statement,

knowingly misrepresents, or fails to

state a material fact;

(3) Fails to maintain good character;

(4) Fails to operate according to

prudent lending standards;

(5) Fails to correct servicing,

collection, reporting, or other

deficiencies; or

(6) Is unable or unwilling to operate

in accordance with the requirements of

this part.

(b) Transfer portfolio. Upon

suspension or revocation, the CDC must

transfer its remaining portfolio and any

504 applications or financings in

process to another CDC designated or

approved by SBA. If a pending 504

financing is completed after a transfer,

any deposit must also be transferred.

Any fees must be apportioned by SBA

between the two CDCs in proportion to

services performed.

(c) Provide written notice. SBA must

give written notice to the CDC at least

10 business days prior to the effective

date of a suspension or revocation,

informing the CDC of the opportunity

for a hearing pursuant to part 134 of this

chapter.

Enforceability of 501, 502 and 503

Loans and Other Laws

§ 120.990 501, 502, and 503 loans.

SBA has discontinued loan programs

for 501, 502, and 503 loans. Outstanding

loans remain under these programs, and

Borrowers, CDCs, and SBA must comply

with the terms and conditions of the

corresponding notes and Debentures,

and the regulations in effect when the

obligations were undertaken or last in

effect, if applicable.

§ 120.991 Effect of other laws.

No State or local law may preclude or

limit SBA’s exercise of its rights with

respect to notes, guarantees, Debentures

and Debenture Pools, or of its

enforcement rights to foreclose on

collateral.

PARTS 108, 116, 122, AND 131—

[REMOVED]

2. Parts 108, 116, 122, and 131 are

removed.

Dated: November 13, 1995.

Philip Lader,

Administrator.

[FR Doc. 95–30327 Filed 12–14–95; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[EE–34–95]

RIN 1545–AT78

Notice of Significant Reduction in the

Rate of Future Benefit Accrual

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

by cross-reference to temporary

regulations.

SUMMARY: In the Rules and Regulations

section of this issue of the Federal

Register, the IRS is issuing temporary

regulations relating to the requirements

of section 204(h) of the Employee

Retirement Income Security Act of 1974,

as amended (ERISA). Section 204(h) of

ERISA applies to defined benefit plans

and to individual account plans that are

subject to the funding standards of

section 302 of ERISA. It requires the

plan administrator to give notice of

certain plan amendments to participants

in the plan and certain other parties.

The text of those temporary regulations

also serves as the text of these proposed

regulations.

DATES: Written comments must be

received by March 14, 1996.

ADDRESSES: Send submissions to

CC:DOM:CORP:R (EE–34–95), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to CC:DOM:CORP:R (EE–34–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington DC.

FOR FURTHER INFORMATION CONTACT:

Betty J. Clary, (202) 622–6070 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed