[Federal Register Volume 60, Number 241 (Friday, December 15, 1995)]
[Proposed Rules]
[Pages 64356-64401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30327]



========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


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

[[Page 64356]]


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-by-page, 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;   120.1 to 120.99.      
                           definitions.                                 
A.......................  Policies applicable to  120.100 to 120.199.   
                           all business loans.                          
B.......................  Loanmaking policy       120.200 to 120.299.   
                           specific to                                  
                           Guarantees and Direct                        
                           7(a) Loans.                                  
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               120.700 to 120.799.   
                           Demonstration Program.                       
H.......................  Development Company     120.800 to 120.899.   
                           Loan Program (504).                          
------------------------------------------------------------------------

    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. 

[[Page 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                                                New section  
     #          Subject matter        New 120 subpart       number(s)   
------------------------------------------------------------------------
108........  Development Company   H...................      120.800-899
              Loans.                                                    
116........  Subpart A--Veterans.  N/A.................          120.104
116........  Subpart B--Flood      N/A.................          120.170
              Insurance.                                                
116........  Subpart C--Lead-      N/A.................          120.173
              based Paint.                                              
116........  Subpart D--           N/A.................          120.172
              Floodplain                                                
              Management and                                            
              Woodlands                                                 
              Protection.                                               
116........  Subpart E--Coastal    N/A.................          120.175
              Barrier Resources                                         
              Act.                                                      
120........  Subpart--General;     Dispersed in Intro.,            120.1
              Subpart A--Loan-      Subpart A, Subpart                  
              Making Policy.        B..                                 
120........  Subpart B--Loan       Subpart E...........      120.500-599
              Administration.                                           
120........  Subpart C--Loan       Subpart D...........  ...............
              Participants.                                             
120........  Subpart D...........  Subpart D...........  ...............
120........  Subpart E...........  Subpart D...........  ...............
120........  Subpart F...........  Subpart F...........  ...............
120........  Subpart G...........  Subpart F...........  ...............
122........  Subpart A--General    Dispersed in          ...............
              Provisions.           Introduction,                       
                                    Subpart A, Subpart                  
                                    B.                                  
122........  Subpart B--Special    Subpart C...........  ...............
              Purpose Loans.                                            
131........  Loan Moratorium.....  Subpart E...........      120.532-536
------------------------------------------------------------------------

    Definitions applicable to all business loans are located in 
Sec. 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:

----------------------------------------------------------------------------------------------------------------
                                                              Action(s) (Note: all      Extent of policy change,
      Former section  number         New part 120 number    sections were renumbered      if any; comments on   
                                     for loan provisions     and moved, or deleted)            action(s)        
----------------------------------------------------------------------------------------------------------------
116.1-116.3.......................  120.104..............  Revised; Subpart was        Minor policy change;     
                                                            split; provisions moved     explanatory material and
                                                            to program Parts.           definitions will be in  
                                                                                        SOP or other policy     
                                                                                        material.               
116.10-116.12.....................  120.170..............  Revised; provisions         No policy change;        
                                                            condensed.                  explanatory material    
                                                                                        will be in SOP or other 
                                                                                        policy material.        
116.20-116.23.....................  120.173..............  Revised; provisions         No policy change;        
                                                            condensed.                  explanatory material    
                                                                                        will be in SOP or other 
                                                                                        policy material.        
116.30-116.35.....................  120.172..............  Revised; provisions         No policy change;        
                                                            condensed.                  explanatory material    
                                                                                        will be in SOP or other 
                                                                                        policy material.        
116.40-116.41.....................  120.175..............  Revised; provisions         No policy change.        
                                                            condensed.                                          
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;     No policy change. Some   
                                                            material moved.             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.         

[[Page 64358]]
                                                                                                                
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-  No policy change.        
                                                            1.                                                  
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),         Revised; new rule included  Major policy changes. See
                                     120.111.                                           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,   Revised...................  No policy change.        
                                     120.175-76.                                                                
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.               

[[Page 64359]]
                                                                                                                
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),            Revised...................  No policy change.        
                                     120.222(e),                                                                
                                     120.221(d).                                                                
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.              
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 

[[Page 64360]]
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 Sec. 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 Sec. 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 business-loan 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 

[[Page 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 co-Borrower 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 Sec. 120.101, SBA clarifies its 
present policy. The current provision, Sec. 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 Sec. 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 
Sec. 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 

[[Page 64362]]
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 Secs. 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 Sec. 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 
Sec. 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 Sec. 120.430 states specifically that SBA may review a 
Lender's records relating to SBA guaranteed loans during normal 
business hours. In addition, Sec. 120.420, which is the former 
Sec. 120.301-7, contains a new provision (120.420(c)) restricting the 
use of SBA loans by Non-Depository Lenders.
    (a) Certified Lenders Program (``CLP''). The proposed rule deletes 
the definitions found now at Sec. 120.501. Some of the terms are not 
used in the subpart. Others apply to the entire Part and will appear in 
Sec. 120.10.
    The proposed rule streamlines the procedure for obtaining CLP 
status. Thus, current Sec. 120.502-1 will be deleted and replaced with 
new Sec. 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 Sec. 120.502-2, which 
specifies factors which SBA will consider in deciding whether a Lender 
should become a CLP lender. Its replacement, Sec. 120.441(a), retains 
several of the current seven considerations. SBA may consider other 
factors as well.
    Proposed Sec. 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 
Sec. 120.401. Some of the terms are not used in the subpart. Others 
apply to the entire Part and will appear in Sec. 120.10.
    Current Sec. 120.402-1 describes how a Lender initially may become 
a PLP Lender. Proposed Sec. 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 Sec. 120.451(b)(current Sec. 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 Sec. 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. 

[[Page 64363]]

    The proposed rule consolidates the current Sec. 120.403-1 
(statutory ceiling), Sec. 120.403-5 (interest rates), and Sec. 120.403-
6(b)(fees) into Secs. 120.151, 120.213, 120.214, 120.221 and 120.222 
respectively. The proposed rule deletes the current Sec. 120.403-3 
(credit allocation) because it is no longer used.
    The proposed rule deletes the current Sec. 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 Sec. 120.403-7(c) into Sec. 120.430.
    The current Sec. 120.403-7 has been rewritten as the new 
Sec. 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 Sec. 120.403-2 to Sec. 120.452(a)(3). 
In proposed Sec. 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 Secs. 120.404-1 through 
120.405-1 concerning servicing and liquidation into proposed 
Sec. 120.453, and deletes current Secs. 120.405-2 through 120.405-4 
because they are redundant or adequately described in SBA's SOP.
    In proposed Sec. 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 Sec. 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 Secs. 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 
Sec. 120.512 describes this arrangement.
    Proposed Sec. 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 Sec. 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 Sec. 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 Sec. 120.524.
    A Borrower's obligation to pay principal and interest continues 
after SBA honors its guarantee. Proposed Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 120.530 authorizes SBA to defer a Borrower's 
initial payments for a stated period of time. Under proposed 
Sec. 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 Sec. 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 Sec. 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 

[[Page 64364]]
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 Sec. 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 Sec. 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 Sec. 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 farmer-
Borrower 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 Sec. 120.550 specifies that a farmer-Borrower who defaults on 
an SBA loan would be allowed to lease the collateral from SBA. Under 
proposed Sec. 120.551, SBA must notify the farmer-Borrower 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 Sec. 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 Sec. 120.553, a farmer-Borrower 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 Sec. 120.600 describes the secondary market. Section 
120.601 contains definitions used in subpart F. Proposed Sec. 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 Sec. 120.611 describes the Pools which back Pool 
Certificates, including Pool characteristics and Pool Certificate 
interest rates. In Sec. 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 Sec. 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. 

[[Page 64365]]

    Proposed Sec. 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 Sec. 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 Sec. 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 Sec. 120.631, SBA specifies 
reasons for suspending a Pool Assembler from the secondary market.
    Proposed Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 120.650 the FTA registers, issues, transfers title to, 
and redeems Certificates. Proposed Sec. 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 Sec. 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) Sec. 120.708(c) 
provides a clearer understanding of how SBA determines the interest 
rate charged to an intermediary; (2) Sec. 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) 
Sec. 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           
----------------------------------------------------------------------------------------------------------------
Sec.  122.61 (a) and (b).................  Revised..........................  Sec.  120.700 (a)-(c)             
Sec.  122.61-2 (a)-(c)...................  Retained.........................  Sec.  120.701 (a)-(c)             
Sec.  122.61-2(d)........................  Revised..........................  Sec.  120.701(d)                  
Sec.  122.61-2 (e)-(g)...................  Retained.........................  Sec.  120.701 (e)-(g)             
                                           New..............................  Sec.  120.701(h)                  
Sec.  122.61-3(a)........................  Revised..........................  Sec.  120.700(d)                  
Sec.  122.61-3(b)........................  Revised..........................  Sec.  120.703                     
Sec.  122.61-3(c)........................  Revised..........................  Sec.  120.703(c)                  
Sec.  122.61-4 (a) and (b)...............  Revised..........................  Sec.  120.705                     
Sec.  122.61-4(c)........................  Deleted..........................  ..................................
Sec.  122.61-5...........................  Revised..........................  Sec.  120.704                     
Sec.  122.61-6 (a)-(c)...................  Revised..........................  Sec.  120.707                     
Sec.  122.61-6(d)........................  Revised..........................  Sec.  120.707                     
Sec.  122.61-6(e)........................  Revised..........................  Sec.  120.707                     
Sec.  122.61-6(f)........................  Deleted..........................  ..................................
Sec.  122.61-7...........................  Revised..........................  Sec.  120.708                     
Sec.  122.61-8 (a)-(c)...................  Revised..........................  Sec.  120.710                     
Sec.  122.61-8(d)........................  Deleted..........................  Sec.  120.710                     
Sec.  122.61-9 (a) and (b)...............  Revised..........................  Sec.  120.710                     
Sec.  122.61-10..........................  Retained.........................  Sec.  120.712                     
Sec.  122.61-11(a).......................  Revised..........................  Sec.  120.712                     
Sec.  122.61-11(b).......................  Revised..........................  Sec.  120.702                     

[[Page 64366]]
                                                                                                                
Sec.  122.61-11(c).......................  Retained.........................  Sec.  120.712                     
Sec.  122.61-12..........................  Revised..........................  Sec.  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 Sec.  108 subpart                   Proposed action on subpart               Comments on action   
----------------------------------------------------------------------------------------------------------------
Sec.  108.1(a)........................  Condensed and moved to Sec.  120.800.........  No policy change.        
Sec.  108.1(b)........................  Condensed and moved to Sec.  120.800.........  No policy change.        
Sec.  108.1(c)........................  Rewritten and moved to Sec.  120.860-Sec.      No policy change.        
                                         120.862.                                                               
Sec.  108.1(d)........................  Incorporated into Sec.  120.862..............  No policy change.        
Sec.  108.1(e)........................  Eliminated as redundant; incorporated into     No policy change;        
                                         Sec.  120.176.                                 eliminated because      
                                                                                        policy covered by other 
                                                                                        parts.                  
Sec.  108.2...........................  Definitions applying to all business loans     See comments below on    
                                         are in Sec.  120.10. Those applying solely     specific definitions.   
                                         to 504 loans are in Sec.  120.801. Some                                
                                         terms applying only to a certain subsection                            
                                         are defined in the subsection.                                         
Sec.  108.3(a)........................  Rewritten and placed into Sec.  120.881(a).    No policy change.        
                                         Definition of Substantial Increase in                                  
                                         Unemployment is found in Sec.  120.801.                                
Sec.  108.3(b)........................  Eliminated...................................  Deleted because 501 and  
                                                                                        502 programs have been  
                                                                                        eliminated.             
Sec.  108.3(c)........................  Eliminated...................................  Deleted because 501 and  
                                                                                        502 programs have been  
                                                                                        eliminated.             
Sec.  108.3(d)........................  Eliminated...................................  Deleted because 501 and  
                                                                                        502 programs have been  
                                                                                        eliminated.             
Sec.  108.4(a)........................  Eliminated...................................  No change of policy; rule
                                                                                        eliminated because      
                                                                                        inherent in standard    
                                                                                        business practice.      
Sec.  108.4(b)........................  Eliminated, but covered in Sec.  120.826.....  No change in policy; will
                                                                                        be covered in SBA's     
                                                                                        Standard Operating      
                                                                                        Procedure (SOP) or other
                                                                                        policy guidance.        
Sec.  108.4(c)........................  Eliminated, but covered in Sec.  120.826.....  No change in policy; will
                                                                                        be covered in SBA's SOP 
                                                                                        or other policy         
                                                                                        guidance.               
Sec.  108.4(d)........................  Rewritten, clarified, and broadened. Most      Minor policy change: SBA 
                                         provisions consolidated with corresponding     may waive prohibition on
                                         sections of current Part 120 into proposed     member of CDC Board of  
                                         Sec.  120.140. See Note 4, subparts A and B.   Directors being on      
                                         Those applying only to 504 loans are in Sec.   another CDC's Board.    
                                          120.855.                                                              
Sec.  108.4(e)........................  Consolidated with Sec.  108.4(d) and placed    No policy change.        
                                         in Sec.  120.40. Specific examples of                                  
                                         conflicts of interest will be found in SOP.                            
                                         Prohibition against debt refinancing is in                             
                                         Sec.  120.884.                                                         
Sec.  108.4(f)........................  Eliminated...................................  Consolidated into Sec.   
                                                                                        120.176.                
Sec.  108.5(a)........................  Covered in Sec.  120.826; specific             No policy changes.       
                                         explanations and details in SOP.                                       
Sec.  108.5(b)........................  Covered in Sec.  120.826; specific             Miniaturized             
                                         explanations and details in SOP.               reproductions of CDC    
                                                                                        records no longer       
                                                                                        referenced. Other       
                                                                                        technologies now        
                                                                                        available. Specific     
                                                                                        details will be in SOP. 
Sec.  108.5(c)........................  Condensed into Sec.  120.830(c)..............  No policy change.        
Sec.  108.5(d)........................  Condensed into Sec.  120.830(d) and (e)......  Policy change -means of  
                                                                                        delivery will be        
                                                                                        detailed in SOP.        
Sec.  108.5(e)........................  Eliminated...................................  Report considered        
                                                                                        unnecessary under       
                                                                                        Presidential directive  
                                                                                        to reduce paperwork.    
Sec.  108.5(f)........................  Eliminated...................................  No policy change. Not    
                                                                                        required as regulation. 
Sec.  108.6...........................  Eliminated...................................  Reserved sections were   
                                                                                        removed.                
Sec.  108.7(a)........................  Consolidated in Sec.  120.140................  No policy change.        
Sec.  108.7(b)........................  Eliminated. Provision covered in note and      No policy change.        
                                         other closing documents.                                               
Sec.  108.8(a)........................  Credit elsewhere test consolidated and placed  Major change of policy   
                                         in Sec.  120.101; evidence of need and use     emphasis. See Note 6,   
                                         of personal resources by principals placed     subparts A and B.       
                                         in Sec.  120.102.                                                      
Sec.  108.8(b)........................  Consolidated into Sec.  120.150 and Sec.       No policy change.        
                                         120.160.                                                               
Sec.  108.8(c)........................  Sound business purpose is addressed in Sec.    No policy change.        
                                         120.120 and Sec.  120.150. Size requirements                           
                                         is addressed in Sec.  120.100(c) and Sec.                              
                                         120.880(b).                                                            

[[Page 64367]]
                                                                                                                
Sec.  108.8(d)........................  Replaced by Sec.  120.111....................  Major policy change. See 
                                                                                        Note 2, subparts A and  
                                                                                        B.                      
Sec.  108.8(e)........................  Condensed and placed in Sec.  120.870........  No policy change.        
Sec.  108.8(f)........................  Included in Sec.  120.881. Financial and       Clarifies policy.        
                                         investment businesses addressed in Sec.        Ineligibility of project
                                         120.110.                                       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.
Sec.  108.8(g)........................  This subject is consolidated into Sec.         No policy change.        
                                         120.110 and Sec.  120.130.                                             
Sec.  108.9...........................  Rewritten and placed in Sec.  120.923(c).....  No policy change.        
Sec.  108.10..........................  Eliminated. Not necessary to include in        No policy change.        
                                         regulation.                                                            
Sec.  108.501.........................  Eliminated...................................  Deleted because program  
                                                                                        eliminated, but SBA     
                                                                                        still regulates existing
                                                                                        loans under this        
                                                                                        program. See Sec.       
                                                                                        120.180.                
Sec.  108.501-1.......................  Eliminated...................................  Deleted because program  
                                                                                        eliminated, but SBA     
                                                                                        still regulates existing
                                                                                        loans under this        
                                                                                        program. See Sec.       
                                                                                        120.180.                
Sec.  108.502.........................  Eliminated...................................  Deleted because program  
                                                                                        eliminated, but SBA     
                                                                                        still regulates existing
                                                                                        loans under this        
                                                                                        program. See Sec.       
                                                                                        120.180.                
Sec.  108.502-1.......................  Eliminated...................................  Deleted because program  
                                                                                        eliminated, but SBA     
                                                                                        still regulates existing
                                                                                        loans under this        
                                                                                        program. See Sec.       
                                                                                        120.180.                
Sec.  108.503(a)......................  Eliminated...................................  No policy change; covered
                                                                                        in Sec.  120.1.         
Sec.  108.503(b)......................  Rewritten and incorporated into Sec.  120.2,   No policy change.        
                                         Sec.  120.860, Sec.  120.861, and Sec.                                 
                                         120.862.                                                               
Sec.  108.503(c)......................  Rewritten and placed in Sec.  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.               
Sec.  108.503(d)......................  Condensed and placed in Sec.  120.829(b) and   No policy change;        
                                         (c).                                           specific instructions   
                                                                                        and details in SOP and  
                                                                                        policy guidance.        
Sec.  108.503-1(a)....................  Description of the program incorporated into   No policy change         
                                         Sec.  120.2(c) and Sec.  120.801. Eligible                             
                                         projects are in Sec.  120.120, and                                     
                                         applications for certification are in Sec.                             
                                         120.810.                                                               
Sec.  108.503-1(b)....................  Rewritten and placed in Sec.  120.820 through  No policy change;        
                                         Sec.  120.826, and Sec.  120.855(a).           incidental benefit to   
                                                                                        CDC Associate clarified 
                                                                                        to allow relationship in
                                                                                        the regular course of   
                                                                                        business.               
Sec.  108.503-1(c)....................  Rewritten and placed in Sec.  120.821. See     Important policy changes--
                                         definition of Area of Operations in Sec.       see comments below.     
                                         120.802. Extending a CDC's Area of                                     
                                         Operations is in Sec.  120.835 and Sec.                                
                                         120.836. Expiration of existing, temporary                             
                                         Expansions is in Sec.  120.837. Case-by-case                           
                                         extensions are in Sec.  120.838.                                       
Sec.  108.503-1(d)....................  Consolidated into Sec.  120.822. Member or     Policy change. See Note  
                                         Board representation in another CDC is in      under current Sec.      
                                         Sec.  120.855(b).                              108.4(d) above. Specific
                                                                                        details and instructions
                                                                                        will be in SOP          
Sec.  108.503-1(e)....................  Rewritten and placed in Sec.  120.826 and      No policy change;        
                                         Sec.  120.827. SBIC limitation addressed in    Specifics addressed in  
                                         Sec.  120.820.                                 SOP.                    
Sec.  108.503-1(f)....................  Incorporated in Sec.  120.827................  No policy change         
Sec.  108.503-1(g)....................  Rewritten and placed in Sec.  120.855(b).....  Policy change. See Note  
                                                                                        under current Sec.      
                                                                                        108.4(d) above.         
Sec.  108.503-2(a)....................  Rewritten and placed in Sec.  120.810........  Small substantive change.
                                                                                        Regional offices removed
                                                                                        from process because of 
                                                                                        SBA reorganization. More
                                                                                        information in SOP.     
Sec.  108.503-2(b)....................  Rewritten and placed in Sec.  120.811........  Minor procedural changes.
                                                                                        10 day period to submit 
                                                                                        notice to SBA           
                                                                                        eliminated; officer and 
                                                                                        director addresses no   
                                                                                        longer required in      
                                                                                        notice.                 
Sec.  108.503-2(c)....................  Rewritten and placed in Sec.  120.981........  No policy changes.       
Sec.  108.503-2(d)....................  Rewritten and placed in Sec.  120.812........  No policy change.        
Sec.  108.503-2(e)....................  Rewritten and placed in Sec.  120.980........  No policy change.        

[[Page 64368]]
                                                                                                                
Sec.  108.503-3(a)....................  Rewritten and placed in Sec.  120.827........  No policy change.        
Sec.  108.503-3(b)....................  Covered by Sec.  120.827(a)..................  No policy change. Will be
                                                                                        expounded upon in SOP.  
Sec.  108.503-3(c)....................  Rewritten and placed in Sec.  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.         
Sec.  108.503-3(d)....................  Covered by Sec.  120.826.....................  No policy change.        
                                                                                        Specifics in SOP.       
Sec.  108.503-3(e)....................  Eliminated...................................  Deleted reserved section.
Sec.  108.503-3(f)....................  Rewritten and placed in Sec.  120.830(a) and   No policy change. SBA    
                                         (b).                                           streamlining paperwork  
                                                                                        requirements under      
                                                                                        Presidential directive. 
                                                                                        Specifics in SOP.       
Sec.  108.503-3(g)....................  Rewritten and placed in Sec.  120.140(c).....  No policy change.        
Sec.  108.503-3(h)....................  Rewritten and placed in Sec.  120.983........  No policy change.        
Sec.  108.503-4(a)....................  Rewritten and placed in Sec.  120.120, Sec.    No policy changes.       
                                         120.110, Sec.  120.150 and Sec.  120.193.                              
                                         See Sec.  120.871 and Sec.  120.872 for                                
                                         portions of new construction or existing                               
                                         building that may be leased.                                           
Sec.  108.503-4(b)....................  Rewritten and placed in Sec.  120.130 and      Policy change. Airplanes 
                                         Sec.  120.881.                                 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.              
Sec.  108.503-4(c)....................  Rewritten and placed in Sec.  120.882(a)(2)    Policy change. Any       
                                         and Sec.  120.884(a) and (c). Statutory        expenditure made toward 
                                         ceiling discussed in Sec.  120.931; SBIC       a project in            
                                         participation in Sec.  120.103 and Sec.        anticipation of SBA     
                                         120.913; and administrative ceiling in Sec.    assistance within 6     
                                         120.932..                                      months of receipt by SBA
                                                                                        of an application is    
                                                                                        eligible. No notice is  
                                                                                        required. See comment   
                                                                                        (b) below.              
Sec.  108.503-5(a)....................  Rewritten and placed in Sec.  120.120 and      No policy change.        
                                         Sec.  120.882.                                                         
Sec.  108.503-5(b)....................  Rewritten and placed in Sec.  120.883........  No policy change.        
Sec.  108.503-5(c)....................  Rewritten and placed in Sec.  120.130 and      No policy change.        
                                         Sec.  120.884.                                                         
Sec.  108.503-5(d)....................  Discussed in Sec.  120.882(a)(2). Land         See comment under current
                                         contributions in Sec.  120.911.                Sec.  108.503-4(c) above
                                                                                        and policy comment      
                                                                                        discussion (b) below.   
                                                                                        Specific instructions   
                                                                                        and explanations will be
                                                                                        in SOP.                 
Sec.  108.503-6(a)....................  Rewritten and placed in Sec.  120.883(c),      No policy change. Omits  
                                         Sec.  120.961(a), and Sec.  120.971(a)(1).     reference to $2,500 in  
                                                                                        discussion of legal     
                                                                                        fees. See note (c).     
                                                                                        Specifics in SOP.       
Sec.  108.503-6(b)....................  Rewritten and placed in Sec.  120.936........  No policy change.        
Sec.  108.503-6(c)....................  Rewritten and placed in Sec.  120.961(b).....  No policy change.        
Sec.  108.503-6(d)....................  Rewritten and placed in Sec.  120.971(a)(3)..  No policy change.        
Sec.  108.503-6(e)....................  Eliminated...................................  Policy change. See Note  
                                                                                        8, subparts A and B.    
Sec.  108.503-7(a)....................  Rewritten. Certification of project            No policy change.        
                                         completion placed in Sec.  120.891.            Specifics in SOP.       
                                         Certifications of no adverse change are in                             
                                         Sec.  120.892..                                                        
Sec.  108.503-7(b)....................  Rewritten and placed in Sec.  120.890........  No policy change.        
Sec.  108.503-7(c)....................  Rewritten and placed in Sec.  120.962........  No policy change.        
Sec.  108.503-8(a)....................  Rewritten and placed in Sec.  120.900........  No policy change, but (3)
                                                                                        is now called ``Borrower
                                                                                        contribution'' instead  
                                                                                        of ``the 503 Company    
                                                                                        injection''.            
Sec.  108.503-8(b)....................  Rewritten and placed in Sec.  120.920 through  No policy change, but    
                                         Sec.  120.925. Newly published (1/20/95)       Sec.  120.923(b)        
                                         ``other real estate owned'' provision placed   clarifies that some     
                                         in Sec.  120.923(a).                           payments made by        
                                                                                        lienholder are allowed  
                                                                                        to maintain and protect 
                                                                                        the lien position.      
Sec.  108.503-9.......................  Loan conditions are detailed in Sec.  120.930  No policy change.        
                                         through Sec.  120.941. Description of                                  
                                         program is in Sec.  120.3 and Sec.  120.801.                           
Sec.  108.503-10......................  Rewritten and placed in Sec.  120.910 through  No policy change. Some   
                                         Sec.  120.913.                                 specifics left for SOP. 
Sec.  108.503-11......................  Eliminated. Consolidated with current Sec.     No policy change.        
                                         108.504(e) into Sec.  120.954.                                         
Sec.  108.503-12......................  Rewritten and placed in Sec.  120.960........  No policy change.        
                                                                                        Specifics in SOP.       
Sec.  108.503-13(a) and (b)...........  Rewritten and placed in Sec.  120.970.         No policy change.        
                                         Quarterly reports discussed in Sec.            Specifics moved to SOP. 
                                         120.830(f).                                                            
Sec.  108.503-13(c)...................  Placed in 120.970. Incorporates Sec.  120.513  No policy changes.       
                                                                                        Specifics in SOP.       
Sec.  108.503-13(d)...................  Rewritten and placed in Sec.  120.971(a)(1)..  No policy change.        
Sec.  108.503-13(e)...................  Rewritten and placed in Sec.  120.982........  No policy change.        
Sec.  108.503-13(f)...................  Rewritten and placed in Sec.  120.983........  No policy change.        

[[Page 64369]]
                                                                                                                
Sec.  108.503-13(g)...................  Rewritten and placed in Sec.  120.938........  No policy change.        
Sec.  108.503-13(h)...................  Consolidated into Sec.  120.530..............  No policy change.        
                                                                                        Specific information and
                                                                                        explanatory material    
                                                                                        will be in SOP.         
Sec.  108.503-14......................  Rewritten and placed in Sec.  120.970........  No policy change.        
                                                                                        Specific information and
                                                                                        explanatory material    
                                                                                        will be in SOP.         
Sec.  108.503-15(a) and (b)...........  Rewritten and placed in Sec.  120.972........  No policy change--       
                                                                                        specifics in SOP.       
Sec.  108.503-15(c) and (d)...........  Eliminated...................................  Deleted all reserve      
                                                                                        sections.               
Sec.  108.503-15(e)...................  Rewritten and placed in Sec.  120.984........  No policy change.        
Sec.  108.504 (a), (b) and (c)........  Consolidated into Sec.  120.801..............  No policy change.        
Sec.  108.504(d)......................  Placed in Sec.  120.934......................  No policy change.        
Sec.  108.504(e)......................  Rewritten and placed in Sec.  120.954........  No policy change.        
Sec.  108.504(f)......................  Rewritten and placed in Sec.  120.941........  No policy change.        
Sec.  108.504(g)......................  Eliminated. More suitable for inclusion in     No policy change.        
                                         SOP.                                                                   
Sec.  108.504(h)......................  Rewritten and placed in Sec.  120.941........  .........................
Sec.  108.504(i)......................  Consolidated into Sec.  120.962..............  No policy change.        
Sec.  108.504(j)......................  Rewritten and placed in Sec.  120.939........  No policy change.        
Sec.  108.504(k)......................  Placed into Sec.  120.941....................  No policy change.        
Sec.  108.504(l)......................  Eliminated...................................  No policy change.        
                                                                                        Debentures are sold     
                                                                                        through Pools.          
Sec.  108.504-1.......................  Condensed and placed in Sec.  120.194........  Computer generated forms 
                                                                                        now may be used for all 
                                                                                        business loans, not just
                                                                                        504 loans.              
Sec.  108.505(a)......................  Consolidated into Sec.  120.1................  No policy change.        
Sec.  108.505(b)......................  Consolidated into Sec.  120.2 and Sec.         No policy change.        
                                         129.801.                                                               
Sec.  108.505(c)......................  SBA guarantee discussed in Sec.  120.801;      No policy change.        
                                         timely payment on Certificate is in Sec.                               
                                         120.942; effect of other laws is in Sec.                               
                                         120.991.                                                               
Sec.  108.505(d)......................  Condensed and placed in 120.941..............  No policy change.        
Sec.  108.505(e)......................  Condensed and placed in Sec.  120.942........  No policy change.        
Sec.  108.505(f)......................  Placed in Sec.  120.950, Sec.  120.951         No policy change, but    
                                         (selling agent), Sec.  120.952 (fiscal         reference to ``Transfer 
                                         agent), Sec.  120.953 (trustee), and Sec.      Agent'' has been        
                                         120.954 (central servicing agent). Bond/       deleted. ``Trustee'' has
                                         Insurance requirement moved to Sec.            been used since 1986.   
                                         120.956(a).                                                            
Sec.  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.  
Sec.  108.505(h)......................  Consolidated and placed in Sec.  120.955.....  No policy change.        
Sec.  108.505(i)......................  Consolidated and placed in Sec.  120.971(c)..  No policy change.        
Sec.  108.505(j)......................  Included in Sec.  120.942(b).................  No policy change.        
Sec.  108.505(k)......................  Condensed into Sec.  120.940.................  No policy change.        
Sec.  108.505(l)......................  Condensed into Sec.  120.956.................  No policy change.        
Sec.  108.506.........................  Condensed and consolidated into Sec.           No policy change.        
                                         120.140(i).                                                            
Sec.  108.507.........................  Rewritten and placed in Sec.  120.850........  No policy change.        
Sec.  108.507-1.......................  Merged into Sec.  120.850....................  No policy change.        
Sec.  108.507-2.......................  Consolidated into Sec.  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.       
Sec.  108.507-3.......................  Condensed into Sec.  120.851.................  No policy change.        
                                                                                        Specifics will be in    
                                                                                        SOP.                    
Sec.  108.507-4.......................  Consolidated into Sec.  120.850(a)...........  No policy change.        
Sec.  108.507-5.......................  Reviews and audits consolidated into Sec.      No policy change.        
                                         120.972. Suspension and revocation discussed                           
                                         in Sec.  120.852.                                                      
Sec.  108.508-1.......................  This new program, published 4/26/95, was       No policy change.        
                                         condensed and placed at Sec.  120.840.                                 
Sec.  108.509.........................  This new program, published 4/26/95, was       No policy change.        
                                         condensed and placed at Sec.  120.845.                                 
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 

[[Page 64370]]
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 Sec. 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 (Sec. 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 (Sec. 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 (Sec. 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, anti-competitive. 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 

[[Page 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 
Secs. 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 (Sec. 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 Sec. 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 
Sec. 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 Sec. 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 
Sec. 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 programs-energy, 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. 

[[Page 64372]]

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? 

[[Page 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. 

[[Page 64374]]


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


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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 
Sec. 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 

[[Page 64375]]
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 
non-metropolitan 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


Sec. 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.


Sec. 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 
non-Federal 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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 Sec. 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 

[[Page 64376]]
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.


Sec. 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


Sec. 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.


Sec. 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 Sec. 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 Sec. 120.310);
    (f) A purpose which does not benefit the small business; or
    (g) Any use restricted by Secs. 120.201-120.203 and 120.884 
(specific to 7(a) loans and 504 loans respectively).

Ethical Requirements


Sec. 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; 
    
[[Page 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


Sec. 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.)


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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-by-case 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.


Sec. 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.


Sec. 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.


Sec. 120.175  Coastal barrier islands.

    SBA and Intermediaries may not make or guarantee any loan within 
the Coastal Barrier Resource System.


Sec. 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. 

[[Page 64378]]


Enforceability Despite Rule Changes


Sec. 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.


Sec. 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).


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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 Sec. 120.390 for special 
Caplines program.)

Maturities; Interest Rates; Loan and Guarantee Amounts


Sec. 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.


Sec. 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.


Sec. 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.)

[[Page 64379]]



Sec. 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.


Sec. 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 
(2\1/4\) 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 (2\3/4\) 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


Sec. 120.220  Guarantee fees that Lender pays SBA.

    (a) The Lender pays a guarantee fee to SBA for each loan as 
follows:

----------------------------------------------------------------------------------------------------------------
                                     Fee measured as                                                            
    Guaranteed portion of loan        percentage of       When payable     Lender may get fee   When SBA refunds
                                   guaranteed portion                         from borrower    fee from borrower
----------------------------------------------------------------------------------------------------------------
Under 12 months..................  .25%..............  With guarantee      When SBA approves   If application   
                                                        application.        loan.               withdrawn or    
                                                                                                denied \1\      
More than 12 months and total      2.0% of guaranteed  Within 90 days of   After First         If loan cancelled
 guaranteed portion is $80,000 or   portion.            SBA approval.       disbursement.       and never       
 less.                                                                                          disbursed       
More than 12 months and amount of  3%................  Within 90 days of   After first         If loan cancelled
 guaranteed portion of loan that                        SBA approval.       disbursement.       and never       
 is $250,000 or less.                                                                           disbursed       
More than 12 months and amount of  3.0% of 1st         Within 90 days of   After first         If loan cancelled
 guaranteed portion of loan         $250,000 plus       SBA approval.       disbursement.       and never       
 between $250,000 and $500,000.     3.5% of balance.                                            disbursed       
More than 12 months and amount of  3.0% of 1st         Within 90 days of   After first         If loan cancelled
 guaranteed portion of loan         $250,000 plus       SBA approval.       disbursement.       and never       
 exceeding $500,000.                3.5% of next                                                disbursed.      
                                    $250,000 plus                                                               
                                    3.875% of the                                                               
                                    amount exceeding                                                            
                                    $500,000.                                                                   
----------------------------------------------------------------------------------------------------------------
\1\ Also, 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.


Sec. 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 

[[Page 64380]]
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.


Sec. 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


Sec. 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)


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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 Sec. 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.


Sec. 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.


Sec. 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


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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, 

[[Page 64381]]
equipment, furniture, fixtures, facilities, supplies, and material 
needed to accomplish any of the eligible program purposes in 
Sec. 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.


Sec. 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)


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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-
fixed-asset portion cannot exceed $750,000.

Qualified Employee Trusts (ESOP)


Sec. 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.


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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. 
    
[[Page 64382]]



Sec. 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


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 120.382  Repayment ability.

    SBA shall resolve reasonable doubts concerning the small business' 
proposed business plan for transition to non-defense-related markets in 
favor of the loan applicant in determining the sound value of the 
proposed loan.


Sec. 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


Sec. 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


Sec. 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.


Sec. 120.392  Who may apply?

    A construction contractor or home-builder 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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. 

[[Page 64383]]


Subpart D--Lenders


Sec. 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


Sec. 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 Sec. 120.140; and
    (d) Be supervised and examined by a State or Federal regulatory 
authority, satisfactory to SBA.


Sec. 120.411  Preferences.

    No agreement to participate under the Act shall establish any 
Preferences in favor of the Lender.


Sec. 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.


Sec. 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


Sec. 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


Sec. 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.


Sec. 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)


Sec. 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.


Sec. 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. 

[[Page 64384]]



Sec. 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)


Sec. 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.


Sec. 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 .


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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)


Sec. 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 Sec. 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 paid-in 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 

[[Page 64385]]
within 30 calendar days of the month-end 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.


Sec. 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 
Sec. 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.


Sec. 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 
Sec. 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 Sec. 120.473; and
    (e) Such other reports as SBA may require from time to time by 
written directive.


Sec. 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 

[[Page 64386]]
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.


Sec. 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.


Sec. 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


Sec. 120.500  General.

    This subpart outlines the general loan administration policies 
applicable to SBA financial assistance.

Servicing


Sec. 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.


Sec. 120.511  Servicing guaranteed loans.

    The Lender services guaranteed loans, holds the Loan Instruments 
and receives the Borrower's payments of principal and interest.


Sec. 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.


Sec. 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


Sec. 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 Sec. 120.524(a), the guarantee agreement or 
the Loan Instruments.


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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; 

[[Page 64387]]

    (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


Sec. 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.


Sec. 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.


Sec. 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.''


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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 Sec. 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 

[[Page 64388]]
(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


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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)).


Sec. 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


Sec. 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.


Sec. 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 


[[Page 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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 Sec. 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 

[[Page 64390]]
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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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)


Sec. 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.


Sec. 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 
    
[[Page 64391]]

    (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.


Sec. 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


Sec. 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


Sec. 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.


Sec. 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.


Sec. 120.702  Are there limits on Intermediaries or loans?

    (a) SBA will not allow a quasi-governmental 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 

[[Page 64392]]
Intermediaries operating in any one State.


Sec. 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.


Sec. 120.704  What is my financial contribution?

    You must contribute from non-Federal sources an amount equal to 15% 
of any loan that you receive from SBA. The contribution may not be 
borrowed.


Sec. 120.705  Microloan Revolving Fund.

    You must establish a Microloan Revolving Fund (``MRF'') in an 
interest-bearing 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 
(Sec. 120.706), proceeds for each Microloan you make, and any payments 
which you owe to SBA.


Sec. 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.


Sec. 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 one-eighth 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 Sec. 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.


Sec. 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:

[[Page 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 120.712  How does a non-Intermediary get a grant?

    (a) Grant procedure for non-Intermediaries. 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 non-Federal sources, 
and may include direct costs or in-kind contributions paid for under 
non-Federal programs.


Sec. 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 Sec. 120.707.

Subpart H--Development Company Loan Program (504)


Sec. 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.


Sec. 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.


Sec. 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.

[[Page 64394]]

    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 long-term fixed assets by a small business, with 504 financing, for 
use in its business operations.
    Project Property is one or more long-term 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


Sec. 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 Secs. 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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 

[[Page 64395]]
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.


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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).


Sec. 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


Sec. 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 
well-qualified 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.


Sec. 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.


Sec. 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.


Sec. 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)


Sec. 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, 

[[Page 64396]]
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


Sec. 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)


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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 
Sec. 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 Third-Party 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


Sec. 120.860  Required objectives.

    A Project must achieve at least one of the economic development 
objectives set forth in Sec. 120.861 or Sec. 120.862.


Sec. 120.861  Job creation or retention.

    A Project must create or retain one Job Opportunity for every 
$35,000 guaranteed by SBA.


Sec. 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 Sec. 124.103(b) 
of this chapter.);
    (4) Aiding rural development;
    (5) Increasing productivity and competitiveness (retooling, 
robotics, modernization, competition with imports); 

[[Page 64397]]

    (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


Sec. 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.


Sec. 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.


Sec. 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 third-party 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


Sec. 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.


Sec. 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).


Sec. 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.


Sec. 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.


Sec. 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


Sec. 120.890  Source of interim financing.

    A Project may use interim financing for all Project costs except 
the 

[[Page 64398]]
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.)


Sec. 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 Sec. 120.962).


Sec. 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


Sec. 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


Sec. 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 
Sec. 120.913 for SBIC exception).


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.

[[Page 64399]]



Sec. 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.


Sec. 120.925   Preferences.

    No Third Party Lender shall establish a Preference.

504 Loans and Debentures


Sec. 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.


Sec. 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 Sec. 120.861(b) applies to the Project).


Sec. 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.


Sec. 120.933   Maturity.

    The term of a 504 Loan and the Debenture which funds it shall be 
either 10 or 20 years.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 120.937   Assumption.

    A 504 loan may be assumed with SBA's prior written approval.


Sec. 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.


Sec. 120.939   Borrower prohibition.

    Neither a 504 loan recipient nor its Small Business Associate may 
purchase the Debenture that funded its 504 loan.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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:
    
[[Page 64400]]

    (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.


Sec. 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.


Sec. 120.955   Agent bonds and records.

    (a) Each agent (in Secs. 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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 Sec. 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.


Sec. 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.

[[Page 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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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.


Sec. 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