Source: https://www.everycrsreport.com/changes/20171205_R41184_00d7f904723c1d2449045ccd76e31bdf5bc1d230__20180406_R41184_2655966a6709a6176c98d4c8ba31cae8e84261b1.html
Timestamp: 2020-03-28 09:40:14
Document Index: 252685317

Matched Legal Cases: ['§120', '§120', '§120', '§120', '§120', '§120', '§120']

Changes in Small Business Administration 504/CDC Loan Guaranty Program from December 5, 2017 to April 6, 2018 - EveryCRSReport.com
Changes from December 5, 2017 to April 6, 2018
December 5, 2017Updated April 6, 2018 (R41184)
The Small Business Administration (SBA) administers programs to support small businesses, including several loan guaranty programs designed to encourage lenders to provide loans to small businesses "that might not otherwise obtain financing on reasonable terms and conditions." The SBA's 504 Certified Development Company (504/CDC) loan guaranty program is administered through nonprofit Certified Development Companies (CDCCDCs). It provides long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of the total project costs, a third-party lender must provide at least 50% of the financing, the CDC provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of the financing. Its name is derived from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended), which provides the most recent authorization for the sale of 504/CDC debentures. In FY2017, the SBA approved 6,218 504/CDC loans amounting to about $5.0 billion.
Congressional interest in the SBA's 504/CDC program has increased in recent years because of concern that small businesses might be prevented from accessing sufficient capital to assist in the economic recoveryenable them to grow and create jobs. For example, during the 111th Congress, P.L. 111-240, the Small Business Jobs Act of 2010,
The SBA's debenture is backed by the full faith and credit of the United States and is sold to underwriters that form debenture pools. Investors purchase interests in the debenture pools and receive certificates representing ownership of all or part of the pool. The SBA and CDCs use various agents to facilitate the sale and service of the certificates and the orderly flow of funds among the parties.4 After a 504/CDC loan is approved and disbursed, accounting for the loan is set up at the Central Servicing Agent (CSA, currently Wells Fargo Corporate Trust ServicesPricewaterhouseCoopers Public Sector LLP), not the SBA. The SBA guarantees the timely payment of the debenture. If the small business is behind in its loan payments, the SBA pays the difference to the investor on every semiannual due date.
In FY2017, the SBA approved 6,218 504/CDC loans amounting to about $5.0 billion.5 The SBA disbursed (after cancelations) 5,2205,834 504/CDC loans totaling $4.64 billion, after cancelations, primarily by borrowers who decided not to accept the loans billion.6 At the end of FY2017, there were 59,141 504/CDC loans with an unpaid principal balance of about $27.4 billion.7
Historically, one of the justifications presented for funding the SBA's loan guaranty programs has been that small businesses can be at a disadvantage, compared with other businesses, when trying to obtain access to sufficient capital and credit.8 Congressional interest in small business access to capital, in general, and the 504/CDC program, in particular, has increased in recent years because of concern that small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recoverygrow and create jobs.
from $1.5 million to $5 million for regular 504/CDC loans to $5 million;
from $2 million to $5 million if the loan proceeds are directed toward one or more of the public policy goals described above to $5 million;
from $4 million for small manufacturers to $5.5 million for small manufacturers;
from $4 million to $5.5 million for projects that reduce the borrower's energy consumption by at least 10% to $5.5 million; and
from $4 million to $5.5 million for projects for plant, equipment, and process upgrades of renewable energy sources, such as the small-scale production of energy for individual buildings or communities consumption (commonly known as micropower), or renewable fuel producers, including biodiesel and ethanol producers to $5.5 million.24
20maturity for a 504/CDC loan is generally 20 or 25 years for real estate,
10 years for machinery and equipment,; and
10, 20, or 25 or 20 years based upon a weighted average of the useful life of the assets being financed.26
The interest rate for 504/CDC debentures is set by the SBA and approved by the Secretary of the Treasury.28 It is based on market conditions for long-term government debt at the time of sale and pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues. The interest rate for December 2017 is 4.5120-year 504/CDC debentures in April 2018 is 4.92%.29 In addition, the SBA sets the maximum interest rate that can be charged by any third-party lender for a commercial loan which funds any portion of the cost of a 504/CDC project. The rate "must be reasonable" and published in the Federal Register. The current maximum interest rate that a third-party lender is allowed to charge for a commercial loan that funds any portion of the cost of a 504/CDC project is 6% greater than the New York prime rate or the maximum interest rate permitted in that state, whichever is less.30
There are currently 270 CDCs and 230In FY2017, 211 CDCs provided at least one 504/CDC loan in FY2016.38
CDCs may apply to the SBA for ALP status. Selection is based on several factors, including the CDC's experience as a CDC, the number of 504/CDC loans approved, the size of the CDC's portfolio, its record of compliance with SBA loan program requirements, and its record of cooperation with all SBA offices.47 The SBA is able to process loan requests from ALP-CDCs more quickly than from regular CDCs because it relies on their credit analysis when making the decision to guarantee the debenture. About one-third of CDCs have ALP status (77 of 230226) and they account for about 60% of all 504/CDC lending.48
As of July 31September 30, 2017, 15 CDCs had active PCLP status.52 In recent years, the number and amount of 504/CDC loans made through the PCLP program have declined. In FY2009, 373 PCLP loans amounting to $185.4 million were disbursed. In FY2017, nine11 PCLP loans amounting to $6.010.6 million were disbursed.53
The CDC closes the loan in time to meet a specific debenture funding date. At the time of closing, the project must be complete (except funds put into a construction escrow account to complete a minor portion of the project). The SBA's district counsel reviews the closing package and notifies the Central Servicing Agent (CSA, currently Wells Fargo Corporate Trust ServicesPricewaterhouseCoopers Public Sector LLP) and the CDC via email if the loan is approved for debenture funding. If the loan is approved, the CDC forwards specified documents needed for the debenture funding directly to the CSA using a transmittal letter or spreadsheet. As mentioned, because the 504/CDC program provides permanent or take-out financing, an interim lender (either the third-party lender or another lender) typically provides financing to cover the period between SBA approval of the project and the debenture sale. Proceeds from the debenture sale are used to repay the interim lender for the amount of the project costs that it advanced on an interim basis.59
Table 2 shows the number and amount of 504/CDC loans that the SBA approved in FY2005-FY2017 and the net number and amount of 504/CDC loans that borrowers actually received in FY2005-FY2016FY2017 after full cancellations are taken into account. Each year, 5% to 15% of SBA-approved 504/CDC loans are subsequently canceled for a variety of reasons, typically by the borrower (e.g., funds are no longer needed or there was a change in ownership).
Source: P.L. 108-447, Consolidated Appropriations Act, 2005; P.L. 109-108, the Science, State, Justice, Commerce and Related Agencies Appropriations Act, 2006; U.S. Small Business Administration, Congressional Budget Justification: FY2008 Annual Performance Report, p. 17; U.S. Small Business Administration, FY2010 Congressional Budget Justification and FY2008 Annual Performance Report, p. 11; U.S. Small Business Administration, FY2011 Congressional Budget Justification and FY2009 Annual Performance Report, p. 19; U.S. Small Business Administration, FY2012 Congressional Budget Justification and FY2010 Annual Performance Report, p. 22; U.S. Small Business Administration, FY2013 Congressional Budget Justification and FY2011 Annual Performance Report, p. 19; U.S. Small Business Administration, FY2014 Congressional Budget Justification and FY2012 Annual Performance Report, p. 25; U.S. Small Business Administration, FY2015 Congressional Budget Justification and FY2013 Annual Performance Report, p. 24; P.L. 113-235, the Consolidation and Further Continuing Appropriations Act, 2015; P.L. 114-113, the Consolidated Appropriations Act, 2016, P.L. 114-223, the Continuing Appropriations and Military Construction, Veterans Affairs, and Related Agencies Appropriations Act, 2017; P.L. 114-254, the Further Continuing and Security Assistance Appropriations Act, 2017; P.L. 115-31, the Consolidated Appropriations Act, 2017; and P.L. 115-56141, the ContinuingConsolidated Appropriations Act, 2018 and Supplemental Appropriations for Disaster Relief Requirements Act, 2017.
Notes: The Microloan program also receives a credit subsidy, primarily for providing below market interest rates to Microloan intermediaries. The subsidies were $1.45 million in FY2005, $1.3 million in FY2006 and FY2007, $2.0 million in FY2008, $8.5 million in FY2009 ($6 million added by P.L. 111-5, the American Recovery and Reinvestment Act of 2009), $3.0 million in FY2010 and FY2011, $3.678 million in FY2012, $3.498 million (after sequestration) in FY2013, $4.6 million in FY2014, $2.5 million in FY2015, $3.3 million in FY2016, $4.3 million in FY2017, and $4.33.44 million in FY2018 under the continuing resolution.
In addition, the SBA's Office of Credit Risk Management (OCRM) created new metrics in FY20142015 for monitoring 504/CDC lender loan performance called SMART (measuring the lender's solvency and financial condition, management and governance, asset quality and servicing, regulatory compliance, and technical issues and mission) and updated those metrics in 2016.106 SMART is designed to "assist OCRM in identifying high risk lenders and ensuring that lender oversight drives meaningful review activities, findings, and corrective actions that reduce risk to the SBA."107 OCRM also created a "detailed bench-marking analysis project that will serve to establish quantitative performance metrics and indicators of quality (Preferred, Acceptable and Less than Acceptable) to be incorporated into each area of risk assessment identified in the ... SMART protocol measurement attributes."108
authorized the SBA to establish an alternative size standard for the 7(a) and 504/CDC programs that uses maximum tangible net worth and average net income as an alternative to the use of industry standards and established an interim size standard of a maximum tangible net worth of not more than $15 million and an average net income after federal taxes (excluding any carryover losses) for the preceding two fiscal years of not more than $5 million;.111
S.Amdt. 1833, the INVEST in America Act of 2012—an amendment in the nature of a substitute for H.R. 3606, the Jumpstart Our Business Startups Act—was introduced on March 15, 2012. It would have allowed 504/CDC loans to be used to refinance projects not involving expansions for an additional year beyond the two years from the date of enactment authorized by the Small Business Jobs Act of 2010.120 The amendment was ruled non-germanenongermane by the chair on March 21, 2012, and was not included in the final version of the bill that was approved by the Senate the following day.121
13 C.F.R. §120.801. 504/CDC debentures are normally sold and proceeds disbursed on the Wednesday after the second Sunday of each monthThe SBA sells 10-year, 20-year, and 25-year 504/CDC debentures. The 10-year 504/CDC debentures are normally sold and proceeds disbursed every other month. The 20-year 504/CDC debentures are normally sold and proceeds disbursed on the Wednesday after the second Sunday of each month. The SBA made 25-year 504/CDC debentures available for 504/CDC projects approved on or after April 2, 2018. The 25-year 504/CDC debentures are expected to be sold and proceeds disbursed on a monthly basis. See SBA, "SOP 50 10 5(I): Lender and Development Company Loan Programs," (effective January 1, 2017), p. 289, at https://www.sba.gov/sites/default/files/sops/SOP_50_10_5_I_FINAL_Clean_Highlighted_Changes.pdf; and SBA, "504 Loans and Debentures With 25 Year Maturity," 83 Federal Register 14536, April 4, 2018.
SBA, "SBA Lending Statistics for Major Programs (as of 9/30/September 30, 2017)," at https://www.sba.gov/sites/default/files/aboutsbaarticle/WebsiteReport_asof_20170930.pdf.
SBA, Office of Congressional and Legislative Affairs, correspondence with the author, November 24, 2017"SBA FY2017 PCLP Annual Report to Congress, April 4, 2018.
IbidSBA, Office of Congressional and Legislative Affairs, correspondence with the author, November 24, 2017.
13 C.F.R. §120.110. Nineteen types of businesses are ineligible for 504/CDC loans. AlsoIn addition, an associate is an officer, director, owner of more than 20% of the equity, or key employee of the small business; any entity in which one or more individuals referred to above owns or controls at least 20% of the equity; and any individual or entity in control of or controlled by the small business, except a Small Business Investment Company licensed by the SBA. See 13 C.F.R. §120.10.
13 C.F.R. §120.921; and SBA, "504 Loans and Debentures With 25 Year Maturity," 83 Federal Register 14536, April 4, 2018. 27. 13 C.F.R. §120.921; and SBA, "504 Loans and Debentures With 25 Year Maturity," 83 Federal Register 14536, April 4, 2018.
Capital Certified Development Corporation, "504/CDC Program Interest Rates," Austin, TX, at https://www.capitalcdc.com/loan-programs/the-sba-504-program. The interest rate for 20-year 504/CDC debentures was 4.59% in March 2012, 4.01% in January 2013, 4.16% in April 2013, 4.53% in June 2013, 5.69% in September53% in June 2013, 5.45% in October 2013, 5.29% in April 2014, 4.82% in October 2014, 4.78% in December 2014, 4.55% in February 2015, 4.85% in June 2015, 4.8% in November 2015, 4.87% in January 2016, 4.32% in May 2016, 4.08% in October 2016, 4.59% in December 2016, 4.37% in September 2017, and 4.51% in Decemberand 4.37% in September 2017.
SBA, "CDC/504 Loan Program," at https://www.sba.gov/tools/local-assistance/cdc; and SBA, FY2018FY2019 Congressional Budget Justification and FY20167 Annual Performance Report, p. 3243, at https://www.sba.gov/sites/default/files/aboutsbaarticle/FINAL_SBA_FY_2018_CBJ_May_22_2017c.pdfSBA_FY_19_508-Final-FINAL.PDF.
13 C.F.R. §120.823; and See SBA, "SOP 50 10 5(I): Lender and Development Company Loan Programs," (effective January 1, 2017), pp. 45-46, at https://www.sba.gov/sites/default/files/sops/SOP_50_10_5_I_FINAL_Clean_Highlighted_Changes.pdf. The SBA issued a final rule, effective April 21, 2015, that changed the SBA's regulations concerning the CDC's board of directors and the structure and operations of CDC loan committees (13 C.F.R. §120.823). Under the new rule, loan committees are required to have at least two members (instead of one) with commercial lending experience satisfactory to the SBA. See SBA, "504 and 7(a) Loan Programs Updates," 79 Federal Register 15650, March 21, 2014.
SBA, Office of Congressional and Legislative Affairs, correspondence with the author, April 7, 2010; September 17, 2012; November 6, 2015; October 12, 2016; August 24, 2017; and November 24, 2017. In FY2017, the SBA disbursed 5,834In FY2017, the SBA disbursed 5,220 504/CDC loans totaling $4.640 billion. Of this amount, 3,592512 were ALP loans totaling $2.84 billion.
6 billion. See SBA, Office of Congressional and Legislative Affairs, "SBA FY2017 PCLP Annual Report to Congress," April 4, 2018.
SBA, Office of Congressional and Legislative Affairs, correspondence with the author, November 24, 2017"SBA FY2017 PCLP Annual Report to Congress," April 4, 2018.
Ibid; SBA, "SBA Information Notice 5000-1348: Revised Risk-Based Review Protocol for Certified Development Companies," October 3, 2017 (effective August 5, 2015), at https://www.sba.gov/sites/default/files/lender_notices/5000-1348.pdf; and SBA, "SBA Information Notice 5000-1398: Updated SMART Methodology for Oversight of CDCs," October 3, 2017 (effective November 9, 2016), at https://www.sba.gov/sites/default/files/lender_notices/SBA_Info_Notice_5000-1398_SM.pdf. 107. SBA, Office of Inspector General, "The SBA's Portfolio Risk Management Program Can be Strengthened," July 2, 2013, p. 19, at https://www.sba.gov/sites/default/files/oig/Audit%20Evaluation%20Report%2013-17%20The%20SBA's%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf.