Source: https://www.federalregister.gov/documents/2003/07/08/03-16862/development-company-loan-504-program-changes
Timestamp: 2016-09-27 02:18:24
Document Index: 646817091

Matched Legal Cases: ['§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', 'art 120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', 'art 120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009508', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009101', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', 'art 103', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009121', '§\u2009107', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009124', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009121', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', 'art 107', '§\u2009107', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120', '§\u2009120']

:: Development Company Loan (504) Program Changes
A Proposed Rule by the Small Business Administration on 07/08/2003
40553-40573
03-16862
https://www.federalregister.gov/d/03-16862
The most significant regulations that SBA proposes to change are those governing a CDC's area of operations; a CDC's organizational structure; the requirements for a new CDC or a CDC requesting to expand its territory; the “adequately served” standard; and whether a CDC may participate in other SBA loan programs. Also, to allow for greater delegation of authority to CDCs, the proposed rule includes expanded sections on the Accredited Lender Program (“ALP”), the Premier Certified Lender Program (“PCLP”) and a simplification and clarification of the Start Printed Page 40554enforcement provisions for CDCs. In addition, SBA proposes to increase the “job opportunity average” and to permit CDCs to approve more projects that do not meet the job creation criteria but do meet other statutory goals. The proposed amendments also clarify the regulations governing fees that a small business may and may not be charged.
The 504 Program, Title V of the Small Business Investment Act (“Act”), 15 U.S.C. 695, was established by Public Law 85-699 on August 21, 1958. A “development company” was defined as an enterprise formed for the purpose of furthering economic development of its community and environs, and with authority to promote and assist the growth and development of small business concerns in the areas covered by their operations. The law further stated that a local development company is a corporation chartered under any applicable State corporation law to operate in a specified area within a State and be composed of and controlled by persons residing or doing business in the locality. The program was amended in 1980 due to changing business conditions for small businesses. During the late 1970s and early 1980s, the prime interest rate and unemployment rate reached historically high levels. It was generally believed that long-term, fixed-rate money was not available at a reasonable cost to small businesses because of these high prevailing rates and that this was hindering job creation. Congress enacted section 503 of the Act in 1980. The 503 and 504 Programs were intended to provide long-term, fixed-rate financing to small businesses at favorable terms that were unavailable in the commercial marketplace. Congress specified in the Act that this program “foster economic development and create or preserve job opportunities in both urban and rural areas by providing long-term financing for small business concerns * * *” The statute authorizes SBA to guarantee debentures backing long-term, fixed-asset loans (“504 Loans”) made by CDCs. It also authorizes SBA to pool the guarantees and sell interests in the pools to investors.
The 504 Program is critical in all economic cycles but of greatest significance in today's economy. The ability of a small business to buy needed equipment and real estate to grow while preserving capital to fund expansion and job growth is crucial in Start Printed Page 40555today's economy. No other program provides these benefits to small businesses * * * By virtue of its structure, providing a financing package that requires participation of a private sector lender, federal resources are leveraged. The program has always been available, regardless of economic cycle, and provides a high level of security to the participating private sector lender. This security is even more critical in a down economy and may mean the difference between financing with 504 or no financing available.
To allow for greater delegation of authority to CDCs, this proposed rule includes expanded sections on the ALP and the PCLP. This proposed rule also simplifies and clarifies the enforcement provisions for CDCs. In addition, SBA proposes to amend the “job opportunity average,” which will permit CDCs to approve more projects that do not meet the job creation criteria but do meet other statutory goals such as increasing manufacturers' productivity and competitiveness through re-tooling, robotics or modernization. Proposed amendments also clarify the regulations governing fees that a small business may and may not be charged. The regulations covered by the proposed rule are 13 CFR, subpart A, § 120.102 and § 120.140, and subpart H, §§ 120.800 through 120.984.
Next, SBA is proposing to eliminate the “adequately served” standard. Currently, a county meets the standard of “adequately served” when the CDC that includes the county in its area of operations averages at least one 504 loan approval in that county per 100,000 population per year averaged over two years. In such cases, the county is unavailable both to an existing CDC applying to expand its operations to include that county, and to a new CDC Start Printed Page 40556applying to include that county in its proposed area of operations. In addition, the regulations currently do not permit a new CDC, or a CDC applying to expand its area of operations, to apply for a particular county if that county has become part of another CDC's area of operations within the previous 24 months. Eliminating this standard will encourage new CDC applications and expansion applications from existing CDCs. SBA is proposing to allow the marketplace to determine the maximum number of CDCs that can co-exist within a State. With these changes SBA anticipates that small businesses, as well as lenders, will have greater choice in and access to capital.
The concept of permitting a CDC to invest in a Small Business Investment Company (“SBIC”) generally was supported by the commenters. Many writers viewed such an investment as economic development as long as the SBIC and the CDC were not affiliates. However, SBA's current regulations prohibit a CDC from owning an equity interest in a business that has received or is applying to receive SBA financing (§ 120.140). Since SBICs typically have an ownership interest in the businesses that they assist, a CDC that has invested in an SBIC also would have an ownership interest in the small business receiving financing from the SBIC and could potentially violate this regulation by providing financing directly to that small business. In addition, SBA's regulations state that a CDC must operate in its Area of Operations. SBA interprets this requirement to apply to all CDC activities that use funds generated from the 504 Program. In light of these concerns, at this time SBA proposes to prohibit a CDC from investing in an SBIC. The proposed rule would not require a CDC with an existing investment in an SBIC to liquidate such investment.
SBA proposes to add a definition of “SOP” to § 120.102, the definitions section applicable to the entire part 120.
SBA proposes to amend § 120.140 to delete references to Associate Development Companies (“ADC”) (see discussion of § 120.850).
SBA proposed to change the headings for § 120.800 and § 120.801 to make their format consistent with the other section headings in subpart H.
SBA proposed some changes to the definitions in § 120.802. The definition of “Area of Operations” would be modified to add that the minimum area of operations for a CDC is the State in which the CDC is incorporated. This change would permit more access to capital as well as choices for small businesses. In response to the ANPRM, several commentors suggested that a CDC's area of operations be SBA district-wide. However, SBA agrees with the reasoning of one commentor regarding the district-wide proposal:
The definition of “Local Economic Area” would be revised slightly to make it consistent with the revised, statewide “Area of Operations” definition. In addition, the definition for “Associate Development Company” would be deleted. This change is discussed in the analysis of revisions proposed for § 120.850. Other regulations in subpart H of part 120 use the terms “Designated Attorney,” “Lead SBA Office” and “Priority CDC.” For clarification, this proposed rule would add definitions for those terms.
In § 120.810, application for certification as a CDC, SBA is proposing changes to the policies governing new CDC applications to reflect the change in the definition of a CDC's “Area of Operations” to a minimum of statewide. Additionally, it deletes the current restrictions that permit existing CDCs to exclude geographic areas from being considered for a new CDC. SBA is permitting the marketplace to determine the optimum number of CDCs that may be supported.
Because of these changes and in order to streamline the application process, SBA would delete § 120.811, public notice of CDC certification application, which requires public notice as well as direct notice to existing CDCs. SBA believes the application process, SBA oversight, and the marketplace will be enough to ensure that the process will lead to improved economic development. This proposed rule would add a clarification that an applicant CDC must demonstrate financial capability to meet the upfront costs of the program until the CDC's operations meet the breakeven point. This is to ensure that the CDC will be staffed sufficiently to meet the requirements of marketing, processing, closing, and servicing 504 Loans.
Section 120.812, probationary period for newly certified CDCs, proposes revisions that would clarify how SBA Start Printed Page 40557will process a CDC's petition for permanent CDC status, and that the probationary period commences on the date of certification. Also SBA proposes to delete all references to ADCs in connection with the proposed elimination of the ADC program (see discussion of § 120.850).
In § 120.820, CDC non-profit status, SBA proposes to describe what SBA means by the term “good standing.” While this is a term SBA has used over the years in administering the 504 Program, SBA has not fully defined it previously. Following discussions between SBA program officials and the CDC industry, SBA proposes several criteria that constitute good standing for the 504 Program. SBA intends to apply the term generally to all CDCs.
Section 120.821, CDC Area of Operations, would be revised to delete the limitation of one statewide CDC since all CDCs' areas of operations will be at least statewide (see discussion of definition of “Area of Operations” in § 120.802).
Section 120.826, basic requirements for operating a CDC, would be slightly reworded for clarity. The responsibilities currently described in § 120.827(a) would be moved to this section because SBA considers them to be basic requirements for operating a CDC. In addition, SBA proposes to clarify that all CDCs must comply with all of the 504 Program requirements imposed by statute, regulation, SOP, policy and procedural notice, loan authorization, debenture, or any agreement between SBA and the CDC, some of which is currently in § 120.827(a).
Section 120.828, minimum level of 504 loan activity and restrictions on portfolio concentrations, would be reworded to clarify the minimum level of 504 loan activity a CDC must maintain. In addition, this section would cover the requirement concerning portfolio concentrations currently contained in § 120.827(a) and the heading to the section would be revised accordingly.
Section 120.835, application to expand an area of operations, would be revised. Most of the applications SBA receives are for expansions of a CDC's area of operations within its State of incorporation. The expansion request usually is for several counties in which there currently are one or more CDCs that include those counties in their areas of operations. Since the proposed rule gives all CDCs a minimum area of operations of the State in which they are incorporated, and since SBA is allowing the marketplace to determine the optimum number of CDCs, much of the current regulatory language is no longer required (refer to § 120.802 and § 120.810 for further discussion). SBA proposes that the only applications for expansion that it would consider would be when the CDC requests to expand beyond its State of incorporation. In this section, SBA also proposes to add the requirement that such applicants must be ALP-qualified. There are two reasons for this. The first is to limit expansions beyond State lines to only those CDCs who have met certain volume, closing, and portfolio quality standards. The second is to reflect the proposed change in the regulations governing multi-state expansions that would permit a CDC to use in the expanded area any unilateral authority it has already received in its State of incorporation (see discussion of proposed changes to § 120.837). To further streamline the application Start Printed Page 40558process, SBA is proposing to delete the requirement that a multi-state CDC have at least three members from each State on its board. SBA believes that the general membership requirements (see § 120.822) and loan committee requirements (see § 120.823) for the State into which it is expanding are sufficient to demonstrate the CDC's commitment to local economic development in that State. Additionally, SBA is proposing to delete the requirement for public notice and for direct notice to all other CDCs in the proposed area of operations since SBA is permitting the marketplace to determine the optimum number of CDCs that can be supported.
Section 120.836, public notice, and opportunity for response, would be deleted. SBA believes that the requirement would not be needed for the same reasons discussed in § 120.811.
In new § 120.841, SBA proposes to establish more detailed qualifications for the ALP. The standards will be consistent with section 507 of the Act and coordinate with eligibility requirements for CDC participation in the PCLP (see § 120.845 discussion below). These changes will make it easier for SBA to provide consistent and objective evaluation of a CDC application to participate in the ALP.
Section 120.845, premier certified lenders program, would be revised. The PCLP is now a permanent program pursuant to section 508 of the Act. SBA proposes to add considerably more detail to § 120.845 and move some of its revised and expanded provisions to new §§ 120.846-120.848. Since CDCs participating in the PCLP must be approved to participate under the ALP or be “ALP qualified,” SBA proposes to add some of the PCLP requirements to § 120.841.
Participation in the PCLP, pursuant to section 508(b) of the Act, is limited to those CDCs that are active in the 504 Program; are in good standing with SBA; have demonstrated the ability to properly analyze, close and service 504 Loans; and have been active as ALP CDCs. Section 508(b)(2)(A) of the Act allows SBA to waive the requirement for those non-ALP CDCs that meet the ALP participation criteria. However, rather than developing a waiver process, SBA proposes incorporating the ALP participation criteria into the PCLP participation criteria (see § 120.845(c)(1)).
Congress, SBA and the CDC industry recognize that the success of the PCLP is highly dependent on the extent to which PCLP CDCs are familiar with SBA's credit and eligibility standards and its loan processing, closing, servicing and liquidation policies and procedures. These policies and procedures are highly complex and require processing a substantial volume of 504 Loans over an extended period of time to remain proficient. Also, SBA needs access to a significant number of a CDC's loans to evaluate its proficiency. SBA notes that the ALP requires that its participants must have processed at least 20 504 Loans in the most recent three years (see proposed § 120.841(b). When considering the minimum 504 Loan volume requirement for participation in the PCLP, SBA considered the concern of smaller and rural CDCs that a high minimum 504 Loan volume requirement could exclude them from being a PCLP CDC. SBA discussed those concerns with the CDC industry and concluded that proficiency in 504 Loan policies and procedures can only be developed and maintained from regularly processing a significant Start Printed Page 40559number of 504 Loans. In addition, one of the main purposes of the PCLP was to improve the efficiency and expedite the loan processing of higher volume CDCs, which were being disproportionately impacted by the longer turn-around time in SBA's district offices. Also, for low volume CDCs, any potential efficiency benefits from participating in the PCLP would more than likely be offset by the cost and effort required to develop and maintain the high level of 504 Loan proficiency required in a staff that rarely processes an SBA 504 Loan. (About half of all CDCs process less than six 504 Loan applications per year.) After considering these issues, SBA proposes to require that ALP and PCLP applicants must have received approval for at least twenty 504 Loans in the most recent three years and have a portfolio of at least 30 active 504 Loans. (SBA proposes to define an “active” 504 Loan as a loan that was approved and closed by the CDC and has a status of either current, delinquent, or in liquidation.)
Section 508(b)(2)(A) requires that PCLP CDCs be in good standing with SBA. SBA interprets that requirement to mean both in good standing with the State in which the CDC is incorporated (as discussed in § 120.820), and in compliance with the 504 Program requirements imposed by statute, regulation, SOP, policy and procedural notice, loan authorization, debenture, or any agreement between SBA and the CDC. Under the PCLP, due to the higher level of authority delegated to the PCLP CDCs and the potential risk to the Agency, SBA expects a significantly higher level of compliance with both of these requirements by PCLP CDCs, with only very rare deviation. SBA sees a similar distinction between non-PCLP CDCs generally meeting SBA's five established portfolio benchmarks versus virtually absolute compliance by PCLP CDCs with those benchmarks.
Section 120.846, requirements for maintaining and renewing PCLP status, would be added. Pursuant to section 508(b)(3) of the Act, in order to retain its PCLP status, a PCLP CDC must continue to meet the eligibility requirements of the PCLP, as proposed in § 120.845. While level of activity is one of those criteria, section 508(i) of the Act requires that PCLP CDCs establish a goal of processing a minimum of 50 percent of their 504 Loan applications using PCLP procedures. SBA considered establishing a requirement that PCLP CDCs process at least 30 percent of their 504 Loans using PCLP procedures immediately after becoming a PCLP CDC and gradually increasing that requirement as the PCLP CDCs matures. However, following discussions with the CDC industry, SBA determined that immediately establishing such an absolute minimum could discourage participation in what is a developing program with a variety of relatively new concepts and procedures. Nevertheless, SBA recognizes that the legislation authorizing PCLP mandates that PCLP CDCs be active CDC lenders and establish a goal of processing a minimum of 50 percent of their 504 Loans using PCLP procedures. As a result, while SBA still expects PCLP CDCs to process a substantial proportion of their 504 Loans using PCLP procedures and strive to reach their 50 percent goal as mandated by statute, SBA will not immediately require an absolute minimum. Thus, as the PCLP matures, SBA intends to publish procedural guidance gradually Start Printed Page 40560incorporating and increasing the minimum number and percent of 504 Loans that PCLP CDCs must process using PCLP procedures.
Due to its management control and oversight responsibilities, SBA must ensure that LLRFs (1) are properly established, (2) contain the required reserve amounts and (3) are appropriately administered and controlled. Periodic reporting by PCLP CDCs to SBA on the amount of funds maintained in LLRFs is critical to ensuring that LLRFs are properly established and maintained. However, while LLRFs must contain deposits equal to one percent of each PCLP debenture, the deposits associated with each PCLP debenture may be made in as many as three installments. Also, during the normal course of a PCLP CDC's operations, LLRFs will be subject to a variety of other deposits and withdrawals (e.g., withdrawals associated with loans paid in full and defaults). As a result, reporting and reconciling LLRFs might become quite complex. SBA is concerned with the potential burden such reporting could represent to PCLP CDCs. SBA continues to work with the CDC industry to Start Printed Page 40561develop and test efficient and effective reporting procedures, and will publish appropriate procedural guidance as those procedures are finalized.
SBA proposes to allow PCLP CDCs to withdraw any funds from the LLRFs that exceed required minimums, at SBA's discretion. The proposed § 120.847(g) provides that requests for withdrawals must be forwarded to the Lead SBA Office, which will check the balances to ensure the required minimums are maintained and authorize withdrawals as appropriate.
Proposed § 120.847(h) would provide that when a PCLP CDC has submitted a liquidation wrap-up report to SBA, or SBA otherwise has determined that all reasonable collection efforts have been exhausted, the Lead SBA Office will calculate the SBA's loss and notify the PCLP CDC of the amount of any reimbursement obligation and provide appropriate supporting documentation. The proposed role sets forth procedures so that PCLP CDCs may appeal any problems or disagreements regarding the calculation of SBA's loss.
Proposed § 120.847(i) would require PCLP CDCs to reimburse SBA for 10 percent of any loss and states that the reimbursement may come from the LLRF or from other funds provided by the PCLP CDC. There could also be instances where a PCLP CDC would not have sufficient funds in its LLRF to reimburse SBA for 10 percent of SBA's loss, and the regulation proposes to provide the PCLP CDC a reasonable period of time after SBA demand to reimburse the Agency.
Pursuant to § 508(e) of the Act, PCLP CDCs are permitted to approve, authorize, and close 504 Loans, subject to standards established by SBA. Proposed § 120.848 provides additional guidance and notes that all 504 Program requirements apply to 504 Loans processed by PCLP CDCs. PCLP CDCs are specifically authorized to determine a 504 Loan applicant's credit-worthiness and are permitted to establish the terms and conditions under which the loan will be made. The PCLP CDC also will be authorized to take other processing actions as may be delegated by SBA to PCLP CDCs. However, because SBA's management control and oversight responsibilities require a systematic review of a PCLP CDC's 504 loan processing proficiency, SBA must periodically review the processing actions of PCLP CDCs to ensure the PCLP CDC is using appropriate and reasonable procedures. PCLP CDCs are thus expected to retain in their loan files copies of all documents associated with their processing actions. SBA may occasionally review these documents on site or request that they be forwarded to SBA for review. If SBA identifies significant problems or deviations from SBA's 504 Program requirements, SBA will take appropriate corrective action, including possible removal from the PCLP.
SBA is proposing to delete §§ 120.850-120.852, concerning ADCs, and to eliminate the ADC designation. First, SBA is seeking to eliminate redundancy in the regulations. One aspect of the ADC program was that it established requirements for organizations to qualify to contract with CDCs for 504-related services. However, § 120.824 permits CDCs to contract for 504-related services and governs such contracts. Second, these regulations established one of the grounds (not meeting the minimum required level of 504 Loan approval activity) for removing a CDC from the 504 Program. In the proposed rule, all grounds for taking enforcement action against a CDC would be combined under one regulation, § 120.854.
Section 120.855, CDC ethical requirements, would be redesignated as § 120.851, and reworded to clarify its meaning and to remove the reference to ADCs (see § 120.850 discussion).
Proposed new § 120.852 would prohibit a CDC from investing in or being affiliated with a 7(a) lender or an SBIC, which SBA believes will help to avoid apparent conflicts of interest and serve the economic development mission of the CDC. The proposed rule would not require a CDC with an existing investment in an SBIC to liquidate such investment. As part of the ANPRM, SBA asked the question whether SBA should permit a CDC to establish a 7(a) lender or permit a 7(a) lender to establish a CDC. The overwhelming response was that two programs should remain separate.
Proposed new § 120.853 is identical to existing § 120.973 except that it would eliminate references to ADCs.
Proposed new § 120.854, grounds for taking enforcement action against a CDC, § 120.855, types of enforcement actions, and § 120.856, enforcement procedures, would consolidate existing Start Printed Page 40562§ 120.852 and §§ 120.982-120.984 and would clarify the grounds required for SBA enforcement actions against CDCs as well as SBA's and CDCs' rights and responsibilities in such actions. Section 120.981, voluntary transfer and surrender of CDC certification, would be redesignated as § 120.857 to move it under the new heading.
Section 120.861, job creation or retention, is revised (see discussion of proposed revisions to § 120.829 for a description of the changes to the job requirement criteria). The change in the criteria will be published in a Federal Register notice from time to time.
SBA proposes to change the headings of §§ 120.900 and 120.910 to make their form consistent with the other section headings in subpart H.
Section 120.923, policies on subordination, proposes changing the section heading and consolidating existing §§ 120.923 and 120.924.
SBA proposes to remove §§ 120.980-120.984.
Fees 504 loan and debenture closings
Executive Order 12866: The Office of Management and Budget (OMB) has Start Printed Page 40563determined that this proposed rule constitutes a significant regulatory action under Executive Order 12866. SBA believes there is a need for this regulatory action for the reasons stated in the preamble to this proposed rule. SBA believes the proposed regulatory changes will improve 504 Program delivery to small business customers by increasing customer choice of service; increase third party lender choice of CDCs; facilitate the formation of new CDCs; facilitate the expansion of existing CDCs; and increase the number of CDCs able to take advantage of special initiatives for rural areas. By allowing market-driven forces to determine availability of 504 Program service, small business will have greater opportunity to negotiate the best total financing package, including fees, as well as receive increased service by CDCs. In addition, the 504 Program will be more responsive to changes in market conditions. SBA believes that there are no viable alternatives to these changes that would produce similar positive results without imposing an additional burden on SBA or the public. However, SBA requests comment from members of the public who believe there are viable alternatives that would achieve the same objectives with no greater burden.
In addition, SBA expects the impact of the proposed rule will be a reduction in the overall paperwork burden for CDCs since CDCs will no longer have to apply to SBA to expand their area of operations within their State of incorporation. SBA received and approved approximately 11 expansion requests during 2002. All were for CDCs requesting expansions into neighboring counties within the CDC's State of incorporation. The burden hours for a new CDC or a CDC wishing to expand to complete an application is estimated to be 10 hours. None of the applications for an expansion would have been necessary under the proposed rule. In addition, applicants requesting to become CDCs also will be permitted to establish their optimal area of operations within their State of incorporation without being excluded from areas that currently have one or more CDCs. SBA receives one or two applications to become a CDC per year. The burden hours for an application will be reduced by approximately one hour due to the changes in the general Start Printed Page 40564membership requirements that will allow an applicant more flexibility in meeting this requirement. SBA asserts that the economic impact of the reduction in paperwork, if any, will be minimal to small entities.
Need and Purpose: Proposed § 120.847(f) of SBA regulations states that each PCLP CDC must periodically report to SBA the amounts in its LLRF in a form that will readily facilitate reconciliation of the amounts maintained in its LLRF with the amounts required. This will require the PCLP CDC to keep track of the face amount of each PCLP debenture and then determine and record the amount Start Printed Page 40565that must be contributed into its LLRF. Pursuant to the proposed regulations (§ 120.847(e)) the PCLP CDC has several deadlines related to when those contributions relating to each PCLP debenture must be made. There are three relevant deadlines for each PCLP debenture. The PCLP CDC must also keep track of its contributions to the LLRF.
15 U.S.C. 634(b)(6), 636(a) and (h), 696(3) and 697(a)(2). End Authority
2. Amend § 120.10 by adding a definition of “SOP” to read as follows:
§ 120.10 Definitions.
2. Revise the first sentence of the introductory text of § 120.140 to read as follows:
§ 120.140 What ethical requirements apply to participants?
3. Revise the heading of § 120.800 to read as follows:
§ 120.800 The purpose of the 504 program.
4. Revise the heading of § 120.801 to read as follows:
§ 120.801 How a 504 Project is financed.
5. Amend § 120.802 by removing the definition of “Associate Development Company”; revising the definition of “Area of Operations”; adding definitions of “Designated Attorney”, “Lead SBA Office”, “Priority CDC”, and revising the first sentence of the definition of “Local Economic Area”, to read as follows:
§ 120.802 Definitions.
Priority CDC is a CDC certified to participate on a permanent basis in the 504 program (see § 120.812) that SBA has approved to participate in an expedited 504 loan and Debenture closing process.
6. Revise § 120.810 to read as follows:
§ 120.810 Applications for certification as a CDC.
(a) An applicant for certification as a CDC must apply to the SBA District Office serving the jurisdiction in which the applicant has or proposes to locate its headquarters (see § 101.103 of this chapter).
(c) The applicant must demonstrate that it satisfies the CDC certification and operational requirements in §§ 120.820, and § 120.822 through 120.824. The applicant also must include an operating budget, approved by the applicant's Board of Directors, which demonstrates the required financial ability (as described in § 120.825), and a plan to meet CDC operational requirements (without specializing in a particular industry) in § 120.821, and §§ 120.826 through 120.830.
(d) The District Office will forward the application and its recommendation to the AA/FA, who will make the final decision. SBA will notify the CDC in writing of its decision, and, if the petition is declined, the reasons for the decision. The procedures of §§ 120.855 through 120.857 do not apply to the denial of an application.
§ 120.811 [Removed]
7. Remove § 120.811.
8. Revise § 120.812 to read as follows:
(c) The Lead SBA Office will send the petition and its recommendation to the AA/FA, who will make the final decision. SBA will determine permanent CDC status or an extension of probation, in part, based upon the Start Printed Page 40566CDC's compliance with the certification and operational requirements in §§ 120.820 through 120.830.
(d) SBA will notify the CDC in writing of its decision, and, if the petition is declined, the reasons for the decision. The procedures of §§ 120.855 through 120.857 do not apply to a denial of a petition for permanent CDC status.
9. Revise § 120.820 to read as follows:
§ 120.820 CDC non-profit status and good standing.
10. Revise § 120.821 to read as follows:
§ 120.821 CDC Area of Operations.
A CDC must operate only within its designated Area of Operations approved by SBA except as provided in § 120.839.
11. Revise § 120.822 to read as follows:
§ 120.822 CDC membership.
12. Amend § 120.824 by revising the second sentence in the introductory text and paragraph (a) to read as follows:
§ 120.824 Professional management and staff.
13. Revise § 120.826 to read as follows:
§ 120.826 Basic requirements for operating a CDC.
14. Revise § 120.827 to read as follows:
§ 120.827 Other services a CDC may provide to small businesses.
A CDC may provide a small business with assistance unrelated to the 504 loan program as long as the CDC does not make such assistance a condition of the CDC accepting from that small business an application for a 504 loan. An example of other services a CDC may provide is assisting a small business in applying for a 7(a) loan (as described in § 120.2). A CDC is subject to part 103 of this chapter when providing such assistance.
15. Revise § 120.828 to read as follows:
§ 120.828 Minimum level of 504 loan activity and restrictions on portfolio concentrations.
16. Amend § 120.829 by revising paragraph (a) to read as follows:
§ 120.829 Job Opportunity average a CDC must maintain.
17. Revise paragraphs (a) and (b) of, and add a new paragraph (g) to, § 120.830 to read as follows:
§ 120.830 Reports a CDC must submit.
18. Revise § 120.835 to read as follows:
Start Printed Page 40567
§ 120.835 Application to expand an Area of Operations.
(a) General. A CDC that has been certified to participate in the 504 program may apply to expand its Area of Operations if it meets all requirements to be an Accredited Lender Program (ALP) CDC, as set forth in § 120.840(c), and demonstrates that it can competently fulfill its 504 program responsibilities in the proposed area.
(2) The CDC demonstrates that its membership meets the requirements in § 120.822 separately for its State of incorporation and for each additional State in which it seeks to operate as a Multi-State CDC; and
(3) The CDC has a loan committee meeting the requirements of § 120.823.
§ 120.836 [Removed]
19. Remove § 120.836.
20. Amend § 120.837 by revising paragraph (b) and adding a new paragraph (c) to read as follows:
§ 120.837 SBA decision on application to become a Multi-State CDC.
(b) SBA will notify the CDC of its decision in writing, and if the application is denied for some, or all, of the requested states, the reasons for its decision. The procedures set forth in §§ 120.855 through 120.857 will not apply to the denial of a Multi-State application.
§ 120.838 [Removed]
21. Remove § 120.838.
22. Revise § 120.839 to read as follows:
23. Revise § 120.840 to read as follows:
§ 120.840 Accredited Lenders Program (ALP).
(c) Eligibility. In order for a CDC to be eligible to receive ALP status, its application must show that it meets the criteria set forth in § 120.841.
(e) Term of ALP designation. SBA generally will designate a CDC as an ALP CDC for a two-year period. SBA may renew the designation for an additional two-year period if the CDC continues to meet the ALP program eligibility requirements. The procedures of §§ 120.855 through 120.857 do not apply to the non-renewal of ALP status.
24. Add a new § 120.841 to read as follows:
(3) Proper and diligent completion of required 504 loan closing documents and compliance with SBA 504 loan closing policies and procedures.Start Printed Page 40568
(4) Compliance with SBA loan servicing policies and procedures.
(5) Compliance with the certification and operational requirements as set forth in §§ 120.820-120.830.
(7) Compliance with CDC ethical requirements (see § 120.851).
25. Revise § 120.845 and add new §§ 120.846-120.848 to read as follows:
§ 120.845 Premier Certified Lenders Program (PCLP).
(1) The CDC must be an ALP CDC in compliance with 504 program requirements imposed by statute, regulation, SOP, policy and procedural notices, Debentures, loan authorizations, and any agreement between SBA and the CDC or meet the criteria to be an ALP CDC set forth in §§ 120.841(a)-(h).
§ 120.846 Requirements for maintaining and renewing PCLP status.
(1) Meet the PCLP eligibility requirements in § 120.845 .
(b) SBA will notify the PCLP CDC in writing of a renewal or non-renewal of PCLP status. If PCLP status is not renewed, SBA will notify the CDC of the reasons for the decision. The procedures of §§ 120.855 through 120.857 do not apply to the non-renewal of PCLP status.
§ 120.847 Requirements for the Loan Loss Reserve Fund (LLRF).
(d) Creating and perfecting a security interest in a LLRF. A PCLP CDC must Start Printed Page 40569give SBA a first priority, perfected security interest in the LLRF to secure the PCLP CDC's obligation to reimburse SBA for the PCLP CDC's Exposure under all of its outstanding PCLP Debentures. (If a PCLP CDC's LLRF is comprised of multiple deposit accounts, it must give SBA this security interest with respect to each such account.) The PCLP CDC must grant to SBA the security interest in the LLRF pursuant to a security agreement between the PCLP CDC and SBA, and a control agreement between the PCLP CDC, SBA, and the applicable depository institution. The control agreement must include provisions requiring the depository institution to follow SBA instructions regarding withdrawal from the account without a requirement for obtaining further consent from the PCLP CDC, and must restrict the PCLP CDC's ability to make withdrawals from the account without SBA consent. When establishing the LLRF, a PCLP CDC must coordinate with its Lead SBA Office to execute and deliver the required documentation. The PCLP CDC must provide to the Lead SBA Office a fully executed original of the security and control agreements. All documents must be satisfactory to SBA in both form and substance.
§ 120.848 Requirements for 504 loan processing, closing, servicing, liquidating, and litigating by PCLP CDCs.
(e) Loan and Debenture closing. After receiving notification from SBA PCLP Start Printed Page 40570Loan Processing Center, the PCLP CDC is responsible for properly undertaking all actions necessary to close the PCLP Loan and Debenture in accordance with the expedited loan closing procedures applicable to a Priority CDC and with § 120.960.
26. Revise § 120.850 to read as follows:
§ 120.850 Expiration of Associate Development Company designation.
27. Add new undesignated center heading before § 120.851 to read as follows:
28. Revise § 120.851 to read as follows:
§ 120.851 CDC ethical requirements.
CDCs and their Associates must act ethically and exhibit good character. They must meet all of the ethical requirements of § 120.140. In addition, they are subject to the following:
(a) Any benefit flowing to a CDC's Associate or his or her employer from activities as an Associate must be merely incidental (this requirement does not prevent an Associate or an Associate's employer from providing interim financing as described in § 120.890 or Third Party Loans as described in § 120.920, as long as such activity does not violate § 120.140); and
29. Revise § 120.852 to read as follows:
§ 120.852 Restrictions regarding CDC participation in the Small Business Investment Company (SBIC) program and the 7(a) loan program.
(a) 7(a) loan program. A CDC must not invest in or be an Affiliate of a Lender participating in the 7(a) loan program described in § 120.2(a). (For a definition of Affiliation, refer to § 121.103 of this chapter.)
(b) SBIC program. A CDC must not directly or indirectly invest in a Licensee (as defined in § 107.50 of this Title) licensed by SBA under the SBIC program authorized in Part A of Title III of the Small Business Investment Act, 15 U.S.C. 681 et seq.
30. Add a new undesignated center heading immediately preceding new § 120.853 to read as follows:
31. Redesignate § 120.973 as § 120.853 and revise redesignated § 120.853 to read as follows:
§ 120.853 Oversight and evaluation of CDCs.
32. Add a new undesignated center heading immediately preceding new § 120.854 to read as follows:
§ 120.855
33. Remove § 120.855.
33a. Add §§ 120.854-120.856 to read as follows:
§ 120.854 Grounds for taking enforcement action against a CDC.
The AA/FA or his or her authorized delegate may undertake one or more of the enforcement actions set forth in § 120.855 with respect to a CDC, based upon a determination that one or more of the following grounds exist:
§ 120.855 Types of enforcement actions.
(a) Enforcement. Upon a determination that one or more of the grounds set forth in § 120.854 exist, the AA/FA or his or her authorized delegate may undertake, in SBA's sole discretion, one or more of the following enforcement actions:
(4) Instruct the CSA to withhold payment of servicing, late and/or other fee(s) to the CDC and, if SBA has experienced financial loss as a result of the CDC's failure to comply with any Start Printed Page 40571SBA requirement or of the CDC's imprudent or commercially unreasonable action, direct the CSA to submit all or some of such payments to SBA to compensate for any such loss.
(b) Immediate suspension. If SBA determines that one or more grounds set forth in § 120.854 exist and further determines that immediate action is necessary to prevent the risk of significant loss to SBA or to prevent significant impairment of the integrity of the 504 program, the AA/FA may issue a written notice of immediate suspension to a CDC, suspending all or certain activities of a CDC pertaining to the 504 program, and such suspension will be effective as of the date of the notice. Any such suspension will be for a term determined by SBA in its sole discretion. SBA may combine a notice of immediate suspension with any enforcement action set forth in paragraph (a) of this section.
§ 120.856 Enforcement procedures.
(a) SBA's notice to CDC of enforcement action. Prior to undertaking an enforcement action set forth in § 120.855(a), the AA/FA or his or her authorized delegate must issue a written notice to the affected CDC identifying the proposed enforcement action, setting forth the reasons for the proposed action and, if a suspension also is proposed, stating the term of the proposed suspension.
(b) SBA's notice to CDC of immediate suspension. If the AA/FA or his or her authorized delegate undertakes an immediate suspension pursuant to § 120.855(b), he or she must issue a written notice to the affected CDC identifying the scope and term of the suspension, and setting forth the reasons for the proposed action.
§ 120.857 Voluntary transfer and surrender of CDC certification. [Redesignated from § 120.981]
33b. Redesignate § 120.981 as § 120.857.
34. Revise § 120.861 to read as follows:
§ 120.861 Job creation or retention.
35. Amend § 120.862 as follows:
d. By adding new paragraphs (b)(3) and (b)(4); and e. By revising redesignated paragraph (b)(5). The revisions and additions read as follows:
§ 120.862 Other economic development objectives.
(5) Expansion of minority enterprise development (see § 124.103(b) of this chapter for minority groups who qualify for this description);
36. Amend § 120.870 as follows: a. By removing paragraph (b); b. By redesignating paragraph (c) as paragraph (b); and c. By revising paragraph (a) to read as follows:
§ 120.870 Leasing Project Property.
(a) A Borrower may use the proceeds of a 504 loan to acquire, construct, or modify buildings and improvements, Start Printed Page 40572and/or to purchase and install machinery and equipment located on land leased to the Borrower by an unrelated lessor if:
37. Revise the heading of § 120.871 to read as follows:
§ 120.871 Leasing part of Project Property to another business.
38. Amend § 120.880 by revising paragraph (b) to read as follows:
§ 120.880 Basic eligibility requirements.
(b) Together with its Affiliates, meet one of the size standards set forth in § 121.301(b) of this chapter.
39. Revise paragraph (c) of § 120.882 to read as follows:
§ 120.882 Eligible Project costs for 504 loans.
(c) Professional fees directly attributable and essential to the Project, such as title insurance, opinion of title, architectural and engineering costs, appraisals, environmental studies, hazard and flood insurance, recording fees, and legal fees related to zoning, permits, or platting (see § 120.971(a)(2) for limitations on legal fees associated with 504 loan and Debenture closing); and
40. Revise paragraph (d) of § 120.883 to read as follows:
§ 120.883 Eligible administrative costs for 504 loans.
(d) Borrower's out-of-pocket costs associated with 504 loan and Debenture closing other than legal fees (for example, certifications and the copying costs associated with them, overnight delivery, postage, and messenger services) but not to include fees and costs described in § 120.882(c);
41. Amend § 120.892(b) by revising the phrase “90 days” to read “120 days”.
42. Revise the heading of § 120.900 to read as follows:
§ 120.900 Sources of permanent financing.
43. Revise the heading of § 120.910 to read as follows:
§ 120.910 Borrower contributions.
44. Revise § 120.911 to read as follows:
§ 120.911 Land contributions.
45. Revise § 120.913 to read as follows:
§ 120.913 Limitations on any contributions by a Licensee.
Subject to part 107 of this chapter, a Licensee may provide financing for all or part of the Borrower's contribution to the Project. SBA will consider Licensee funds to be derived from Federal sources if the Licensee has Leverage (as defined in § 107.50 of this chapter). If the Licensee does not have Leverage, SBA will consider the investment to be from private funds. Licensee financing must be subordinated to the 504 loan and must not be repaid at a faster rate than the Debenture. (Refer to § 120.930(a) for additional limitations.)
46. Amend § 120.923 by revising the heading and redesignating § 120.924 as paragraph (c) of § 120.923 to read as follows:
§ 120.923 Policies on subordination.
47. Revise § 120.925 by adding a parenthetical at the end to read as follows:
§ 120.925 Preference.
* * * (See § 120.10 for a definition of Preference.)
48. Revise § 120.926 to read as follows:
§ 120.926 Referral fee.
49. Revise paragraph (b) of § 120.930 to read as follows:
§ 120.930 Amount.
50. Revise § 120.931 to read as follows:
§ 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 $1,000,000 (or $1,300,000 if one or more of the public policy goals enumerated in § 120.862(b) applies to the Project).
51. Revise § 120.933 to read as follows:
§ 120.933 Maturity.
52. Revise § 120.934 to read as follows:
§ 120.934 Collateral.
53. Revise the heading of § 120.935 to read as follows:
§ 120.935 Deposit from the Borrower that a CDC may require.
§ 120.936 [Removed]
54. Remove § 120.936.
55. Revise § 120.960 to read as follows:
§ 120.960 Responsibility for closing.
(6) The CDC, Third Party Lender or Borrower has misrepresented a material fact to SBA regarding the Project or 504 loan.Start Printed Page 40573
(7) SBA determines that there has been a material adverse change, such as deterioration in the Borrower's financial condition, since the 504 loan was approved, or that approving the closing of the Debenture will put SBA at unacceptable financial risk.
56. Revise the undesignated center heading immediately preceding § 120.970 to read as follows:
57. Revise § 120.970 to read as follows:
§ 120.970 Servicing of 504 loans and Debentures.
58. Add a new undesignated center heading immediately preceding § 120.971 to read as follows:
59. Revise paragraphs (a) intoductory text, and (a)(2) of § 120.971 to read as follows:
§ 120.971 Allowable fees paid by Borrower.
(2) Closing fee. The CDC may charge a reasonable closing fee sufficient to reimburse it for the expenses of its in-house or outside legal counsel, and other miscellaneous closing costs (CDC Closing Fee). Some closing costs may be funded out of the Debenture proceeds (see § 120.883 for limitations);
60. Revise § 120.972 to read as follows:
§ 120.972 Third Party Lender participation fee and CDC fee.
61. Remove the undesignated center heading immediately preceding § 120.980 and §§ 120.980, 120.982 through 120.984.