Rule2023-07181
Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan Authorization
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 12, 2023
Effective
May 12, 2023
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration (SBA or Agency) is amending its business loan program regulations to lift the moratorium on licensing new Small Business Lending Companies (SBLCs) and add a new type of lending entity called a Community Advantage SBLC. SBA is also removing the requirement for a Loan Authorization in the 7(a) and 504 Loan Programs.
Full Text
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[Federal Register Volume 88, Number 70 (Wednesday, April 12, 2023)]
[Rules and Regulations]
[Pages 21890-21900]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-07181]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AH92
Small Business Lending Company (SBLC) Moratorium Rescission and
Removal of the Requirement for a Loan Authorization
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
amending its business loan program regulations to lift the moratorium
on licensing new Small Business Lending Companies (SBLCs) and add a new
type of lending entity called a Community Advantage SBLC. SBA is also
removing the requirement for a Loan Authorization in the 7(a) and 504
Loan Programs.
DATES: This rule is effective May 12, 2023.
FOR FURTHER INFORMATION CONTACT: Dianna Seaborn, Director, Office of
Financial Assistance, Office of Capital Access, Small Business
Administration, at (202) 205-3645 or <a href="/cdn-cgi/l/email-protection#7f3b161e11111e512c1a1e1d100d113f0c1d1e51181009"><span class="__cf_email__" data-cfemail="de9ab7bfb0b0bff08dbbbfbcb1acb09eadbcbff0b9b1a8">[email protected]</span></a>. The phone
number above may also be reached by individuals who are deaf or hard of
hearing, or who have speech disabilities, through the Federal
Communications Commission's TTY-Based Telecommunications Relay Service
teletype service at 711.
SUPPLEMENTARY INFORMATION:
I. Background Information
The mission of SBA is to ``aid, counsel, assist, and protect . . .
the interests of small business concerns in order to preserve free
competitive enterprise . . . and to maintain and strengthen the overall
economy of our nation.'' 15 U.S.C. 631(a). SBA accomplishes this
mission, in part, through programs that bridge the financing gap in the
private market. One such program is the 7(a) Loan Program authorized by
section 7(a) of the Small Business Act (15 U.S.C. 636(a)), which
supports our nation's economy by providing SBA-guaranteed loans to
small businesses that lack adequate access to capital on reasonable
terms and conditions.
Section 7(a)(17) of the Small Business Act states that SBA shall
authorize lending institutions and other entities, in addition to
banks, to make 7(a) loans. To this end, SBA has authorized Small
Business Lending Companies (SBLCs) as defined in 13 CFR 120.10 to
participate in the 7(a) Loan Program. SBLCs are non-depository lending
institutions authorized by SBA only to make loans pursuant to section
7(a) of the Small Business Act and loans to Intermediaries in SBA's
Microloan program. Under current regulations, SBLCs may not be
affiliated with another SBA Lender, including 7(a) Lenders or Certified
Development Companies (CDCs) that participate in SBA's CDC/504 Loan
Program. SBLCs are subject to all regulations pertaining to 7(a) loans
and Loan Program Requirements (as defined in 13 CFR 120.10) regarding
origination, servicing, and liquidation. Unlike the majority of 7(a)
Lenders, which are Federally-regulated depository institutions, SBLCs
are regulated, supervised, and examined solely by SBA. As SBA-regulated
entities, SBLCs are subject to specific regulations and policies
regarding formation, capitalization, and enforcement actions.
On August 17, 1981, SBA published a proposed rule (46 FR 41523) to,
among other things, impose a moratorium on licensing new SBLCs.
Subsequently, on January 4, 1982, SBA published a final rule (47 FR 9)
repealing its authority to approve additional SBLCs as participating
lenders. Since then, the number of SBLC Licenses has remained unchanged
at 14. To become an SBLC under current regulations, an entity must
acquire one of the existing 14 SBLC Licenses from an entity that is
willing to sell its SBLC License and exit the 7(a) Loan Program.
On February 18, 2011, SBA created the Community Advantage (CA)
Pilot
[[Page 21891]]
Program to provide 7(a) loans in underserved markets through mission-
oriented lenders focused on economic development (76 FR 9626). SBA
waived the moratorium on the licensing of new SBLCs to allow
organizations that met the definition of an SBLC but that did not have
an SBLC License to participate in the CA Pilot Program as CA Lenders.
The CA Pilot Program was recently extended until September 30, 2024 (87
FR 19165). SBA is also removing the requirement for a Loan
Authorization and will instead rely on the use of the terms and
conditions of the loan application as submitted by the SBA Lender into
E-Tran. These terms and conditions will reflect the agreement between
the Borrower, the SBA Lender and SBA providing the terms and conditions
under which SBA will guarantee a business loan to the Borrower, subject
to the Lender's compliance with all applicable Loan Program
Requirements.
On November 7, 2022, SBA published a notice of proposed rulemaking
with a request for comments in the Federal Register to lift the
moratorium on licensing new SBLCs, to add a new type of entity called a
Mission-Based SBLC, and to remove the requirement for a Loan
Authorization. 87 FR 66963 (November 7, 2022). This final rule
implements the proposed revisions put forth for public comment in the
November 7, 2022 proposed rule, amended as indicated below.
II. Summary of Comments
SBA received 169 comments on the proposed rule. Of these, 11
comments were submitted by trade groups and 85 comments were received
from lenders, nonprofit organizations, or individuals. The remaining 73
comments were submitted anonymously. SBA received comments from six
trade groups, six lenders or employees of lenders, and two comments
from individuals or businesses objecting to the confluence of the
proposed changes in the notice of proposed rulemaking in the Federal
Register (87 FR 64724 October 26, 2022) to streamline and modernize the
7(a) Loan Program and 504 Loan Program regulations (Affiliation
Proposed Rule), the notice of proposed rulemaking published in the
Federal Register (87 FR 66964 November 7, 2022) to lift the moratorium
on licensing new SBLCs, to add a new type of entity called a Mission-
Based SBLC, and to remove the requirement for a Loan Authorization
(SBLC Proposed Rule), and SBA's announcement of a revision to the
Standard Operating Procedures (SOP) 50 10, Lender and Development
Company Loan Programs. The comments stated the confluence of these
revisions are problematic as proposed because SBA would immediately
invite additional non-federally regulated entities to participate as
7(a) Lenders without first testing whether the streamlining of
provisions such as lending criteria and hazard insurance will have an
adverse effect on SBA's loan portfolio. One trade group requested that
the Administrator temporarily withdraw both proposed rules.
Comments on SBLC Changes
SBA received 119 comments on SBA's proposal to remove the
moratorium on licensing new SBLCs and create a new type of SBLC called
a Mission-Based SBLC. As discussed in the section-by-section analysis
below, SBA has determined that the new name for mission-based SBLCs
will be Community Advantage SBLCs. Thirteen comments expressed support
and 106 comments expressed opposition or suggested modifications to
SBA's proposed amendments. The comments covered a range of topics that
can be grouped into 9 topics.
Comments Topic 1
Comments stated the proposed rules do not adequately address how
current CA Lenders would transition into becoming Community Advantage
SBLCs. On May 11, 2023, as determined by the Administration, SBA will
grandfather current CA Lenders in accordance with section 120.420(e)
that participated in the CA Pilot Program to be licensed as 7(a)
Community Advantage SBLCs.
Some comments pointed out that current CA Lenders may operate on a
for-profit basis, which is incompatible with SBA's proposal that new
Community Advantage SBLCs operate as nonprofit organizations. This and
other comments regarding CA Lenders are addressed in the section-by-
section analysis below.
Comments Topic 2
Comments stated that licensing additional regular SBLCs and new
Community Advantage SBLCs will increase risk to SBA that will in turn
increase subsidy costs to SBA and will negatively impact SBA lenders
and borrowers, perhaps in the form of higher fees to lenders and
borrowers or lower program authority. Some comments speculated that new
SBLC licenses may be awarded to financial technology (fintech) lenders
and point to reports that in the Paycheck Protection Program (PPP),
some fintech lenders were associated with fraud. However, SBLCs are
defined as non-depository lending institutions, which is not synonymous
with the term fintech. SBA has for many years provided oversite to non-
depository entities participating in the SBA business loan programs.
This includes SBLCs, non-federally regulated lenders (NFRLs), 504
Certified Development Companies (CDCs), and Microloan Intermediaries.
In fact, most all lending institutions incorporate the use of financial
technology in their delivery of loans and other financial products. SBA
received comments supporting the proposed revisions with these comments
stating that PPP lending has different statutory requirements that were
enacted in response to an immediate need for capital to prevent a
collapse of the small business economy during a worldwide pandemic, and
that it is not a fair comparison to equate fraud in PPP with potential
fraud in the regular 7(a) loan program, which has well-established and
robust operating policies and procedures that have proven successful at
protecting the integrity of the program.
Comments Topic 3
Comments expressed concern that SBA will not be able to adequately
provide oversight and servicing for SBA lenders. As SBA discussed at
length in the proposed rule, SBA conducted in depth assessments to
ensure it has capacity to provide oversight and servicing to SBA's
entire portfolio of lenders, including any potential additional SBLCs.
As a result of these assessments, SBA stated in the proposed rule that
it will license, service, and provide oversight to three new regular
SBLCs. It should be noted that since January 1982 when SBA imposed the
moratorium on licensing new SBLCs, that there have been more than 60
different holders of the 14 authorized SBLC licenses. SBA has
successfully overseen transition and operation of various
organizational structures of SBLC entities.
Comments Topic 4
Comments allege that the proposed revisions will not increase
lending to underserved markets because SBA is not proposing to impose
any lending requirements to underserved markets on regular SBLCs, and
because SBA has been too vague as to how it will define and identify
capital market gaps for new Community Advantage SBLCs. However, SBA
received several comments in support of licensing new nonbank lenders,
with some of these comments stating that non-bank lenders offer a more
flexible and alternative avenue to capital compared to
[[Page 21892]]
traditional banking institutions, and that these lenders mainly focus
on smaller loan amounts that are not considered a priority in the
traditional banking system. One comment in support of the proposed
revisions referenced a recent working paper published by the Federal
Reserve Bank of Philadelphia that presents preliminary research being
circulated for discussion purposes that states that fintech small
business lending platforms made loans in more zip codes with higher
business bankruptcy filings and higher unemployment rates. Fintech
platforms' internal credit scores were able to predict future loan
performance more accurately than the traditional approach to credit
scoring. Overall, the research found that fintech lenders have a
potential to create a more inclusive financial system, allowing small
businesses that were less likely to receive credit through traditional
lenders to access credit and to do so at lower cost.\1\ SBA's history
with the CA Pilot Program indicates that as Community Advantage SBLCs
these CA lenders will continue to commit resources to reaching
communities with capital market gaps.
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\1\ Federal Reserve Bank of Philadelphia Working Papers,
Cornelli, G, Frost, J., Gambacorta, L., Jagtiani, J., April 21,
2022, ``The Impact of Fintech Lending on Credit Access for U.S.
Small Businesses'' at <a href="https://www.philadelphiafed.org/the-economy/banking-and-financial-markets/the-impact-of-fintech-lending-on-credit-access-for-us-small-businesses">https://www.philadelphiafed.org/the-economy/banking-and-financial-markets/the-impact-of-fintech-lending-on-credit-access-for-us-small-businesses</a>.
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Comments Topic 5
Comments expressed concern that the proposed revisions will create
an uneven playing field between federally regulated lenders and SBLCs/
Community Advantage SBLCs. The comments focus on the idea that
federally regulated lenders are held to a higher standard by their
federal regulators than SBA imposes on SBLCs. However, SBA has and will
continue to require that SBA Supervised Lenders and CDCs, including
SBLCs and Community Advantage SBLCs, submit their credit policies for
review by SBA as part of the application to become an SBA Lender. SBA
seeks to ensure that each lender authorized to participate in the
program has policies that demonstrate reasonable and prudent credit
standards that adequately address SBA's Loan Program Requirements. SBA
also reviews lender credit policies during lender oversight and when
lenders propose changes to their policies or practices in accordance
with Loan Program Requirements as defined in 13 CFR 120.10. Further,
SBA Supervised Lenders must use the approved policies and procedures to
satisfy underwriting criteria for similarly-sized, non-SBA guaranteed
commercial loans, where reference is made in Loan Program Requirements.
Comments Topic 6
Comments expressed concern over the proposed capital requirements
for Community Advantage SBLCs. Some comments stated that SBA should set
a minimum threshold for capitalization of all Community Advantage
SBLCs. However, as SBA indicated in the proposed rule, SBA will examine
each lender applicant on an individual basis to determine the capital
requirements best suited to minimize risk while not burdening smaller
lenders with unnecessarily large capital requirements. However, SBA
agrees that further steps should be taken to address risk mitigation
for Community Advantage SBLCs. SBA will require Community Advantage
SBLCs to maintain a loan loss reserve account as discussed more fully
in the section-by-section analysis below for section 120.471.
Additionally, regarding SBA's proposal to set minimum lender
capital amounts at the discretion of the Administrator in consultation
with SBA's Associate Administrator for SBA's Office of Capital Access
(AA/OCA), SBA received comments expressing concern that placing the
decision at the level of political appointees may lead to the
politicization of the program. SBA disagrees with this concern because
political appointees determine the Agency's goals and direction, and
across the federal government, political appointees have the authority
to make and review final determinations as informed by career
employees. In response, the final rule expands the decision-making
authority in this case so that the Administrator and the AA/OCA may
delegate their decision-making authority to designees.
Comments Topic 7
Comments challenged SBA's assumptions in the proposed rule. A trade
group requested that SBA provide information regarding how it
determined that allowing decisions regarding the determination of
capital requirements for Community Advantage SBLCs to be made on a
case-by-case basis is consistent with existing statute. Section 23 of
the Small Business Act, Supervisory and Enforcement Authority for Small
Business Lending Companies, requires the SBA Administrator to, among
other things, ``issue regulations outlining the conditions under which
the Administrator may determine the level of capital . . .'' That
language clearly allows the Administrator the discretion to establish
the ``conditions under which'' the required level of capital would be
determined for SBLCs. SBA is abiding by this statutory requirement
through this rulemaking in revisions to Sec. 120.471.
Some comments challenged the assumptions made in the proposed rule,
doubting SBA's estimates that a newly licensed SBLC would make 425
loans over the next 4 years because the commenters believe it likely
that some or all of the new regular SBLCs would be fintechs that may
have the capacity to approve a significantly higher number of loans
than is estimated. SBA stands by its estimate that a new SBLC has the
potential to increase 7(a) lending by approximately 425 loans per year
over the next four years, because the estimate was derived from actual
historical performance of new SBA 7(a) Lenders over a four-year period
of fiscal years 2018 through 2022.
Comments Topic 8
Comments stated the proposed rule was too vague or did not provide
enough information. For example, commenters stated that SBA should
publish the application and evaluation processes for new applicants for
SBLC licenses in the regulations. SBA disagrees with this approach
because it would be overly restrictive. Instead, the proposed approach
allows SBA the flexibility to respond to unique challenges such as
pandemics, recessions, issues faced by specific industry sectors, etc.
Comments Topic 9
Comments expressed concern that existing SBLCs will be devalued by
the licensing of new SBLCs/Community Advantage SBLCs. However, SBA also
received comments in support of expanding the number of SBLCs. These
comments pointed out that by imposing a moratorium on licensing new
SBLCs and by restricting the total number of SBLCs to 14 for the last
40 years, SBA has created an oligopoly over the $36 billion a year
lending market for the existing SBLCs, which unfairly restricts
competition. These comments point out that expanding the number of SBLC
licenses will increase competition and encourage innovation, which
benefits the small business.
Comments on Removing the Definition of ``Authorization''
SBA received 80 comments on removing the definition of
Authorization and removing reference
[[Page 21893]]
to an Authorization from its regulations. The comments were nearly
universally opposed to removing the word Authorization, with three
comments supporting the proposal and the rest opposing the proposal or
requesting modifications. Most comments that opposed the proposal
expressed the concern that the Authorization is the document that
clearly defines the agreement between the lender and SBA for each
transaction and is beneficial in communicating requirements to the
borrower, lenders, and SBA. Other comments stated the Authorization
serves as a reference document for the life of the loan. Some comments
stated borrowers will not know the terms they are agreeing to without
an Authorization. Several comments stated that lenders rely on the
Authorization as a template or checklist to ensure the lender's
compliance with Loan Program Requirements, with one comment stating the
Authorization is the gold standard for commercial lending. Several
comments stated the Authorization is a roadmap for all closing
processes and should not be eliminated without a cohesive and
comprehensive replacement. Many comments suggested that if SBA
eliminates the Authorization, SBA should develop an alternative
document that serves the same purpose but is easier to use. However, as
explained in the proposed rule, although SBA is eliminating the word
Authorization as a defined term in its regulations, SBA will continue
to require and provide a means for memorializing each loan's terms and
conditions and will provide further guidance for the procedures of
providing the loan terms and conditions to SBA in Loan Program
Requirements. In practice, SBA's E-Tran system currently enables users
to download a printable document with corresponding fields executed by
the lender, including uses of proceeds and collateral. This rule
finalizes the proposed changes to remove the word Authorization from
SBA's regulations will enable SBA to eliminate duplication of data
entry and will save lenders and SBA time. For the reasons stated above,
SBA is moving forward as proposed.
III. Section-by-Section Analysis
SBLC Moratorium Recission
Section 120.10--Definitions
SBA has determined that certain markets where there are capital
market gaps continue to struggle to obtain financing on non-predatory
terms. Therefore, SBA is lifting the moratorium on licensing new Small
Business Lending Companies (SBLC) and creating a new type of SBLC to
help bridge this financing gap.
SBA proposed to add a new definition for Mission-Based SBLC as a
specific type of SBLC that is a nonprofit organization that will be
licensed to make 7(a) loans. SBA proposed to call this new type of SBLC
a Mission-Based SBLC; however as discussed below, SBA will instead call
this new type of SBLC a Community Advantage SBLC.
SBA believes Community Advantage SBLCs will increase access to
capital in their respective communities. SBA proposed Community
Advantage SBLCs to be nonprofit entities because nonprofit lending
organizations often serve communities with capital market gaps SBA
intends to fill. Adding Community Advantage SBLCs to the possible types
of 7(a) Lenders will also allow existing CA Lenders an opportunity to
participate in the 7(a) Loan Program on a non-temporary basis as a
Community Advantage SBLC while continuing to meet the needs of
underserved communities. When SBA authorizes an additional Community
Advantage SBLC License to a CA Lender, the CA Lender will transition
from making 7(a) loans in a temporary pilot program to instead making
loans under the 7(a) loan program without an expiration date associated
with their participation. SBA received many comments that SBA should
make the CA Pilot Program permanent. However, the nature of a pilot
program is that it is a temporary program. SBA will instead provide a
process to allow current CA Lenders to transition into Community
Advantage SBLCs. Such guidance will be set forth in upcoming Loan
Program Requirements. SBA determined that CA Lenders were a potential
group of lenders already making loans in underserved markets, that
would be able to meet the purpose of mission-based SBLCs, therefore SBA
will refer to the new type of SBLCs as Community Advantage SBLCs rather
than Mission-Based SBLCs.
To accomplish the goal of expanding capital opportunities and
allowing Community Advantage SBLCs and regular SBLCs to increase the
availability of 7(a) loans to small businesses, SBA will remove the
moratorium on licensing new SBLCs. Current section 120.10 definition of
Small Business Lending Company (SBLC) states that SBA has imposed a
moratorium on licensing new SBLCs since January 1982, and the number of
licenses for SBLCs has remained at 14 ever since. SBA is finalizing the
proposed definition to remove the statement that SBA has imposed a
moratorium on licensing new SBLCs. Not only will this allow SBA to
license Community Advantage SBLCs, but it will allow SBA to increase
the number of regular SBLCs as well. SBA plans to issue notices in the
Federal Register with information regarding the SBLC license
application processes.
Section 120.466--SBA Supervised Lender Application
Current section 120.466, paragraph (a)(6), states that in
connection with any application to become an SBLC, the applicant must
include a letter agreement from the existing SBLC stating that the SBLC
is seeking to transfer its lending authority. SBA proposed to revise
this section because the lifting of the moratorium on new SBLC Licenses
will no longer require that an applicant show that an existing lender
is transferring its authority. However, as SBA proposed to accept
applications for new SBLCs from time to time in section 120.10, there
may be periods when new SBLC Licenses are not being issued and existing
Licenses will be acquired and transferred. Therefore, SBA proposed to
revise this section to state that an applicant to become an SBLC must
show a letter agreement from an existing SBLC if it is acquiring an
existing License. For the reasons stated above, SBA is moving forward
as proposed.
Section 120.470--What are SBA's additional requirements for SBLCs?
SBA proposed to revise Sec. 120.470 to reference and include
additional requirements for Community Advantage SBLCs. As a type of
SBLC, except where otherwise explicitly mentioned in regulations, all
requirements imposed on SBLCs and SBA Supervised Lenders will apply to
Community Advantage SBLCs as well.
Several comments said that the existing requirement in paragraph
(a) that states an SBLC may only make 7(a) loans or loans to
Intermediaries is unnecessarily restrictive and is incompatible with
the business models of some current CA lenders that are Community
Development Financial Institutions (CDFI) or SBA CDCs. They further
commented that this would also prevent such entities from applying in
the future to become an SBLC or a Community Advantage SBLC because
those entities may also conduct other business activities, including
loanmaking. SBA agrees with this concern and will revise paragraph (a)
by removing the word ``only'' to make it clear that SBLCs and Community
Advantage SBLCs may participate in other lines of business in addition
to
[[Page 21894]]
7(a) lending or making loans to Intermediaries.
SBA proposed to revise paragraph (b) to require Community Advantage
SBLCs to be nonprofit organizations without imposing similar
requirements on regular SBLCs. As discussed above, some comments
expressed concern that current CA Lenders may operate on a for-profit
basis. Any Community Advantage Pilot Program lender will be permitted
to hold a Community Advantage SBLC license regardless of their profit
or nonprofit structure. New Community Advantage SBLC applicants that
did not participate as a Community Advantage Pilot Program lender are
required to have nonprofit status to qualify.
SBA received multiple comments regarding the costs that lending
entities may encounter when they become Community Advantage SBLCs. SBA
agrees with these concerns, and in an effort to reduce some ongoing
costs for these lenders, SBA will revise the requirement at paragraph
(e) for fidelity insurance. The current requirement for fidelity
insurance is that an SBLC 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 $2,000,000 executed by a surety holding a certificate of authority
from the Secretary of the Treasury pursuant to 31 U.S.C. 9304-9308. SBA
has determined this requirement may be overly burdensome for Community
Advantage SBLCs to bear; therefore, SBA will provide an exception to
this requirement to state that SBA's Administrator, in consultation
with SBA's Associate Administrator for the Office of Capital Access
(AA/OCA) or their designee(s), at their discretion, will determine the
appropriate coverage levels for Community Advantage SBLCs as published
in Loan Program Requirements.
SBA also proposed to add a new paragraph (h) to describe the
requirements Community Advantage SBLCs must meet. However, SBA has
determined that it will not go forward with a new paragraph (h) as
proposed and instead, SBA's Administrator, in consultation with SBA's
Associate Administrator for the Office of Capital Access (AA/OCA) or
their designee(s), at their discretion, will determine the specific
market requirements, if any, that apply to Community Advantage SBLCs in
Loan Program Requirements.
Section 120.471--What are the minimum capital requirements for SBLCs?
Current Sec. 120.471, paragraph (a)(1) addresses minimum capital
requirements for SBLCs and states that beginning on January 4, 2024,
each SBLC that makes or acquires a 7(a) loan must maintain, at a
minimum, unencumbered paid-in capital and paid-in surplus of at least
$5,000,000, or 10 percent of the aggregate of its share of all
outstanding loans, whichever is greater. SBA proposed to revise this
paragraph by adding a new paragraph (a)(4) that will state that a
Community Advantage SBLC must maintain a minimum amount of capital at
the discretion of the Administrator, in consultation with SBA's
Associate Administrator for SBA's Office of Capital Access (AA/OCA), or
their designee(s) to ensure sufficient risk protection for SBA and
lenders while not burdening smaller lenders with large capital
requirements. This proposal allows SBA to license Community Advantage
SBLCs that are nonprofit lenders when these entities would otherwise
not be able to meet SBA's minimum capital requirements.
SBA received comments that SBA should consider requiring a minimum
loan loss reserve requirement for Community Advantage SBLCs. Given
SBA's determination to create flexibility in minimum capital
requirements for lenders participating in the Community Advantage Pilot
program, SBA agrees with these comments regarding loan loss reserves
and will require Community Advantage SBLCs to maintain a loan loss
reserve account as determined at the discretion of the Administrator,
in consultation with SBA's Associate Administrator for SBA's Office of
Capital Access (AA/OCA), or their designee(s) in Loan Program
Requirements
Section 120.820--CDC Affiliation
Current section 120.820 limits the entities with which CDCs may be
affiliated. SBA proposed to add a new paragraph (g), which states
notwithstanding paragraphs (b), (c), and (e), a CDC may be affiliated
with a Community Advantage SBLC. This revision will allow CDCs to form
the required entity whose purpose is to make 7(a) loans as a Community
Advantage SBLC. Additionally, SBA will provide language stating that
CDCs that are also CA Lenders as of the effective date of this rule may
be licensed as Community Advantage SBLCs without having to form a
separate entity to participate in 7(a) loanmaking.
Removal of Requirement for Loan Authorization
Section 120.10--Definitions
SBA proposed to remove the regulatory definition for Authorization.
SBA will continue to rely on the SBA Form 750, which is a written
agreement executed by all participating lenders requiring that those
same lenders comply with all statutes and regulations. The removal of
the regulatory definition for Authorization will not change SBA's
ongoing practice of providing specific written instructions regarding
documentation of an SBA loan's terms and conditions in SBA's Loan
Program Requirements. For loan accounting purposes, SBA Lenders will
continue, as they do today, to electronically submit their request for
a loan guaranty authorization from the Agency's loan accounting system
of record--E-Tran.
SBA proposed to amend the definition of Loan Instruments to remove
the word Authorization. The amended definition will state that Loan
Instruments are the note, instruments of hypothecation, and all other
agreements and documents related to a loan.
SBA proposed to amend the definition of Loan Program Requirements
or SBA Loan Program Requirements to remove the word Authorization. The
amended definition will state that Loan Program Requirements or SBA
Loan Program Requirements are requirements imposed upon Lenders, CDCs,
or Intermediaries by statute; SBA and applicable government-wide
regulations; any agreement the Lender, CDC, or Intermediary has
executed with SBA or to which the Lender or CDC is subject; SBA
Standard Operating Procedures (SOPs); Federal Register notices; and
official SBA notices and forms applicable to the 7(a) Loan Program, 504
Loan Program or Microloan Program; as such requirements are issued and
revised by SBA from time to time. For CDCs, this term also includes
requirements imposed by Debentures, as that term is defined in Sec.
120.802. For Intermediaries, this term also includes requirements
imposed by promissory notes, collateral documents, and grant
agreements.
Section 120.120--What are eligible uses of proceeds?
Current Sec. 120.120 states that a small business must use an SBA
business loan for sound business purposes, and the uses of proceeds are
prescribed in each
[[Page 21895]]
loan's Authorization. The section goes on to describe the various ways
in which a borrower may use SBA loan proceeds. SBA proposes to amend
this section to remove the sentence that states ``The uses of proceeds
are prescribed in each loan's Authorization.'' SBA already captures the
uses of proceeds of the SBA-guaranteed loan through the loan
application data and conditions the SBA Lender enters into ETRAN;
therefore, it is not necessary to include the information in a separate
Authorization. For the reasons stated above, SBA is moving forward with
the rule as proposed.
Section 120.192--Approval or Denial
Current section 120.192 states that 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. SBA proposed to amend Sec.
120.192 to remove the sentence that states ``If a loan is approved, an
Authorization will be issued.'' SBA's current practice is to review an
Authorization and issue an SBA Loan Number when the Authorization is
considered satisfactory to SBA. SBA considers the issuance of the loan
number to indicate loan approval by SBA. The proposed rule to no longer
require an Authorization will only slightly modify the current process.
Under the proposed rule, SBA will indicate loan approval by issuing a
loan number. For the reasons stated above, SBA is moving forward with
the rule as proposed.
Section 120.220--Fees That Lender Pays SBA
Section 120.220 states the requirements for the fees that 7(a) Loan
Program Lenders pay SBA. The introductory text of Sec. 120.220 states
in part ``Acceptance of the guaranty fee by SBA does not waive any
right of SBA arising from a Lender's negligence, misconduct or
violation of any provision of these regulations, the guaranty
agreement, or the loan authorization.'' For the reasons stated above,
SBA proposed to remove the reference to the loan Authorization so that
the sentence states ``Acceptance of the guaranty fee by SBA does not
waive any right of SBA arising from a Lender's negligence, misconduct
or violation of any provision of these regulations, or the guaranty
agreement.
Current Sec. 120.220(e) states in part ``Acceptance of the
guarantee fee by SBA shall not waive any right of SBA arising from the
[7(a)] Lender's misconduct or violation of any provision of this part,
the guarantee agreement, the Authorization, or other loan documents.''
For the reasons stated above, SBA proposed to remove the reference to
the loan Authorization so the revised Sec. 120.220(e) will state
``Acceptance of the guarantee fee by SBA shall not waive any right of
SBA arising from the [7(a)] Lender's misconduct or violation of any
provision of this part, the guarantee agreement, or other loan
documents. For the reasons stated above, SBA is moving forward with the
rule as proposed.
Section 120.801--How a 504 Project Is Financed
Current Sec. 120.801(a) applies to the 504 Loan Program and states
``One or more small businesses may apply for 504 financing through a
CDC serving the area where the 504 Project is located. SBA issues an
Authorization if it agrees to guarantee part of the funding for a
Project.'' For the reasons stated above, SBA proposed to remove the
sentence that references the Authorization, and SBA is moving forward
with the rule as proposed.
Section 120.842--ALP Express Loans
Current Sec. 120.842(b)(4) states the requirements for submission
of loan documents for 504 Loan Program ALP Express loans and states in
part ``If approved, SBA will notify the ALP CDC of the loan number
assigned to the loan and provide the CDC with a signed copy of the Loan
Authorization.'' SBA's current practice is to review an Authorization
and issue a loan number when the Authorization is considered
satisfactory to SBA. Under the proposed rule, SBA will indicate loan
approval by issuing a loan number. Therefore, SBA proposed to remove
the reference to the Loan Authorization so the sentence will state ``If
approved, SBA will notify the ALP CDC of the loan number assigned to
the loan.''
Current Sec. 120.842(b)(5) states the requirements for loan and
debenture closing for 504 Loan Program ALP Express loans and states
``After receiving notification of the loan number from SBA, the ALP CDC
is responsible for properly undertaking all actions necessary to close
the ALP Express Loan and Debenture in accordance with the expedited
loan closing procedures applicable to a Priority CDC and with Sec.
120.960.'' For the reasons stated above, SBA proposed to remove the
reference to the Loan Authorization so that section 120.842(b)(5) will
state ``After receiving notification of the loan number, the ALP CDC is
responsible for properly undertaking all actions necessary to close the
ALP Express Loan and Debenture in accordance with the expedited loan
closing procedures applicable to a Priority CDC and with Sec.
120.960.'' For the reasons stated above, SBA is moving forward with the
rule as proposed.
Section 120.921--Terms of Third Party Loans
Current Sec. 120.921(a) states the requirements for the loan
maturity of the 504 Loan Program Third Party Lender loan. Section
120.921(a) provides that Third Party Loans have loan maturity
requirements. A 504 loan for a 10 year loan term must have at least a 7
year Third Party Loan and similarly, a 504 loan for 20 years must have
at least 10 years for the Third Party Loan. Additionally, overall loan
maturities must be recalculated if there is more than one Third Party
Loan. However, a balloon payment must be justified in the Loan
Authorization. For the reasons stated above, SBA proposed to remove the
last sentence in section 120.921(a) in its entirety so that balloon
payments need not be identified in the Loan Authorization. For the
reasons stated above, SBA is moving forward with the rule as proposed.
Section 120.960--Responsibility for Closing
Current Sec. 120.960(c)(1) states that SBA may, within its sole
discretion, decline to close a 504 Loan Program Debenture; direct the
transfer of the 504 loan to another CDC; or cancel its guarantee of the
Debenture, prior to sale, if the CDC has failed to comply materially
with any requirement imposed by statute, regulation, SOP, policy and
procedural notice, any agreement the CDC has executed with SBA, or the
terms of a Debenture or loan authorization. For the reasons stated
above, SBA proposed to remove the reference to the loan Authorization,
and SBA is moving forward with the rule as proposed.
Section 120.971--Allowable Fees Paid by Borrower
Section 120.971 states the requirements for the allowable fees that
a 504 Loan Program Certified Development Company (CDC) may charge the
Borrower in connection with a 504 loan and Debenture. Section
120.971(a)(1) describes the Processing fee and states at what point in
the processing of 504 loan a fee is earned and may be collected by the
CDC as the time Authorization is issued. For the reasons stated above,
SBA proposed to remove the reference to the
[[Page 21896]]
Authorization for the Debenture and to instead refer to the issuance of
the loan number so that the amended section 120.971(a)(1) will provide
that this fee will be considered earned and collected when the loan
number is issued by SBA. For the reasons stated above, SBA is moving
forward with the rule as proposed.
Compliance With Executive Orders 12866, 12988, 13132, and 13563, the
Paperwork Reduction Act (44 U.S.C., Ch. 35), the Congressional Review
Act (5 U.S.C. 801-808), and the Regulatory Flexibility Act (5 U.S.C.
601-612)
Executive Order 12866
The Office of Management and Budget has determined that this rule
is a ``significant regulatory action'' under Executive Order 12866. SBA
performed a comprehensive Regulatory Impact Analysis in the proposed
rule for the public's information. SBA does not anticipate any of the
changes made in this final rule will substantially change any of the
assumptions necessary for the analysis. Therefore, the final Regulatory
Impact Analysis is unchanged and is synopsized below. Each section
begins with a core question.
A. Regulatory Objective of the Proposal
Is there a need for this regulatory action?
SBA performed a comprehensive cost benefit analysis in the proposed
rule. SBA does not anticipate any of the changes made in this final
rule will substantially change any of the assumptions necessary for the
analysis; therefore, the cost benefit analysis remains unchanged and is
synopsized below.
1. SBLC Moratorium Rescission
Access to capital is one of the primary factors indicating whether
a small business will startup, grow, and survive.
SBA's existing loan programs serve an important role in credit
markets for small businesses by providing financing to businesses that
do not have credit available elsewhere from conventional sources on
reasonable terms. SBA believes that increasing the number of
nontraditional lenders will result in the expansion of business
opportunities and the creation of more jobs in underserved communities.
SBA's CA Pilot Program, which currently expires September 30, 2024,
was specifically created to increase access to capital to small
businesses located in underserved markets. SBA has learned that CA
Lenders are able to routinely make at least 60 percent of their loans
to small businesses located in underserved markets; therefore, SBA is
onboarding more lenders to participate in 7(a) lending to increase the
number of mission-based lenders that use the program. Licensing new
SBLCs and Community Advantage SBLCs will provide a path for successful
CA Lenders to become participants in the 7(a) Loan Program long-term.
In addition, many non-traditional lenders participated in SBA's
Paycheck Protection Program (PPP), which provided billions of dollars
to small businesses during the economic upheaval caused by the COVID-19
pandemic. Based on the success of the PPP, removing the moratorium on
licensing new SBLCs and Community Advantage SBLCs opens opportunities
for more non-traditional lenders to participate in the 7(a) Loan
Program, providing additional sources of capital to America's small
businesses.
2. Removal of the Requirement for a Loan Authorization
SBA's current policy of requiring a separate Loan Authorization
document that contains the loan terms and conditions in addition to the
loan terms and conditions that the SBA Lender also submits to SBA with
its guaranty application is cumbersome, outdated, and duplicative. SBA
is revising its regulations to eliminate the duplication of effort and
opportunity for a mismatch of information between multiple sources of
the loan terms and conditions. The official source of all terms and
conditions (including any modifications) under which SBA has agreed to
provide a guaranty will be maintained in SBA's E-Tran system.
B. Benefits and Costs of the Rule
What are the potential benefits and costs of this regulatory
action?
1. SBLC Moratorium Rescission
SBA anticipates minor additional costs or impact on the subsidy to
operate the 7(a) Loan Program in the first 5 years under these proposed
regulations resulting from an anticipated modest increase in 7(a) loan
activity due to additional SBLCs, as newly established SBLCs take up to
five years to reach the current lending activity sustained by
established SBLC license holders. SBA has confirmed that there will be
no subsidy impact in FY 2024.
The existing 14 licensed SBLCs each approve an average of 125 loans
per year. SBA anticipates new SBLCs will require a ramp-up period over
the course of their first several years after they are licensed to
reach this level of 7(a) lending activity. Over the course of the past
four fiscal years, the majority of new 7(a) lenders have made between 1
and 26 7(a) loans in their first year of activity, with the average
number of loans from each new 7(a) lender of less than three loans in
their first year of 7(a) loan activity. Over the fiscal years 2018
through 2021, there were three new SBLC's that acquired SBLC Licenses,
and those new SBLCs approved a total of 40 7(a) loans in their first
years of operation, for an average of approximately 13 7(a) loans for
each SBLC in their first year. Based on loan volume for other new 7(a)
lenders between FY 2018 and FY 2021, SBA anticipates new SBLCs,
including Community Advantage SBLCs, to make approximately eight 7(a)
loans in their first year after they become fully operational because
of the targeted markets of Community Advantage SBLCs. The three new
SBLCs have the potential to increase 7(a) lending by the approximately
425 loans per year over the next four years.\2\
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\2\ This estimate is from the average number of 7(a) loans each
year based on the 1,694 new 7(a) loans approved by all new 7(a)
Lenders in the four-year period of fiscal year 2018 through fiscal
year 2022.
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SBA will grandfather current CA Lenders in accordance with section
120.420(e) that participated in the CA Pilot Program to be licensed as
7(a) Community Advantage SBLCs. When SBA authorizes a Community
Advantage SBLC License to a CA Lender, the CA Lender will transition
from making 7(a) loans in a temporary pilot program to instead making
7(a) loans under a non-temporary license in the regular 7(a) program.
This means a CA Lender transitioning to a Community Advantage SBLC will
pose no additional burden nor increase the total number of entities
overseen and supervised by SBA or the cost to SBA.
SBA is authorized \3\ to charge a fee for conducting oversight
activities, including safety and soundness examinations of SBA-
Supervised Lenders. All entities applying to participate as an SBLC
(including a Community Advantage SBLC) will undergo an initial safety
and soundness examination at the time of application. SBA estimates the
fee for completing the initial safety and soundness examination will be
a minimum of $10,000 per applicant. The fees charged by SBA for
conducting oversight activities support the oversight and examination
activities.
---------------------------------------------------------------------------
\3\ See section 23(a) of the Small Business Act. 15 U.S.C.
650(a), 15 U.S.C. 634(b)(6), (7), (14), and 13 CFR 120.1070.
---------------------------------------------------------------------------
The ongoing oversight fees imposed on the new SBLCs, including
Community Advantage SBLCs, will be
[[Page 21897]]
consistent with the oversight fees for the 7(a) Loan Program published
by OCRM and consistent with the oversight fees, for example, that
Community Advantage SBLCs have been responsible for over the duration
of the Community Advantage Pilot Program.\4\ In general, OCRM conducts
safety and soundness exams on SBLCs at least once every two years.
Additionally, SBA conducts targeted reviews of loan files, among other
reviews, in between regularly scheduled safety and soundness exams. The
total biennial cost of these risk-based exams/reviews is currently
approximately $50,000 to $150,000 per institution, with review costs
correlated to the size of the SBLC's loan portfolio. Exam/review fees
are usually invoiced following a review/exam.
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\4\ SBA Information Notice 5000-828947, FY 2022 Updated Fee
Schedule for SBA Oversight of 7(a) Lenders, March 3, 2022. (<a href="https://www.sba.gov/document/information-notice-5000-828947-fy-2022-updated-fee-schedule-sba-oversight-7a-lenders">https://www.sba.gov/document/information-notice-5000-828947-fy-2022-updated-fee-schedule-sba-oversight-7a-lenders</a>).
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In addition to the review/exam fees charged, SBA charges an annual
oversight fee that covers the costs of monitoring, Other Lender
Oversight Activities, and Delegated Authority Reviews (the latter as
applicable). SBA charges 7(a) Lenders a fee annually for monitoring,
including the quarterly off-site/monitoring reviews conducted through
the Loan and Lender Monitoring System (L/LMS). SBA's annual oversight
fee also includes costs related to Other Lender Oversight Activities
(e.g., technical assistance and analytics, a portion of OCRM salaries
for 7(a) Lender oversight activities, supervision and enforcement
activities, and similar costs to support SBA's lender oversight
program). In addition, the annual oversight fee includes a fee for
Delegated Authority Lender Reviews, as applicable. The annual oversight
fee is based on SBA's costs. The annual fee for monitoring (e.g., L/LMS
and subscription services), Other Lender Oversight Activities, and
Delegated Authority Reviews is assessed annually based on each 7(a)
Lender's portion of the total dollar amount of 7(a) guarantees in SBA's
portfolio or, as applicable, the relevant portfolio segment the
activity covers. For FY 2022, the annual oversight fee ranged from $161
to $174 (the latter for Delegated Authority SBA Supervised Lenders) for
every $1 million in 7(a) guaranteed dollars a 7(a) Lender has
outstanding (exclusive of Paycheck Protection Program (PPP) loans). For
a more detailed discussion on Lender Oversight Fees, see SOP 50 53 2,
Chpt. 5 (eff. Jan. 1, 2021); SBA Information Notice 5000-828947, FY
2022 Updated Fee Schedule for SBA Oversight of 7(a) Lenders, March 3,
2022. (<a href="https://www.sba.gov/document/information-notice-5000-828947-fy-2022-updated-fee-schedule-sba-oversight-7a-lenders">https://www.sba.gov/document/information-notice-5000-828947-fy-2022-updated-fee-schedule-sba-oversight-7a-lenders</a>) and SOP 50 10 6,
Part 1, Section A, Chpt 1, Para. D. Lifting the moratorium on licensing
new SBLCs and authorizing Community Advantage SBLCs will benefit the
approximately 51% of small employer firms that do not have their
financing needs met,\5\ either because they did not receive all the
financing for which they applied, or because they did not apply due to
a variety of reasons, including the belief they would be turned down.
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\5\ Ibid, page 11.
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The proposed revisions may have a negative impact to the 14
existing SBLCs by destabilizing the value of their licenses due to
increased competition and issuance of new SBLC Licenses. The value of
SBLC Licenses may periodically fluctuate based on whether SBA is or is
not accepting applications for new SBLCs and entities interested in the
program must acquire existing SBLC License.
As previously stated above, the primary function of the Community
Advantage Pilot Program was to waive the moratorium on issuing new SBLC
licenses to lenders who would not ordinarily qualify to be a 7(a)
lender. Therefore, by creating a new type of Community Advantage SBLC,
SBA will ensure that all existing Community Advantage Pilot Program
participants will become 7(a) lenders without an expiration date
associated with their participation. The Community Advantage Pilot
Program participants have been important 7(a) lenders, increasing
capital to small business by originating loans consistent with 7(a)
Loan Program Requirements. As a pilot, the temporary Community
Advantage Program will sunset. SBA has concluded that the Community
Advantage Pilot Program demonstrated its benefits. By grandfathering in
all existing Community Advantage Pilot Program lenders to be Community
Advantage SBLCs, the benefits of mission-oriented lenders utilizing the
7(a) loan to extend credit across the country will become a regular
feature of SBA lending. Finally, by authorizing the SBA Administrator,
Associate Administrator for the Office of Capital Access (AA/OCA), or a
designee(s) to determine appropriate capital requirements, loan loss
reserve requirements, fidelity insurance levels and create parity in
oversight fees, the current Community Advantage Pilot Program
participants will not experience material changes in the transition to
Community Advantage SBLCs. Accordingly, the SBA pilot program spanning
three different Executive Branch Administrations will sunset, with the
result being an acknowledgement that these previously ineligible
mission-oriented lenders will be able to participate in 7(a) lending,
or may apply to become 7(a) lenders, to increase access to capital for
America's small businesses.
C. What alternatives have been considered?
1. SBLC Moratorium Rescission
SBA considered leaving the regulations unchanged and relying upon
the CA Pilot Program to address the needs of access to capital in
underserved markets; however, the CA Pilot Program will sunset on
September 30, 2024, and SBA intends for Community Advantage SBLCs to be
a solution that provides greater certainty for lenders.
SBA also considered requiring Community Advantage SBLCs to meet the
$5 million capitalization requirements currently in place for all SBLC
license holders; however, SBA determined many of these lending entities
would be unable to qualify for SBA's program based on such a
requirement.
2. Removal of the Requirement for a Loan Authorization
SBA considered leaving the requirements for the Loan Authorization
intact. However, SBA Lenders struggle under the burden of the existing
lengthy Loan Authorization, and they continue to request relief from
this requirement. In the interest of reducing duplicative effort and
making better use of existing technology and processes, SBA determined
it is in the interest of SBA and SBA Lenders to revise the requirement
for a Loan Authorization as proposed.
SBA also considered facilitating electronic entry of the Loan
Authorization for the subject SBA loans. However, electronic entry of
the Loan Authorization form would not address the duplicative effort
resulting from subsequent entry in E-Tran. Therefore, this would also
not be a viable alternative.
Executive Order 12988
This action meets applicable standards set forth in sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have preemptive effect or retroactive effect.
[[Page 21898]]
Executive Order 13132
This rule does not have federalism implications as defined in
Executive Order 13132. It will not have substantial direct effects on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government, as specified in the Executive Order. As
such it does not warrant the preparation of a Federalism Assessment.
Executive Order 13563
A description of the need for this regulatory action and benefits
and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, are
included above in the Regulatory Impact Analysis under Executive Order
12866.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
The portions of the proposed rule on the SBLC moratorium rescission
would require SBA Form 2498, ``SBA Supervised Lender Assessment Plan,''
to be revised to edit the requirement that an applicant to become an
SBLC must include a letter from an existing SBLC evidencing intent to
transfer lending authority to conform with revisions to 13 CFR 120.466.
The portion of this rule on removing the requirement for a Loan
Authorization is not subject to the Paperwork Reduction Act because the
Loan Authorization is not an information collection. SBA will submit
revisions of this form to OMB and publish notice at a later date.
Congressional Review Act, 5 U.S.C. Ch. 8
Subtitle E of the Small Business Regulatory Enforcement Fairness
Act of 1996, also known as the Congressional Review Act or CRA,
generally provides that before a rule may take effect, the agency
promulgating the rule must submit a rule report, which includes a copy
of the rule, to each House of the Congress and to the Comptroller
General of the United States. SBA will submit a report containing this
rule and other required information to the U.S. Senate, the U.S. House
of Representatives, and the Comptroller General of the United States. A
major rule under the CRA cannot take effect until 60 days after it is
published in the Federal Register. The Office of Information and
Regulatory Affairs has determined that this rule is not a ``major
rule'' as defined by 5 U.S.C. 804(2). Therefore, this rule is not
subject to the 60-day restriction.
Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601-612, requires the agency to
``prepare and make available for public comment a final regulatory
analysis'' which will ``describe the impact of the final rule on small
entities.'' For the reasons stated below, SBA certifies that this
rulemaking will not have a significant economic impact on a substantial
number of small entities.
Of the 182 new 7(a) Lenders onboarded since FY 2018, only four were
new SBLCs that acquired an SBLC License after receiving SBA's approval
for the SBLC License transfer. SBA does not require SBLCs to provide
SBA with the financial statements of the SBLC parent company, if
applicable, or affiliates; therefore, SBA is not able to determine
whether the SBLCs are small businesses in accordance with SBA size
standards. SBA anticipates approving three SBLCs, in the full first
year after this proposed rule becomes effective.
Because some SBLC applicants may be considered small businesses per
size standards in 13 CFR 121.201,\6\ SBA must address the cost of
preparing and submitting an SBLC application to SBA. The 2021 annual
revenues (including revenues of any Parent Company) for the 13 active
SBLCs (one inactive SBLC is in the process of transferring their
license and their 2021 revenues were not available) range from a low of
$5.1 million to a high of $910.8 million, with average annual revenues
of $81.3 million per SBLC. These revenues are well above the SBA small
business size standard of $41.5 million in annual revenues for the
North American Industry Classification System (NAICS) industry 522298,
``All Other Nondepository Credit Intermediation'' average revenue
threshold to be considered a ``small business'', which includes revenue
from affiliates such as parent companies. SBA does not require an SBLC
to be a small business in order to participate as a 7(a) Lender,
therefore SBA does not review the SBLC applicant for size when
evaluating an SBLC application. SBA also does not collect financial
information on any SBLC affiliates, which would be necessary to make a
size determination for an SBLC; therefore, it is not feasible for SBA
to determine if any of the SBLCs are small businesses.
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\6\ Based on the Size Standard for NAICS Code 522298, All Other
Nondepository Credit Intermediation, of $41.5 million gross revenues
averaged over the last five years--13 CFR 121.201 <a href="https://www.ecfr.gov/current/title-13/chapter-I/part-121/subpart-A/subject-group-ECFRf12a11421b08a31/section-121.201">https://www.ecfr.gov/current/title-13/chapter-I/part-121/subpart-A/subject-group-ECFRf12a11421b08a31/section-121.201</a>.
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Based on SBA's experience with similar data collections, an
organization applying to become an SBA Supervised Lender would
typically employ the services of a financial manager, an accountant, an
attorney, and an administrative assistant when preparing a complete
application for submission to SBA. SBA also anticipates a minor
increase of additional 7(a) loan approvals each year based on the
approximately three new SBLC and Community Advantage SBLC lenders per
year.
The cost estimate for an SBLC applicant to complete an SBA SBLC
application is based on the estimated time to complete the application
multiplied by the median hourly wage by job position wages published by
the U.S. Department of Labor's Bureau of Labor Statistics for 2021 \7\
and increased by 100% to account for overhead benefit costs. The cost
breakdown is as follows: Financial Manager (30 hours times an hourly
rate of $63.32 plus overhead and benefit costs of $63.32 per hour =
$3,799.20); plus Accountant (10 hours times an hourly rate of $37.14,
plus overhead and benefit costs of $37.14 per hour = $742.80); plus
Lawyers (5 hours times an hourly rate of $61.54, plus overhead and
benefit costs of $61.54 per hour = $615.40); plus Administrative
Assistant (5 hours times an hourly rate of $19.08, plus overhead and
benefit costs of $19.08 per hour = $190.80); for a total anticipated
cost to complete the SBLC application for each SBLC applicant of
$5,348. As stated elsewhere, SBA estimates the fee for completing the
initial safety and soundness examination will be a minimum of $10,000
per applicant, which would increase the cost burden for each of the
three SBLC applicants to $15,348.
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\7\ <a href="https://www.bls.gov/oes/current/oes_nat.htm">https://www.bls.gov/oes/current/oes_nat.htm</a>.
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SBA believes the one-time estimated cost burden of $15,348 does not
represent a significant economic impact to a potential SBLC applicant
in comparison to the average annual revenue of existing SBLCs of $81.3
million per SBLC.
List of Subjects in 13 CFR Part 120
Community development, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons stated in the preamble, SBA is amending 13 CFR part
120 as follows:
[[Page 21899]]
PART 120--BUSINESS LOANS
0
1. The authority citation for 13 CFR part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note,
636(a), (h) and (m), and note, 636m, 650, 657t, and note, 657u, and
note, 687(f), 696(3), and (7), and note, 697, 697a and e, and note;
Pub. L. 116-260, 134 Stat. 1182.
0
2. Amend Sec. 120.10 by:
0
a. Removing the definition for ``Authorization'';
0
b. Adding a definition for ``Community Advantage Small Business Lending
Company (COMMUNITY ADVANTAGE SBLC)'' in alphabetical order; and
0
c. Revising the definitions for ``Loan Instruments'', ``Loan Program
Requirements or SBA Loan Program requirements'' and ``Small Business
Lending Company (SBLC)''.
The revisions and addition read as follows:
Sec. 120.10 Definitions
* * * * *
Community Advantage Small Business Lending Company (Community
Advantage SBLC) is a type of SBLC that is a nonprofit lending
institution licensed and authorized by SBA to make loans pursuant to
section 7(a) of the Small Business Act. Note: This includes former
Community Advantage Pilot Lenders that were grandfathered in at the
time Community Advantage SBLC licenses were authorized regardless of
their profit or nonprofit status. SBA accepts applications for
Community Advantage SBLCs from time to time as published in the Federal
Register.
* * * * *
Loan Instruments are the note, instruments of hypothecation, and
all other agreements and documents related to a loan.
Loan Program Requirements or SBA Loan Program Requirements are
requirements imposed upon Lenders, CDCs, or Intermediaries by statute;
SBA and applicable government-wide regulations; any agreement the
Lender, CDC, or Intermediary has executed with SBA or to which the
Lender or CDC is subject; SBA Standard Operating Procedures (SOPs);
Federal Register notices; and official SBA notices and forms applicable
to the 7(a) Loan Program, 504 Loan Program or Microloan Program, as
such requirements are issued and revised by SBA from time to time. For
CDCs, this term also includes requirements imposed by Debentures, as
that term is defined in Sec. 120.802. For Intermediaries, this term
also includes requirements imposed by promissory notes, collateral
documents, and grant agreements.
* * * * *
Small Business Lending Company (SBLC) is a non-depository lending
institution that is SBA-licensed and is authorized by SBA to make loans
pursuant to section 7(a) of the Small Business Act and loans to
Intermediaries in SBA's Microloan program. SBA accepts applications for
SBLCs from time to time as published in the Federal Register.
* * * * *
Sec. 120.120 [Amended]
0
3. Amend Sec. 120.120 introductory text by removing the last sentence.
Sec. 120.192 [Amended]
0
4. Amend Sec. 120.192 by removing the last sentence.
0
5. Amend Sec. 120.220 by revising the last sentence of the
introductory text and the last sentence of paragraph (e) to read as
follows:
Sec. 120.220 Fees that Lender pays SBA.
* * * Acceptance of the guaranty fee by SBA does not waive any
right of SBA arising from a Lender's negligence, misconduct or
violation of any provision of these regulations or the guaranty
agreement or other loan documents.
* * * * *
(e) * * * 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 or other loan
documents.
* * * * *
0
6. Amend Sec. 120.466 by revising paragraph (a)(6) to read as follows:
Sec. Sec. 120.466 SBA Supervised Lender application.
* * * * *
(a) * * *
(6) In connection with any application to acquire an existing SBLC
License, the applicant must include a letter agreement signed by an
authorized official of the SBLC whose License is to be acquired
certifying that the SBLC is seeking to transfer its SBA lending
authority to the applicant;
* * * * *
0
7. Amend Sec. 120.470 by revising the introductory text, paragraph (a)
introductory text, and paragraphs (b) and (e) to read as follows:
Sec. Sec. 120.470 What are SBA's additional requirements for SBLCs?
In addition to complying with SBA's requirements for SBA Lenders
and SBA Supervised Lenders, an SBLC (including a Community Advantage
SBLC) must meet the requirements contained in this regulation and the
SBLC regulations that follow.
(a) Lending. An SBLC or Community Advantage SBLC may make:
* * * * *
(b) Business structure. An SBLC must be a corporation (profit or
nonprofit) or a limited liability company or limited partnership,
except for a Community Advantage SBLC, which must either be a nonprofit
corporation or have been a Community Advantage Pilot Program
participant.
* * * * *
(e) Fidelity insurance. An SBLC, except for a Community Advantage
SBLC, 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 $2,000,000 executed
by a surety holding a certificate of authority from the Secretary of
the Treasury pursuant to 31 U.S.C. 9304-9308. SBA's Administrator, in
consultation with SBA's Associate Administrator for the Office of
Capital Access (AA/OCA), or their designee(s), at their discretion,
will determine the appropriate bond coverage levels for Community
Advantage SBLCs as published in Loan Program Requirements.
* * * * *
0
8. Amend Sec. 120.471 by adding paragraphs (a)(4) and (5) to read as
follows:
Sec. 120.471 What are the minimum capital requirements for SBLCs?
(a) * * *
(4) A Community Advantage SBLC must maintain a minimum amount of
capital as determined at the discretion of the Administrator in
consultation with SBA's Associate Administrator for the Office of
Capital Access (AA/OCA), or their designee(s). The minimum capital
amount as published in Loan Program Requirements will ensure sufficient
risk protection for SBA and lenders while not burdening smaller lenders
with large capital requirements.
(5) Community Advantage SBLCs must maintain a loan loss reserve
account as determined at the discretion of the Administrator in
consultation with SBA's Associate Administrator for the Office of
Capital Access (AA/OCA), or their designee(s) as published in Loan
Program Requirements.
* * * * *
0
9. Amend Sec. 120.801 by revising the last sentence of paragraph (a)
to read as follows:
[[Page 21900]]
Sec. Sec. 120.801 How a 504 Project is financed.
(a) * * * SBA issues a loan number if it agrees to guarantee part
of the funding for a Project.
* * * * *
0
10. Amend Sec. 120.820 by adding paragraph (g) to read as follows:
Sec. Sec. 120.820 CDC Affiliation.
* * * * *
(g) Notwithstanding paragraphs (b), (c), and (e) of this section, a
CDC may be affiliated with a Community Advantage SBLC. Additionally,
CDCs that are also Community Advantage Pilot Program Lenders as of May
11, 2023 may be licensed as Community Advantage SBLCs.
0
11. Amend Sec. 120.842 by revising the last sentence of paragraph
(b)(4) and the last sentence of paragraph (b)(5) to read as follows:
Sec. Sec. 120.842 ALP Express Loans.
* * * * *
(b) * * *
(4) * * * If approved, SBA will notify the ALP CDC of the loan
number assigned to the loan.
(5) * * * After receiving notification of the loan number from SBA,
the ALP CDC is responsible for properly undertaking all actions
necessary to close the ALP Express Loan and Debenture in accordance
with the expedited loan closing procedures applicable to a Priority CDC
and with Sec. 120.960, and in compliance with all applicable Loan
Program Requirements.
* * * * *
Sec. Sec. 120.921 [Amended]
0
12. Amend Sec. 120.921 by removing the last sentence in paragraph (a).
0
13. Amend Sec. 120.960 by revising paragraph (c)(1) to read as
follows:
Sec. Sec. 120.960 Responsibility for closing.
* * * * *
(c) * * *
(1) The CDC has failed to comply materially with any Loan Program
Requirement as defined in Sec. 120.10;
* * * * *
0
14. Amend Sec. 120.971 by revising paragraph (a)(1) to read as
follows:
Sec. Sec. 120.971 Allowable fees paid by Borrower.
(a) * * *
(1) Processing fee. The CDC may charge up to 1.5 percent of the net
Debenture proceeds to process the financing. Two-thirds of this fee
will be considered earned and may be collected by the CDC when the loan
number is issued by SBA. The portion of the processing fee paid by the
Borrower may be reimbursed from the Debenture proceeds;
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-07181 Filed 4-11-23; 8:45 am]
BILLING CODE 8026-09-P
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</html>Indexed from Federal Register on April 12, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.