Rule2024-16207
Disaster Assistance Loan Program Changes to Unsecured Loan Amounts and Credit Elsewhere Criteria
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
July 24, 2024
Effective
September 9, 2024
Issuing agencies
Small Business Administration
Abstract
This direct final rule amends the U.S. Small Business Administration (SBA or Agency) regulations governing the SBA Disaster Loan Program by revising how it determines whether an applicant has credit elsewhere to modernize and replace the current process. SBA is also increasing the unsecured threshold for physical damage loans under Major Disaster declarations and for Economic Injury Disaster Loans (EIDL) under all disaster declarations.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 142 (Wednesday, July 24, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 142 (Wednesday, July 24, 2024)]
[Rules and Regulations]
[Pages 59826-59831]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-16207]
[[Page 59826]]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 123
RIN 3245-AI08
Disaster Assistance Loan Program Changes to Unsecured Loan
Amounts and Credit Elsewhere Criteria
AGENCY: U.S. Small Business Administration.
ACTION: Direct final rule.
-----------------------------------------------------------------------
SUMMARY: This direct final rule amends the U.S. Small Business
Administration (SBA or Agency) regulations governing the SBA Disaster
Loan Program by revising how it determines whether an applicant has
credit elsewhere to modernize and replace the current process. SBA is
also increasing the unsecured threshold for physical damage loans under
Major Disaster declarations and for Economic Injury Disaster Loans
(EIDL) under all disaster declarations.
DATES:
Effective date: This rule is effective September 9, 2024, unless
SBA receives a significant adverse comment to this direct final rule.
If a timely, significant adverse comment is received, the Agency will
publish a notification of withdrawal of the direct final rule in the
Federal Register before the effective date.
Applicability date: This rule is applicable for disasters declared
on or after September 9, 2024.
Comment date: Comments must be received on or before August 23,
2024.
ADDRESSES: You may submit comments, identified by the Regulation
Identifier Number (RIN) 3245-AI08, through the Federal eRulemaking
Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Follow the instructions for
submitting comments.
SBA will post all comments on <a href="https://www.regulations.gov">https://www.regulations.gov</a>. If you
wish to submit confidential business information (CBI) as defined in
the User Notice at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, please submit the
information via email to Robert Blocker at <a href="/cdn-cgi/l/email-protection#74061b161106005a16181b171f1106340716155a131b02"><span class="__cf_email__" data-cfemail="51233e333423257f333d3e323a3423112233307f363e27">[email protected]</span></a> and
highlight the information that you consider to be CBI and explain why
you believe SBA should hold this information as confidential. SBA will
review the information and make the final determination whether it will
publish the information.
FOR FURTHER INFORMATION CONTACT: Robert Blocker, Office of Financial
Assistance, Office of Capital Access, Small Business Administration, at
<a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="70221f121502045e121c1f131b1502300312115e171f06">[email protected]</a> or (202) 619-0477.
SUPPLEMENTARY INFORMATION:
I. Background Information
SBA's Disaster Loan Program provides direct assistance to
homeowners, renters, businesses, and nonprofits, which is critical to
rebuilding communities after a disaster. Pursuant to section 7(b) of
the Small Business Act, 15 U.S.C. 636(b) (the Act), SBA is authorized
to make direct loans to homeowners, renters, businesses, and non-profit
organizations that have been adversely affected by a disaster. The Act
authorizes the Administrator to increase the SBA's size limits on
unsecured disaster loans for physical damages in Major Disasters and
for EIDL loans for all disaster declarations except Military Reservist
Economic Injury Disaster Loans (MREIDL). (See 15 U.S.C. 636(d)(6)) SBA
is further authorized to set a low-interest rate for individuals and
businesses that SBA determines are unable to obtain credit elsewhere
and to set a market interest rate for the individuals and businesses
that can obtain credit elsewhere.
With natural disasters increasing in severity and frequency across
the United States and its territories, SBA is increasing the maximum
unsecured loan limits for home and business loans declared for Major
Disasters and for EIDL loans for all disaster declaration types. SBA is
also revising the method used to determine whether an applicant has
credit elsewhere.
SBA believes these changes are necessary to:
<bullet> Address limits due to inflation.
<bullet> Increase efficiencies in the administration and delivery
of the program to better achieve mission and improve outcomes for
economic recovery.
<bullet> Increase the percentage of borrowers utilizing the SBA
mitigation program which is designed to prevent future disaster damages
and reduce future disaster economic impacts.
<bullet> Reduce the burden of collateral and improve access to
credit in underserved communities which oftentimes have limited access
to other sources of capital and historically have seen higher rates of
disasters and lower economic survival rates.
II. Section-by-Section Analysis
Section 123.11 Does SBA require collateral for any of its disaster
loans?
Section 123.11 defines the conditions under which SBA will not
require collateral for disaster loans. Paragraph (a) provides the
dollar thresholds below which collateral generally will not be required
for EIDL loans, physical disaster home and business loans, and MREIDL
loans. Paragraph (c) defines when SBA will aggregate physical home and
business loans and or EIDL loans to the same borrowers and affiliates
to determine if collateral is required.
The collateral threshold for major disasters and EIDL across all
declaration types, has been at $25,000 since 2014. The collateral
threshold for SBA Agency disasters has been $14,000 since 2008, except
for a temporary increase to $25,000 in 2015. These amounts have not
been updated despite cost and inflationary increases.
SBA is revising paragraphs (a)(1) and (2) to increase the unsecured
loan threshold to $50,000 for EIDL loans for all disasters and for
physical home and business loans for Major Disaster declarations. SBA
believes the current collateral threshold of $25,000 unnecessarily
prevents borrowers from receiving adequate funds to completely recover
after a disaster. A recent working paper published by the National
Bureau of Economic Research (NBER working paper) used SBA disaster loan
application and loan performance data to analyze the effect of
collateral requirements on borrower behavior and default rates.\1\
Using data from 2005 to 2018, the authors determined that 38 percent of
all borrowers with losses above the secured threshold tended to borrow
less money than they were eligible, because many have first liens (some
had second liens), on their property. As a result, there is little to
no justification for further leveraging a property with insufficient
equity. The study concluded that the median Disaster Loan Program
borrower forgoes up to 40 percent of their loan eligibility to minimize
additional liens on their property. The result is that borrowers make
decisions that may result in insufficient funds to repair their home
adequately and replace personal property. The NBER working paper
authors estimated that over $1.1 billion in eligible loan funds were
not disbursed due to borrowers electing to keep loan amounts below the
collateral threshold.
---------------------------------------------------------------------------
\1\ The Cost of Consumer Collateral: Evidence from Bunching
(<a href="https://www.fdic.gov/analysis/cfr/consumer/2022/papers/collier-paper.pdf">https://www.fdic.gov/analysis/cfr/consumer/2022/papers/collier-paper.pdf</a>). Collier, Benjamin, et al. The Cost of Consumer
Collateral: Evidence from Bunching, 2021, <a href="https://doi.org/10.3386/w29527">https://doi.org/10.3386/w29527</a>.
---------------------------------------------------------------------------
SBA expects the increase in the unsecured loan limit will result in
increased use by disaster survivors of additional available funds,
which may include funds SBA makes available specifically for mitigation
uses that minimize the risk and cost of future disasters. Currently,
only two percent of borrowers utilize mitigation funds. By increasing
the unsecured threshold, we
[[Page 59827]]
expect more borrowers to fully access the funds available, not only to
fully repair and rebuild, but to build resiliency against future risk.
This serves as an incentive for borrowers to secure their homes against
such impacts to prevent losses and expedite borrowers' recoveries from
subsequent disasters. These changes align with SBA's initiative to
increase utilization of the mitigation program from two percent to
twenty percent.
Historically, home loans make up approximately 80 percent of
disaster applications in most disasters. The real estate collateral
associated with these loans is primarily the damaged residence of the
disaster survivor. Most disaster home borrowers have one or more
existing mortgages leaving minimal or no equity value for additional
leverage. When SBA requires a lien on those assets, the lien is
subordinate to all existing encumbrances and, often does not add
recoverable value to SBA's lien position. The subordinate position
significantly reduces recovery for SBA in the event of a default and
foreclosure. Collateral analysis of SBA loan portfolio from 2018
through 2023, 41 percent of disaster survivors who apply for and
receive SBA assistance do not have collateral sufficient to fully
secure the loan. Further collateral analysis indicates 13 percent of
borrowers do not have adequate equity to secure 20 percent of the loan
amount and 7 percent of borrowers have no equity to secure the SBA
loan. In practice, the costs of default and foreclosure and the
satisfaction of any senior liens on the property significantly diminish
SBA's recovery.
This change will expedite disbursement of more funds to borrowers
and reduce costs to the Agency for monitoring liens. Most importantly,
it will lower costs (lien recording fees, documentary stamps, etc.) to
the disaster survivors, while ensuring they have adequate recovery
support. Reducing SBA's costs associated with obtaining property
reports necessary to secure collateral and preparing security
instruments to comply with each state will also reduce the need for
both additional disaster contracts and surge staffing to process,
disburse, and service secured disaster loans.
Section 123.104 What interest rate will I pay on my home disaster loan?
The current language of Sec. 123.104 requires SBA to determine
whether a disaster survivor has credit elsewhere by analyzing their
cash flow and disposable assets. SBA is streamlining the process of
determining whether an applicant has credit elsewhere by allowing the
use of credit score modeling as a basis of this determination. This
change would sync the requirement with what is currently utilized by
non-Federal sources. As a result of the changes to Sec. 123.104 SBA
also is amending Sec. 123.507(c), as it also references analyzing cash
flow and disposable assets.
On April 25, 2014, SBA amended its regulations to allow the use of
an applicant's credit score as evidence of repayment ability, 79 FR
22859. The intent of the change was to allow SBA to expedite the
processing of applications with strong credit by removing the
requirement to analyze cash flow for all loans. Although the change
allowed SBA to utilize a more efficient process for determining
repayment, there was no coinciding change to streamline the
determination of credit elsewhere. Because the current regulation
states that credit elsewhere is evaluated based on cash flow and
disposable assets, a complete financial analysis still must be
performed for every applicant even when credit scores are used as a
basis for repayment. To review a disaster survivor's disposable assets,
SBA requires home loan applicants to submit a list of assets; business
principals to submit a personal financial statement; and, in some
cases, business and affiliate entities to submit complete copies of
their Federal tax returns. The regulation also requires SBA to review
the assets to determine what is disposable. This process is time
consuming and subjective.
SBA has determined that a high credit score is the best indication
of whether a disaster survivor could obtain financing from non-Federal
sources at reasonable terms. The lending industry uses credit scoring
for determining both whether to approve credit and what interest rate
to provide the borrower. Individual credit scores generally range from
300 to 835. According to the Fair Isaacs Corporation (FICO) loan
calculator, borrowers with credit scores of 760 and above receive the
lowest mortgage interest rates, and interest rates increase by .225
percentage points in each lower credit score tier.\2\ In addition,
according to Bankrate, credit scores of 720 and above receive the
lowest average interest rates on personal loans, with the average
interest rates increasing by 2.77-10.7 percentage points in each lower
credit score tier.\3\
---------------------------------------------------------------------------
\2\ myFICO (<a href="http://www.myfico.com/credit-education/calculators/loan-savings-calculator">www.myfico.com/credit-education/calculators/loan-savings-calculator</a>).
\3\ Average Personal Loan Interest Rates [verbar] Bankrate
(<a href="https://www.bankrate.com/loans/personal-loans/average-personal-loan-rates/">https://www.bankrate.com/loans/personal-loans/average-personal-loan-rates/</a>).
---------------------------------------------------------------------------
The current regulation requiring evaluation of cash flow and
disposable assets has led to approvals of disaster loans that are not
consistent with private sector practices, where credit scores are the
primary factor in determining the interest rate. Our analysis of
Hurricane Ian business loans shows that the average credit score for
loan business principals for loans approved for businesses with credit
elsewhere was 775. In comparison, the average credit score for loans
approved for businesses without credit elsewhere was comparable, at
776. Additionally, analysis for home loans approved for Hurricane Ian
shows the average credit score for homeowners without credit elsewhere
was 717. Of those individuals determined to have credit elsewhere, the
average credit score was 784. Of that number, 9.4 percent of those had
credit scores of 719 or below.
SBA can use FICO Small Business Scoring Service (SBSS) to determine
credit available elsewhere for business loan applicants. The SBSS Score
ranges from zero to 300 and is calculated based on the business owners'
consumer credit bureau data, the business's credit report (e.g., D&B),
the business's financial data, and loan application data. Information
obtained from <a href="http://businesscreditreports.com">businesscreditreports.com</a> shows SBSS scores can be
divided into ranges as follows: \4\
---------------------------------------------------------------------------
\4\ BCR--FICO SBSS--Overview.pdf (<a href="http://businesscreditreports.com">businesscreditreports.com</a>)
(<a href="https://businesscreditreports.com/documents/BCR%20-%20FICO%20SBSS%20-%20Overview.pdf">https://businesscreditreports.com/documents/BCR%20-%20FICO%20SBSS%20-%20Overview.pdf</a>).
---------------------------------------------------------------------------
Poor: 1-160, 16% of applicants score in this range;
Fair: 161-190, 29% of applicants score is this range;
Good: 191-210, 45% of applicants score in this range;
Excellent: 211-300, 10% of applicants score in this range.
SBA disaster lending has not historically used SBSS scores, so
there is no comparable data to show average SBSS scores for current
disaster market rate loans compared to below market rate loans or to
show what percentage of loans would be at market rate based on a
specific SBSS score. However, SBA currently utilizes SBSS scoring for
other financial assistance programs, specifically as a prescreening
process for 7(a) Small Loans, with a minimum SBSS score of 155; and
Community Advantage loans, with a minimum SBSS score of 140. The
Disaster Loan Program's implementation of SBSS
[[Page 59828]]
scores will bring consistency in prescreening processes across SBA
financial programs. The FICO SBSS score is calculated using two main
factors: personal finance and business finance. Personal finance
includes factors such as on-time payment history, types of loan
accounts, and your credit utilization rate. Business finance includes
factors like the number of employees, cash flow, time in business, and
major complaints and lawsuits against your company.
SBA's rule will streamline the processing of disaster loans by
removing the requirement to evaluate cash flow and disposable assets
for all loans. However, SBA may still utilize a review of cash flow as
part of the credit elsewhere determination in certain situations. For
example, when an applicant has a high credit score but large disaster
losses, SBA may evaluate cash flow to determine if the cost of
obtaining disaster financing from non-Federal sources would present a
hardship to the disaster survivor.
The regulatory changes would allow SBA to automate and streamline
more loan processes. Utilizing credit scores to determine credit
elsewhere also allows SBA to provide greater clarity to disaster
survivors regarding interest rate determinations. Furthermore,
determining credit elsewhere by using credit scores would make the
process easily adaptable. If a score leads to a large increase or
decrease in the percentage of disaster survivors showing credit
elsewhere, the score can be adjusted, which would directly impact the
percentage.
III. Justification for Direct Final Rule
Agencies typically utilize direct final rulemakings for non-
controversial regulatory actions that are unlikely to receive adverse
comments. In direct final rulemaking, an agency publishes a final rule
with a statement that the rule will go into effect unless the agency
receives significant adverse comment within a specified period.
Significant adverse comments are comments that provide strong
justifications why the rule should not be adopted or for changing the
rule. If the agency receives no significant adverse comment in response
to the direct final rule, the rule goes into effect. If the agency
receives significant adverse comment, the agency withdraws the direct
final rule and may instead issue a proposed rulemaking. SBA has
determined that the regulatory changes addressed in this direct final
rulemaking are non-controversial, and not likely to result in adverse
comments.
By permitting the use of credit score modeling, SBA is expending
the process of determining whether an applicant has credit elsewhere.
This will allow for a quicker approval process because SBA will not be
restricted to performing a time-consuming cash flow analysis for each
loan. SBA will be able to decrease the time it takes to process all
loan applications overall and expedite the processing of applications
from victims of disasters. The SBA's disaster loan unsecured loan
threshold has not changed in over a decade, even though natural
disasters are becoming more severe and frequent across the United
States and its territories, as evidenced by more longer hurricane
seasons and more frequent wildfires, tornados, floods, and blizzards.
All disasters are urgent, necessitating the most efficient and
effective path to assistance for survivors. In short, an increase in
the SBA's disaster unsecured threshold is necessary to meet the current
economic demands of more severe and frequent disasters.
SBA does not anticipate receiving significant adverse comments
because the principal effect of these amendments is to reduce delays in
loan processing and provide faster assistance. Also, SBA will be able
to increase the amount disaster survivors can borrow through the SBA's
Disaster Assistance Loan Program while reducing the burdens of pledging
collateral to the disaster survivors, such as having to provide the
additional documentation required for a secured loan amount and
incurring costs associated with lien recording fees, title company
fees, etc. Unsecured loans require minimal documentation, such as an
executed Note and Loan Authorization and Agreement. Because there is
less documentation to collect and review, the SBA can disburse funds
below the unsecured loan threshold much more quickly. SBA's disaster
loan program offers long-term, low interest, fixed rate loans to
disaster survivors, enabling them to replace real or personal property
damaged or destroyed in declared disasters. It also offers such loans
to affected small businesses and non-profits to help them recover from
economic injury caused by such disasters.
The changes in this direct final rule will not require members of
the public to adjust their behavior. Rather, the changes will benefit
the public by allowing for increased compensation before collateral is
required to adequately reflect increases in costs associated with
replacing and repairing residential real property and household effects
that have been lost or damaged as a result of a disaster, as well as
expediting the processing and disbursement of SBA disaster loans. Due
to urgent needs for disaster assistance, and the noncontroversial
nature of these changes, the SBA concludes immediate action is required
to support homeowners, businesses, and their communities as they
recover from future disasters.
Compliance With Executive Orders 12866, 12988, 13132, 13175, 13563,
14030, 14094, the Paperwork Reduction Act (44 U.S.C., Ch. 35)),), and
the Regulatory Flexibility Act (5 U.S.C. 601-612)
Executive Orders 12866, 13563 and 14094
SBA is issuing this direct final rulemaking in conformance with
Executive Orders 12866, 13563, and 14094. Executive Orders 12866 and
13563 direct agencies to assess all costs and benefits of available
regulatory alternatives and, if regulation is necessary, to select
regulatory approaches that maximize net benefits (including potential
economic, environmental, public health and safety effects, distributive
impacts, and equity). Executive Order 13563 emphasizes the importance
of quantifying both costs and benefits, reducing costs, harmonizing
rules, and promoting flexibility. Executive Order 14094 reaffirms,
supplements, and updates Executive Order 12866 and further directs
agencies to solicit and consider input from a wide range of affected
and interested parties through a variety of means. The Office of
Management and Budget has determined that this rule does not constitute
a significant regulatory action under Executive Order 12866, as amended
by Executive Order 14094.
SBA has developed this rule in a manner consistent with these
requirements and thoroughly examined the costs and benefits as well as
availability of regulatory alternatives associated with its
implementation; therefore, SBA has drafted an analysis for the public's
information below.
A. Objectives of the Rule
This rule amends regulations governing the SBA Disaster Loan
Program by revising the Credit Elsewhere Test (CET) to allow credit
score modeling in order to streamline disaster loan processing.
Additionally, the rule increases the unsecured loan threshold from
$25,000 to $50,000 for EIDL loans for all disasters and for physical
home and business loans for Major Disaster declarations. The revised
[[Page 59829]]
CET streamlines loan processing, including interest rate determination,
making these Disaster Loan Program practices more consistent with
lending sector practices. SBA recognizes the increased severity of
financial consequences from disasters and, in response, is increasing
the threshold for the collateral requirement. Evidence suggests that
the collateral requirement has been an impediment to access of
financial resources for disaster recovery for households by limiting
disaster loan amounts. SBA expects that lending shortfalls will become
greater with increased severity of financial consequences from
disasters.
B. Benefits of the Rule
Revision of the Credit Elsewhere Test (CET) and the introduction of
the Agency's Unified Lending Platform (ULP), a new processing system,
will streamline SBA disaster lending. The benefit of the revised CET
for the Agency and borrowers is clarity of evaluation for loan
eligibility and interest rate determination, increased program
efficiency, and reduction of uncertainty in the process. Revised CET
integrated within the ULP will reduce the hiring of temporary personnel
in the Disaster Loan Program for each separate disaster lending period.
SBA expects the government to benefit from the cost savings enabled by
a reduced need for temporary lending personnel with the revised CET
within the ULP.
SBA undertook the increase in the collateral threshold in response
to evidence that shows an increase in financial well-being for disaster
loan borrowers,\5\ and also addresses a reluctance to enter into a loan
agreement with SBA that would involve a lien on property. The
collateral threshold revision increases the availability of the
benefits of SBA's disaster lending. Noteworthy is that home loans
generally make up 80 percent of disaster loan applicants.
---------------------------------------------------------------------------
\5\ Collier, Ben and Ben Keys, SBA-Wharton Partnership: Update
on Findings, March 2023 found a statistically significant reduction
in bankruptcies among disaster loan borrowers in the years following
a disaster.
---------------------------------------------------------------------------
The increased threshold for collateral is consistent with increased
ability to work within the Agency's statutory authorization in Section
7(b) of the Small Business Act to make loans to individuals and
entities that have been adversely affected by disasters. SBA believes
that its current collateral requirements are an impediment to
increasingly expensive rebuilding efforts, by increasing the collateral
threshold SBA will shorten loan cycle time for approved loans. The
Agency has noted that loans without collateral requirements are
generally fully funded in a single disbursement while secured loans
have usually required multiple disbursements. SBA expects a significant
reduction in the time required for full disbursement of loan proceeds
for the great majority of disaster borrower by increasing the secured
loan limit, along with other program improvements within the ULP,
resulting in major benefits to borrowers. A faster disbursement of the
loans further enhances the restorative work of these loans to homes and
businesses.
The adjustment of the collateral threshold and revision of the CET
decreases the burden on borrowers to provide documentation that SBA
must verify, resulting in savings in disaster staffing and training.
The Agency expects that with the higher collateral threshold, the
number of loans requiring collateral at original approval will decrease
from 46.4 percent to 31 percent of approved disaster loans. SBA
estimates the decrease in loan processing costs with the increased
collateral threshold is $20.33 per loan, generating $203,300 in savings
to the Agency for every 10,000 approved loans. Another example of cost
savings is the reduction in property and vesting reports and other
information for recording of liens, for which SBA currently contracts
with a third-party vendor. A vesting report costs about $25 per
property, so a decrease from 46.4 percent to 31 percent of loans
requiring this report reduces this particular expense by $38,500 for
every 10,000 approved loans.\6\
---------------------------------------------------------------------------
\6\ 10,000 x (.464-.31) x $25 = $38,500.
---------------------------------------------------------------------------
C. Costs of the Rule
Assessment of costs in this impact analysis includes those borne by
borrowers and by the Agency. Excluding initial procurement costs of the
ULP,\7\ learning the new application system with ULP is the initial
cost for borrowers and for SBA. However, any loan application involves
an application and as the revised system is expected to be more
streamlined, SBA expects this burden to applicants to be lower than
under the system it is to replace. SBA expects the reduction in
application processing and portfolio management costs will outweigh
costs of familiarization with the new system plus any costs of
developing and revising internal policies, procedures, and training.
---------------------------------------------------------------------------
\7\ SBA's acquisition of ULP is independent of a change in the
collateral threshold. The procurement cost is therefore not a cost
of CET or the increased threshold. The learning and familiarization
costs are not entirely attributable to CET or the increased
threshold, as ULP will be the platform for SBA's loan programs.
---------------------------------------------------------------------------
The largest source of potential costs for SBA may result from the
increase in loans without collateral following the increase in the
collateral threshold in Sec. 123.11. With this change, SBA estimates
from its experience with loans after Hurricane Ian that 70.98 percent
of home loans would be unsecured, an increase from the current
unsecured home loan portfolio from Hurricane Ian of 55.3 percent. Based
on historical data, this increase in unsecured loans may lead to more
defaults, necessitating a higher subsidy rate. The Agency notes the
cost savings from the new CET will offset at least some of this cost
and with the additional cost savings from the ULP, SBA expects a
decrease in the overall costs of the disaster loan program. In the
event of default, SBA does expect an impact on the recovery rates from
reduced collections from collateral liquidations, but this is in part
limited even under current regulations because these disaster loans
have been and will continue to be subordinated to existing mortgages.
To consider the impact of increased unsecured loan limits, SBA
analyzed the activity from Hurricane Ian, a powerful Category 5
hurricane which made landfall on the west coast of Florida on September
28, 2022, and again in the Carolinas on September 30, 2022. Ian was
responsible for 155 fatalities in the United States and caused an
estimated $113 billion dollars in damages.
SBA's analysis of Hurricane Ian suggests that if the unsecured home
loan limit of $50,000 had been in place, 9,286 of the 13,083 home loans
from Hurricane Ian could be unsecured compared to the 7,235 that were
at the unsecured threshold or less for that disaster. This represents
an overall percentage increase of 15.68%. The increase in the unsecured
portfolio for Ian home loans would be 35.50% of the dollar value
compared to the actual 22.73% value of the active Ian portfolio. A
similar percentage increase to the active home loan portfolio would
increase the unsecured portion of home disaster loans by $81,466,615,
which is small when compared to the $7.2 billion-dollar active home
loan portfolio.
At an estimated subsidy rate of 19bps and a five-year average loan
amount of $39,300 for loans impacted by the collateral change, the
estimated effect on the subsidy for each increase of 10,000 unsecured
loans is $746,700.
The following table represents Hurricane Ian home loans Secured vs
Unsecured if the unsecured limit was
[[Page 59830]]
$50,000 as a percentage of the active home loan portfolio and in
dollars.
Hurricane Ian Home Loans
----------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
Loan amounts Number of active number of home Total loan value total value of
loans loans home loans
----------------------------------------------------------------------------------------------------------------
0-$50,000............................... 9,286 70.98 $226,545,460 35.50
>$50,000................................ 3,797 29.02 411,660,300 64.5
-----------------------------------------------------------------------
Total............................... 13,083 100 638,205,760 100
----------------------------------------------------------------------------------------------------------------
Hurricane Ian Business Loans
----------------------------------------------------------------------------------------------------------------
Percentage of Percentage of
Loan amounts Number of active number of Total loan value total value of
loans business loans business loans
----------------------------------------------------------------------------------------------------------------
0-$50,000............................... 1,099 55.76 $26,308,000 8.93
>$50,000................................ 872 44.24 268,687,200 91.07
-----------------------------------------------------------------------
Total............................... 1,971 100 294,695,200 100
----------------------------------------------------------------------------------------------------------------
The table of Hurricane Ian business loans shows that 1,099 of the
business loans for Ian would have been unsecured if the limit was
$50,000 compared to the 828 approved for $25,000 or less for that
disaster. This represents an overall percentage increase of 13.75%. The
increase in the total loan amounts in the unsecured portfolio for Ian
business loans would be 8.93% compared to the 5.34% for this disaster.
The dollar figure of unsecured business loans for Ian would only
increase by $10,557,300 or only 3.6% of the Ian business portfolio. A
similar comparison to the current active portfolio finds that 3.6%
would only be $67,696,547 of the current $1,880,459,649 disaster
business loan portfolio.
Based on SBA's analysis, the Agency determined that the changes
enhance the efficiency of the administration and delivery of the
Disaster Loan Program. For example, SBA anticipates increasing the
unsecured threshold will allow SBA to disburse the majority of approved
disaster loans within seven days of approval. Moreover, SBA anticipates
the changes will have minimal impact on the overall cost of the
Disaster Loan Program. Additionally, SBA expects the changes may
motivate borrowers to make use of the disaster loan mitigation program,
thereby reducing the extent of damages caused by future disasters.
Furthermore, the changes aim to ensure fair and equal access to
disaster assistance in underserved communities that may lack access to
other sources of capital, requiring these borrowers to pledge
collateral to SBA rather than forgoing collateral lien and seeking
other sources of affordable capital.
D. Alternatives
The rule includes increasing the unsecured loan thresholds for
physical and EIDL loans from current levels. The alternative may be to
modify the increases at a lower or higher amount. By providing updates
and adjustments in unsecured loan amounts, including aggregation of
loans to one borrower, the Agency has optimized the disaster survivors'
options for recovery on more reasonable and equitable terms. SBA has
determined that the increase to $50,000 for unsecured disaster loans
and the corresponding changes to the loan aggregation rules for a
single borrower is the appropriate action. The Agency did not consider
any alternative to the new CET, which brings consistency with general
lending practices to the loan program and facilitates the
implementation of ULP, which is an Agency priority.
For each 10,000 loans, the rule generates savings to the Agency of
$203,300 from reduced processing costs and $38,500 from elimination of
the recording of liens, for quantifiable savings of $241,500 on each
10,000 unsecured loans. These quantifiable benefits are balanced
against an estimated subsidy impact of $746,700 for each 10,000
unsecured loans. Additionally, SBA expects the changes in the rule to
make the disaster loans more widely available, which will generate
additional benefits to the borrowers and their communities, further
balancing the benefits against the costs.
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.
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 13175
This rule does not have tribal implications under Executive Order
13175, Consultation and Coordination with Native American Tribal
Governments, because it does not have a substantial direct effect on
one or more Native American Tribes, on the relationship between the
Federal Government and Native American Tribes, or on the distribution
of power and responsibilities between the Federal Government and Native
American Tribes.
Executive Order 14030
SBA was tasked with developing recommendations for improving how
Federal financial management and reporting can incorporate climate-
related financial risk, especially as that risk relates to Federal
lending programs. The SBA Disaster Loan Program contains eligibility
and additional loan
[[Page 59831]]
funds for mitigation measures that allow physical disaster loan
recipients to obtain additional funds to install mitigating measures to
protect homes and businesses and reduce future property damage.
Currently, only two percent of borrowers apply for mitigation
funds. Increasing the unsecured threshold will encourage borrowers not
only to make full use of funds available to complete not just repairs,
but to also to access funds to mitigate future loss from subsequent
disasters. This increases survivors' recovery and resiliency against
future disasters and achieves the Agency's goal to increase the
mitigation program utilization from two percent to 20 percent.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
SBA has determined that this final rule does not impose additional
reporting or recordkeeping requirements under the Paperwork Reduction
Act, 44 U.S.C., Chapter 35.
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
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, generally
requires that when an agency issues a proposed rule, or a final rule
pursuant to section 553(b) of the APA or another law, the agency must
prepare a regulatory flexibility analysis that meets the requirements
of the RFA and publish such analysis in the Federal Register. 5 U.S.C.
603, 604.
Rules that are exempt from notice and comment are also exempt from
the RFA requirements, including conducting a regulatory flexibility
analysis, such as when--among other exceptions--the agency for good
cause finds that notice and public procedure are impracticable,
unnecessary, or contrary to the public interest. SBA Office of Advocacy
Guide: How to Comply with the Regulatory Flexibility Act, Ch.1. p.9.
Since this rule is exempt from notice and comment, SBA is not required
to conduct a regulatory flexibility analysis.
List of Subjects in 13 CFR Part 123
Disaster assistance, Loan programs--business, Small businesses.
For the reasons set forth in the preamble, the SBA amends 13 CFR
part 123 as follows:
PART 123--DISASTER LOAN PROGRAM
0
1. The authority citation for part 123 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 636(d), 657n, and
9009.
0
2. Amend Sec. 123.11 by revising paragraphs (a)(1) and (2) and (c) to
read as follows:
Sec. 123.11 Does SBA require collateral for any of its disaster
loans?
(a) * * *
(1) Economic injury disaster loans. SBA generally will not require
the borrower to pledge collateral to secure an economic injury disaster
loan of $50,000 or less.
(2) Physical disaster home and physical disaster business loans.
(i) For Major Disasters declared under Sec. 123.3(a)(1) or (2), SBA
generally will not require the borrower to pledge collateral to secure
a physical disaster home or physical disaster business loan of $50,000
or less.
(ii) For SBA-declared disasters under Sec. 123.3(a)(3) or (6), SBA
generally will not require the borrower to pledge collateral to secure
a physical disaster home or physical disaster business loan of $14,000
or less.
* * * * *
(c) Sometimes a borrower, including affiliates as defined in part
121 of this title, will have more than one loan after a single
disaster. In deciding whether collateral is required, SBA will add up
all physical disaster loans to see if they exceed the applicable
unsecured threshold outlined in paragraph (a)(2) of this section and
all economic injury disaster loans to see if they exceed $50,000.
* * * * *
0
3. Revise Sec. 123.104 to read as follows:
Sec. 123.104 What interest rate will I pay on my home disaster loan?
If you can obtain credit elsewhere, your interest rate is set by a
statutory formula, but will not exceed eight (8) percent per annum. If
you cannot obtain credit elsewhere, your interest rate is one-half the
statutory rate, but will not exceed four (4) percent per annum.
Generally, credit elsewhere means that SBA believes you could obtain
financing from non-Federal sources on reasonable terms subsequent to
the declaration of a disaster. SBA may include the use of credit score
to make this determination. If you cannot obtain credit elsewhere, you
also may be able to borrow from SBA to refinance existing recorded
liens against your damaged real property.
0
4. Amend Sec. 123.507 by revising paragraph (c) to read as follows:
Sec. 123.507 Under what circumstances will SBA consider waiving the
$2 million loan limit?
* * * * *
(c) Your small business has used all reasonably available funds
from the small business, its affiliates, its principal owners and all
available credit elsewhere (as described in Sec. 123.104) to alleviate
the small business' economic injury.
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-16207 Filed 7-23-24; 8:45 am]
BILLING CODE 8026-09-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on July 24, 2024.
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.