[Federal Register: April 12, 2007 (Volume 72, Number 70)] [Rules and Regulations] [Page 18349-18365] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr12ap07-3] ======================================================================= ----------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 13 CFR Part 120 RIN 3245-AE83 Liquidation and Debt Collection Activities AGENCY: U.S. Small Business Administration (SBA or Agency). ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This final rule amends the regulations pertaining to guaranteed loan and debenture liquidation and litigation found in rules governing the 7(a) Guaranteed Loan program and the Certified Development Company program. It codifies statutory language contained in the Small Business Investment Act, and revises the Agency's guidance on the proper liquidation and litigation of defaulted SBA guaranteed loans and debentures. These rules will give program participants authority to liquidate small business loans in a more timely fashion, and creates a process for identifying loans and debentures that could be disposed of in an asset sale conducted or overseen by SBA. DATES: This rule is effective May 14, 2007. FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Director, Loan Programs Division, Office of Financial Assistance, (202) 205-7505, or by e-mail at james.hammersley@sba.gov. SUPPLEMENTARY INFORMATION: On November 3, 2005, SBA published proposed rules to revise and update regulations on liquidating and litigating SBA 7(a) and 504 loans (70 FR 66800, November 3, 2005). The initial period for public comment ended on January 6, 2006, but was reopened for additional comments on January 25, 2006. The extended comment period ended on February 24, 2006. Comment Summary In total, SBA received 138 responses to the proposed regulations. Of these, [[Page 18350]] 133 were submitted by SBA lender participants (``Lenders'') or Certified Development Company (``CDC'') principals, two of the comments were submitted by Lender and CDC trade association representatives, two were submitted by third-party service providers, and one was submitted by the Chairman of the House Committee for Small Business. One hundred eleven of the 138 respondents were generally opposed to portions of the proposed regulations. Lenders were virtually unanimous in expressing their objection to SBA requiring them to complete the liquidation of all collateral securing a defaulted SBA loan before requesting SBA's purchase of its guaranteed portion. Lenders and CDCs also objected to the proposed rule provision under which Lenders and CDCs would have deemed to have given their consent, for loans made on or after the effective date that later go into default, to sell the defaulted loans in an asset sale. CDC commenters generally did not object to the principles behind having CDCs liquidate defaulted loans, but believed the rules lacked sufficient detail on their implementation for the lending community. The most prevalent comment focused on the need to compensate CDCs that perform liquidation and litigation activities. Section-by-Section Analysis of Comments Five general comments were received in relation to the proposed definition of an Authorized CDC Liquidator to be included in Sec. 120.10. One comment expressed a view that the definition as written is too restrictive and that the liquidation function should be a fundamental requirement for all CDC participants. SBA has decided to retain the definition as proposed to provide CDCs and SBA with the flexibility to obtain necessary expertise in liquidations. Seven comments were submitted opposing the proposed definition in Sec. 120.10 for Loan Program Requirements. The comments centered on concerns regarding program compliance and potential denial of an SBA guarantee resulting from interpretations of outdated standard operating procedures (``SOPs''), policy notices, and other loan documentation forms provided by SBA. Another commenter stated that including SOPs, Notices and Forms in the definition raises these items for enforcement purposes to a status equivalent to regulations without granting participants adequate notice and the right to submit comments. A third comment challenges the enforceability of Agency SOPs and notices in legal actions before a court of law, with the lender remaining unconvinced that lender compliance with respect to dynamic changes in SBA procedures or policy would be enforceable. A final commenter felt the proposed definitions could be another way to reinforce that Lenders should rely solely on written instruction and not expect direct assistance from SBA representatives. SBA acknowledges the dynamic nature of SOPs, Agency Notices and other policy and procedural guidelines. However, SBA's proposed definition is not designed to create conditions for releasing itself of the obligation to purchase its guaranteed portion of 7(a) loans. The definition was drafted to build awareness of all the related material the Agency provides to participants in SBA's loan programs. SOPs and Agency Notices are released by SBA to aid lenders in understanding current policy, procedures, and processes. These documents can be issued only after internal Agency clearance, including reviews by offices engaged in measuring Agency risk and compliance with Congressional intent. Forms and other documents are also subject to periodic Office of Management and Budget (``OMB'') review to measure regulatory burden and the impact on small businesses. These reviews ensure that SBA is reasonable in its program delivery. SBA also believes that by incorporating these additional elements in the definition, it will prompt more attention by program participants to stay abreast of changing program requirements, including those brought about through the Agency's periodic reassessment of its loan programs. In addition, this definition merely codifies current law and practice in a more clearly stated form. CDCs are already held to the substance of this definition. Section 120.826, which was enacted through notice and comment rulemaking in 2003, states that CDCs ``must operate in accordance with all 504 program requirements imposed by statute, regulation, SOPs, policy and procedural notices, loan authorizations, debentures, and agreements between the CDC and SBA.'' Lenders are also already held to the substance of this definition. Lenders sign a Loan Guarantee Agreement which requires a lender to comply with SBA's ``rules and regulations.'' Section 120.524(a)(1) states that SBA may deny liability under a 7(a) loan if lender has failed to comply materially with ``any of the provisions of these regulations, the Loan Guarantee Agreement, or the Authorization.'' The National 7(a) Loan Authorization Boilerplate (paragraph E) states that SBA's guarantee on each 7(a) loan is contingent upon the lender's compliance with current SOPs. It is for these reasons that the proposed rule is therefore adopted as written. Proposed Sec. 120.180 revised the current Sec. 120.180 to clarify that Loan Program Requirements in effect when a Lender or CDC undertook a specific action with respect to a given 7(a) or 504 loan will govern that action. The proposed rule makes use of the new term Loan Program Requirements in order to better specify the rules which govern an SBA loan financing transaction. No comments were received in reference to this rule, and thus the rule is adopted as final. Proposed new Sec. 120.181 clarifies that Lenders or CDCs and their contractors are independent contractors and that SBA is not responsible for their actions. Two comments in support and ten comments in opposition to this proposed regulation were received. Support was general in nature, with no specific reasons cited. Comments in opposition to the proposed regulation noted a CDC's past inability to represent SBA in legal proceedings, SBA legal staff coordination issues, and also raised the issue of the availability of liability insurance for firms engaged in liquidation and litigation activity. The matter of legal representation of the SBA's interest in CDC litigation is granted by Congress in Sec. 510(c)(1)(B) of the Small Business Investment Act. Pursuant to the statute, CDCs are to litigate any matter related to the performance of liquidation and foreclosure functions in a reasonable and sound manner according to commercially accepted practices pursuant to a litigation plan approved in advance by SBA. The concern about coordination with SBA legal staff would be resolved through SBA's review and action on the liquidation and litigation plan provided by the CDC pursuant to revised Sec. 120.540. The Agency is not aware of any lack of availability of liability insurance for CDCs since this has not been a problem with Lenders participating in the 7(a) program. The new rule is thus adopted as proposed. Proposed new Sec. 120.197 imposes a notification requirement to the SBA Office of Inspector General by all Lenders, CDCs, Borrowers and others when instances of fraud may have occurred. Twenty comments were received on this proposed regulation, three in support and 17 in opposition. One commenter who opposed the regulation stated that it appears to [[Page 18351]] extend beyond the scope and intent of this regulatory action, and suggested it be treated as a separate matter. Another opposing commenter echoed the sentiments of many in identifying this notification requirement as another Suspicious Activity Reporting System (``SARS'') requirement already required of federal depository institutions. A commenter qualified his support of the proposal, insisting that this requirement be enforced upon bank and non-bank lenders alike. A fourth comment opposed to the proposal focused on the Agency's pursuit of lenders unaware of a fraudulent action and whether the Lender, absent factual evidence, should have timely reported suspected fraud. SBA has provided similar guidance in the past to Lenders, CDCs, and SBA personnel in program operating procedures. These guidelines were useful when SBA underwrote much of the 7(a) and 504 loan portfolio. With current loan activity, however, predominantly delivered through delegated authority processes such as the Preferred Lender Program (``PLP''), the Preferred Certified Lender Program (``PCLP''), and SBAExpress, the element of ensuring program integrity and a level of accountability shifts to the program participants. This new rule formalizes the reporting requirement into regulation for program participants. Sec. 120.197 is retained as proposed. Minor revisions to Sec. 120.440 received no substantive comments and are therefore revised as proposed. SBA received two comments in support of the revisions proposed for Sec. 120.453. The proposed rule amends the heading and the existing regulation on PLP lender servicing, and directs the reader to revised subpart E for general instruction on SBA loan servicing responsibilities. SBA is adopting the revisions as proposed. In the proposed rule, Sec. 120.500 along with Sec. Sec. 120.510- 120.513 were to be deleted. Additionally, a revision to the heading preceding this section was to be revised. Section 120.500 was a general introductory paragraph regarding general loan administration policies applicable to both loan servicing and loan liquidation. No comments were received and the section is deleted as proposed. No comments were received regarding the name change in the heading for Subpart E. The heading for this Subpart is now changed to read Servicing and Liquidation, and is adopted as proposed. Section 120.510 pertains to the servicing of SBA direct loans and immediate participation loans under the 7(a) program. SBA no longer makes direct or immediate participation loans and received no comments on its proposed deletion. SBA deletes this section as proposed. Section 120.511 identifies the Lender as the entity responsible for servicing SBA guaranteed loans, holding Loan Instruments, and accepting borrower payments of principal and interest. These responsibilities have been revised and incorporated into standards for loan servicing for Lenders in new Sec. 120.536. No comments were received regarding this proposed deletion. The existing regulation is therefore deleted. Existing Sec. 120.512 describes Lender responsibilities for servicing and liquidating an SBA loan in the 7(a) program once SBA has purchased its guaranteed interest. This regulation requires Lenders with loans for which SBA has purchased the guaranteed portion to submit liquidation plans on each loan to SBA for approval. The regulation also provides SBA with the discretionary authority to service or liquidate these loans and to have Lenders assign to SBA the related Loan Instruments. Lender liquidation responsibilities for all SBA loans have been reformatted as standards set forth in new Sec. 120.535. The requirement for submission of liquidation plans for 7(a) guaranteed loans has been eliminated except for loans processed as CLP loans, which, by statute, still require the submission of liquidation plans to SBA. Finally, discretionary authority for SBA to service and liquidate loans where it has purchased the guaranteed portion has been incorporated into new Sec. 120.535(d). No comments were received, thus in recognition of the revisions, SBA is deleting the existing regulation in Sec. 120.512. Current Sec. 120.513 outlines servicing actions requiring SBA's prior written consent. The proposed rule amends these requirements and promulgates the revised regulations under new Sec. 120.536. SBA received no comments and is therefore deleting the existing regulation. In Sec. 120.520, SBA proposed to amend the heading for the section; reuse the existing subsection, and add two new subsections. Section 120.520(a) detailed SBA's proposal to require Lenders in the 7(a) program to liquidate all collateral securing a defaulted SBA guaranteed loan prior to requesting SBA purchase of its guaranteed portion. The requirement to liquidate collateral first would only apply to loans made on or after May 14, 2007, with loans made prior to the date subject to SBA guarantee purchase provisions in place at the time the loan was approved. SBA received 62 comment letters opposing this proposal as written. The primary objection centered on the adverse financial effects imposed on Lenders arising from delaying guarantee purchase until all collateral recoveries have been exhausted. One commenter said Lenders will be forced to carry the SBA portion as a non-performing asset, and that this will require greater regulatory capital reserves. Another commenter stated that it would be detrimental to a potential borrower (and the local economy) for SBA guaranteed loans not to be made not because of the lack of a government backed guarantee, but because of the time and cost that it takes to claim the guarantee. SBA has considered the arguments presented by the commenters and seeks a reasonable alternative that improves the Agency's ability to manage its portfolio without hampering the Lenders' ability to participate in the 7(a) program. SBA notes the high volume of loan activity generated by its Lenders over the last five years and seeks to effectively manage the increased volume with the Agency's limited program resources. In modifying processes and procedures, SBA is adapting to the changing environment for small business lending and allowing lenders to perform more lending functions on SBA's behalf. Nonetheless, streamlined delivery methods and SBA's greater reliance on its lending partners has not lessened the Agency's attention to its fiscal management responsibilities for its loan programs and to the public. In recognition of the adverse financial impact that could be experienced by Lenders, SBA has decided to allow Lenders to request purchase without the full disposition of all related loan collateral. Since comments objecting to a full liquidation prior to SBA purchase cited the work effort and legal restrictions associated with real property collateral disposition, SBA will allow real property to be liquidated subsequent to purchase, but will still require all chattels (business personal property) to be liquidated prior to purchase. To ensure consistent interpretation with existing regulations, SBA will also allow Lenders to request purchase on a defaulted loan when the small business borrower files for bankruptcy protection and a period of at least 60 days has elapsed since the last full installment payment. SBA believes that a nine month period following purchase, after which Lenders will be deemed to have consented to SBA's sale of a purchased loan pursuant to new Sec. 120.546, will generally provide Lenders with a reasonable period of time for addressing the activity needed to liquidate most remaining collateral in an orderly manner. Also, Lenders will [[Page 18352]] continue to have the option to delay submitting a purchase request if they desire to liquidate real estate collateral prior to an SBA loan sale. Section 120.520(a) is revised to incorporate these changes resulting from the comments received. Proposed new Sec. 120.520(b) codified existing SBA policy regarding documentation requirements sufficient for SBA to determine if purchase of the guarantee is warranted. One commenter objected to the rule stating that the determination of what is sufficient for SBA is somewhat vague, and that the regulation should direct the Lender to particular Agency procedures or instruction guides. SBA noted that the proposed rule referred to new Sec. 120.524 as SBA's justification for determining if purchase is warranted and that this regulation included the Lenders' requirement to comply materially with any Loan Program Requirements including statutes, regulations, SOPs, SBA notices and applicable forms. SBA believes this level of instruction is sufficient for program participants. The regulation is therefore adopted as proposed. New Sec. 120.520(c) clarifies SBA policy that a Lender's failure to perform all necessary servicing and liquidation actions subsequent to SBA's purchase of the guaranteed portion of a loan from the secondary market may lead to initiation of action to recover money SBA paid to the Registered Holder. Thirty-five comments were received all opposing the proposed regulation. Some felt the action of Lenders to purchase the guaranteed portion of their loans from the secondary market would threaten the true sale nature of other guaranteed portions sold to Registered Holders. SBA believes this premise to be inaccurate inasmuch as SBA lenders have always had the option to purchase defaulted loans. SBA does not pressure lenders to purchase loans nor is it necessary for a lender to purchase loans to protect its reputation in the industry. SBA believes the comments mask the real issue of SBA's ability to seek out documentation in a post-purchase review, and the remedies available to the Agency if such documentation is not provided by Lenders that have already received payment of the guaranteed portion. The regulation is a codification of a long standing policy where SBA has sought repayment from Lenders that did not properly process, close, and service loans sold in the secondary market. This regulation sets out the requirement that a Lender provide a loan status report as well as documentation that SBA deems necessary to make a determination that the loan was processed, closed, and serviced in compliance with SBA rules and regulations. Therefore, we conclude that codification of this long-standing policy will have no effect on the true sale nature of secondary market transactions. Lenders have always been required to provide documentation needed by the SBA to justify the purchase. As indicated, this rule merely codifies existing Lender responsibilities to assist SBA in providing the documentation requested by SBA to affirm that its purchase of the guaranteed portion was based on the Lender's compliance with program requirements. To reinforce SBA's need to provide timely submission of documents, the rule alerts Lenders that SBA will consider the Lender's actions in conjunction with their continued participation in the Secondary Market. SBA retains its rights to suspend or revoke Secondary Market participation if it feels the Lender is not in full compliance with this regulation. Accordingly, SBA has added a sentence to point out the importance of post-purchase document submission and the rule is otherwise adopted as proposed. No substantive comments were received regarding new rule Sec. 120.520(d) relating to SBA's retention of rights of recovery in connection with the new rule. The rule is adopted as proposed. Revised Sec. 120.522(b)(1) seeks to limit SBA's obligation to pay accrued interest on loans requested for guarantee purchase. This limit applies to loans made on or after October 1, 2006, and will limit interest purchased to be no more than 120 days. SBA received 42 comments opposing the proposed rule. Commenters stated that the time limit would unnecessarily force ill-advised liquidations instead of accommodating workouts with borrowers. SBA encourages its Lenders to continue to work with SBA borrowers through periods of temporary difficulty and to provide short-term deferments or other assistance in appropriate situations. However, this limitation on interest to be paid is intended to help streamline and standardize SBA's purchase review process for the benefit of its participant Lenders, and already is a part of program requirements for SBAExpress loans. For other types of loans under existing regulations, a Lender may receive payment from SBA for more than 120 days interest only if the Lender submits a complete purchase request to SBA within 120 days of the earliest uncured payment default. Lenders that have submitted complete purchase packages within 120 days of default have historically involved a small percentage of loans. Determinations as to what may constitute complete purchase requests in specific situations have unnecessarily delayed overall purchase processing to the detriment of Lenders as a whole. Accordingly, SBA is adopting the 120 day interest limitation as set forth in the proposed regulation, and is deleting existing Sec. 120.522(d) as proposed. Revised Sec. 120.524(a)(1) amends the current provision in the regulations and codifies SBA policy that when a Lender is not in material compliance with the Loan Program Requirements as defined in Sec. 120.10, SBA at its discretion may be released from liability under a loan guarantee. Seventeen comments were received in opposition to this proposed revision. One commenter said that this rule would discourage Lenders from taking collateral that is difficult to perfect, and that a denial of liability by the Agency for lender noncompliance absent a verifiable loss would decrease program participation. Another comment stated that wide gaps in interpretation will harm the liquidation process and that this proposed rule removes any rational flexibility. Another commenter felt the rule as drafted is far too broad and is not fair to the participants. SBA has thoroughly considered the comments, but has decided to retain the rule with no changes. The rule does nothing more than incorporate the new definition of Loan Program Requirements and thereby clarifies the intent of the existing regulation while making clear to Lenders what sources of authority will be applied. The view that SBA would look to use this revision to avail itself of its right to deny liability is strikingly narrow and inconsistent with the approach to guarantee purchases applied by the Agency. SBA continually strives for uniformity in its purchase processes, employing supervisory and legal reviews, and quality assurance assessments in the Agency's purchase centers. These factors have reduced the number of complaints received from Lenders regarding varied interpretations of SBA liquidation and guarantee purchase policy. SBA does not anticipate a significant change in the number of denials of liability annually as a result of this rule. The rule thus is retained as proposed. Revised Sec. 120.524(a)(8) proposed extending the time within which a Lender can request guarantee purchase to 180 days following the maturity date on the SBA loan, or the end of all liquidation and debt collection activities. SBA received one comment in support of this proposal and is adopting the rule as proposed. [[Page 18353]] SBA received no comments on proposed Sec. 120.524(b) and (d) and is adopting them as proposed. Proposed rule Sec. 120.535 outlined the standards for the servicing and liquidation of SBA loans. Fewer than six comments were received for each subparagraph, all in opposition to some section of the rule. One commenter objected to the unilateral authority of the SBA to take over servicing and liquidation from a Lender; however, this authority exists already in the current regulations and also in the SBA Form 750, Loan Guarantee Agreement. Upon consideration of the comments provided, SBA adopts the rule as proposed with an additional sentence at the end of each subparagraph emphasizing that the standard applies to all Lenders and CDCs irrespective of whether or not they normally manage a non-SBA portfolio. There were no substantial comments received in reference to proposed new Sec. 120.536 and the rule is adopted as proposed. The Proposed rule re-designated Sec. 1A120.540 as Sec. 120.545 and added a new Sec. 120.540 devoted to SBA loan liquidation. Amended Sec. 120.540(a) described SBA's oversight responsibilities for monitoring efforts by Lenders and Authorized CDCs to dispose of collateral. No comments were received opposing the rule by which SBA seeks to clarify Lender liquidation reporting responsibilities. By statute, all SBA loans made through the CLP delivery process by Lenders authorized to make CLP loans require liquidation plans to be submitted to SBA for defaulted loans. This requirement is different from the liquidation wrap-up report required of all Lenders for their completed SBA defaulted loan recoveries. The rule therefore is adopted as proposed. Proposed Sec. 120.540(b) specified the requirement for submission of written liquidation plans for prior SBA approval. As proposed, all Authorized CDC Liquidators, and Lenders that have made an SBA loan under the CLP delivery method, are required to submit a written liquidation plan to SBA for prior approval. Twelve comments were received in opposition to this proposed rule. The focus of the commenters' objections centered on PLP lender liquidation activities and the need for SBA to exempt the PLP lender from this rule. The rule, however, pertains to loans approved under the CLP delivery method irrespective of the lender's designation. As mentioned above, CLP loan liquidations require the statutory submission of a liquidation plan for prior written approval. SBA is unable to change this practice without a change in legislation. SBA retains the text of the rule as proposed. Proposed Sec. 120.540(c) provided guidance on litigation involving SBA loans. Eighteen comments were received on this proposed rule, one in support and 17 in opposition. Comments in opposition tended to focus on the number of legal matters contained in the definition of Non- Routine litigation and its limit on costs and expenses of $10,000. Commenters acknowledged SBA's proposal to increase the dollar amount of legal fees considered to be for Routine Litigation, however, some comments sought an even higher threshold amount. SBA has reviewed the comments, but has retained the rule as proposed. It has been the Agency's experience that most legal matters in excess of $10,000 are in fact, non-routine and rarely involve actions that are not in dispute. No substantive comments were received regarding amended Sec. 120.540(d) regarding SBA's ability to take over debt collection litigation of a 7(a) or 504 loan and thus the regulation is adopted as written. In amended Sec. 120.540(e), SBA provided a process for Lenders and CDCs to amend previous liquidation and litigation plans. One comment opposed this proposed amendment stating that the litigation rules and procedures as revised by the proposal will continue to increase the need for SBA to review and approve litigation plans on a repeated basis during the course of a matter [which] will cause significant delays. SBA agrees with the suggestion that the revised regulations are likely to increase the work involving liquidation and litigation. SBA's experience, however, has been that in many non-routine litigation cases, the increase in fees was not cost effective to the Agency when compared with actual recoveries. This proposed rule therefore is necessary to protect the Agency and preserve taxpayer funds arising from liquidation recoveries. The rule is adopted with no changes. No comments were received regarding amended Sec. Sec. 120.540(f) and (g). Amended Sec. 120.540(f) provided SBA with a waiver of requirements in amended paragraphs (b),(c) and (e) of this section in cases requiring immediate actions and decisions. New Sec. 120.540(g) provided an appeals process for Lenders with CLP loans and for Authorized CDC Liquidators when they disagreed with a decision by SBA regarding a proposed liquidation plan. The rules are retained as proposed. New Sec. 120.541(a) provided timelines for SBA approval of liquidation and litigation plans submitted by Lenders and CDCs. This section also states the timelines for actions specified in new Sec. 120.536(b)(5) and Sec. 120.536(b)(6) which are established by statute with respect to CDCs. These timelines differ from the ten day timeline found in new Sec. 120.541(c) which is mandated by Sec. 7(a)(19) of the Small Business Act. SBA is making minor technical corrections to the cross-references stated in the proposed rules. One commenter objected to the proposed new rule citing the potential impact on recoveries that may result from CDCs waiting for a 15-day approval from SBA, and the potential for these approval periods to be extended indefinitely. The commenter is encouraged to review statutory requirements placed on SBA if it is unable to respond within 15 business days. Sec. 510(c)(2)(E) of the Small Business Investment Act requires SBA to provide a written notice of no decision stating the reasons for the SBA's inability to act on the plan or request, along with an estimate of the additional time needed by SBA to act on the plan or request, and the nature of any additional information or documentation impeding the SBA from acting on the plan or request. Also, SBA reporting requirements to Congress as mandated in Sec. 510(e)(2)(E) create a quality control check on SBA's progress in reaching an expedient decision to Lenders and CDCs. Thus, the rule is adopted as proposed. New Sec. 120.542 regulated the payment of legal fees and other expenses in conjunction with defaulted SBA loans. Thiry-four comments were received regarding this new rule, one in support and 33 in opposition. Twenty-eight of the 33 comments submitted in opposition are from CDC principals, or the industry's trade association representative. In the proposed rule, SBA had specifically requested comments from CDCs on this issue. Commenters objected to CDCs assuming risk and responsibilities for liquidation and litigation activity, yet not being adequately compensated for their additional involvement. One commenter could not understand why a CDC would request these new responsibilities under the proposed compensation scenario. Another commenter recommended that SBA define by task the items that it believes should be routine and under the $5,000 cap. A third commenter felt that in applying Sec. 120.542(a)(2) of the proposed rule, conflicts may occur on whether SBA specifically directed CDCs to take action which could lead to a violation under proposed rule Sec. 120.542 (b)(2). A fourth commenter felt that SBA [[Page 18354]] should compensate CDCs for the additional expenses associated with locating and selecting liability insurance protection for the work it will assume on SBA's behalf. SBA has evaluated the comments provided and agrees that some form of compensation is warranted for requiring a CDC to incorporate the liquidation function into its CDC's practice. Commenters supported the position taken by the CDC trade association that involves compensation as a percentage of proceeds received from recoveries subject to a cap of $25,000. Having fees derived from recoveries and not from the unpaid principal balance on a loan is responsive to SBA's policy objective that liquidation fees paid to CDCs should be based on work performed in the recovery process. The suggestion of a monetary cap, while noteworthy in concept, would be counterproductive in practice. Authorized CDC liquidators could limit their liquidation activities to the $25,000 threshold, and would lose incentive to seek recoveries beyond this discrete limit. With much of a liquidator's upfront time and effort incurred irrespective of the loan size, SBA sees a real benefit to maximizing recoveries for Authorized CDC liquidators as well as the SBA. The Agency, however, recognizes a time element to liquidation in which, as time goes on, the additional recovery potential is overshadowed by a decrease in the value of the underlying asset. In an effort to retain a real incentive to liquidators while limiting the practice of avoiding final disposition of a collateral asset, SBA has agreed to allow Authorized CDC liquidators to use net recoveries on the defaulted CDC debenture as a base unit for computing a fee for liquidation activity. SBA initially will allow a percentage of net recoveries not to exceed 10%, with the fee dropping by at least 50% after the first $25,000 in fee income is realized. SBA will evaluate these fee percentages from time to time, and provide notice of a change in permissible fee percentages when appropriate through notice published in the Federal Register. SBA would also look for all liquidation activity to be completed within nine months of SBA's purchase of the CDC debenture. This would amount to eleven months after the date of default, and would conform to similar timetables for Lenders liquidating real property in the 7(a) program. To accomplish this change, SBA has inserted a new Sec. 120.542(c). SBA has re-designated proposed Sec. 120.542(c) and Sec. 120.542(d) as Sec. 120.542(d) and Sec. 120.542(e) and implements the section as proposed. The new Sec. 120.542(c) would provide CDCs with guidance on the form of compensation acceptable to SBA for CDC loan liquidation activity. This would not include SBA compensating the CDC for liability insurance coverage. SBA views that element as a normal cost of doing business and provides no similar relief to Lenders in the 7(a) program. The issue of legal fee compensation for work performed by Authorized CDC Liquidators on behalf of the Agency involves several factors. SBA welcomes the use of qualified counsel to address legal matters affecting the Agency's ultimate recovery. SBA is not, however, in a position to provide Authorized CDC Liquidators with unbridled authority to incur substantial legal fees. SBA needs to be able to weigh prospective recovery options against the costs of securing those recoveries and only approve those actions which best serve the needs of the Agency. Since SBA purchases the full amount of the defaulted CDC debenture, SBA is the sole financial beneficiary of the recovery efforts. Consequently SBA is unwilling to modify the proposed rules regarding payment by SBA of legal fees, and adopts Sec. Sec. 120.542(a) and (b) as proposed. New Sec. 120.546 proposed conditions under which SBA would have the opportunity to include defaulted SBA loans in an asset sale process. SBA received one comment in support and 31 comments in opposition to the proposed rule. Commenters objected to new Sec. 120.546(b)(1)(i) which provides for implied consent to an asset sale if Lenders request SBA to purchase the guaranteed portion of a loan directly from the Registered Holder in a secondary market transaction. The option to purchase a loan from the secondary market investor, which exists already, would be the only way for a Lender to avoid this outcome. Many small Lenders objected to this option, noting that the capital needed to purchase the guaranteed portion from the secondary market is comprised of funds that otherwise would have been available for additional small business lending. These same Lenders added that the increased level of non-performing assets would have detrimental capital consequences and would serve as the impetus for leaving the program. Other commenters stated that forced asset sales inevitably cause lenders to participate with a third party, not the SBA, and greatly reduces flexibility in reaching a workout with a small business. Comments also focused on whether these purchases from the secondary market jeopardize the accounting of these transactions as true sales, and if Lenders would have to retain the guaranteed portion of the loan on their books even if sold in a secondary market transaction. SBA has evaluated the comments and has modified its proposal in this final rule with respect to 7(a) loans sold on the Secondary Market. SBA recognizes the possibility that under some circumstances recoveries from sales of collateral and foreclosure proceedings arranged prior to SBA's purchase of the loan from the Registered Holder might be higher than recoveries from a sale of that loan in an asset sale. In the final rule, SBA retains the provision that deems the Lender to have consented to an asset sale for loans approved on or after the effective date of this regulation for which the Lender subsequently sells the guraranteed portions in the secondary market that later default and are purchased by SBA from the Registered Holder. SBA, however, adds a new subparagraph which gives Lenders the option, regardless of the fact that they already are deemed to have consented to the asset sale, to request SBA withhold the loan from such a sale based on a pending sale of collateral or the existence of an existing foreclosure proceeding. The Lender will have 15 business days from the date of SBA's purchase to submit such a request. Liquidation actions contemplated but not underway at the time of SBA's purchase will not be sufficient justification for withholding a loan from inclusion in an asset sale. SBA will consider the Lender's request and, in SBA's sole discretion, SBA may provide the Lender with limited additional time to complete loan restructuring and/or liquidation activities. SBA also revises Sec. 120.546(b)(1) by adding two additional subparagraphs one to include defaulted SBA loans where SBA has purchased its guaranteed portion from the Lender and nine months have elapsed from the date of SBA's purchase, and the other to give Lenders the option of giving written consent to an asset sale for those Lenders that determine this form of asset disposition to be in their best interest. Regardless of the circumstances leading up to an asset sale, the Lender is not released from its obligations to continue to properly service and liquidate the loan up to the point the loan is transferred in an asset sale. A new subparagraph (b)(4) has been added to the final rule to this effect. Finally, Lenders that wish to pursue additional recovery on loans after the nine-month period subsequent to purchase always have the option to repay the guaranty purchase amount disbursed by SBA, [[Page 18355]] and release SBA from further participation in the loan. New Sec. 120.546(c)(1) extends similar guidance on the sale of defaulted PCLP Loans. Since SBA purchases the full amount of the defaulted debenture, the rule does not require PCLP CDC consent. Thirteen comments were received, all in opposition to the regulation. One commenter stated that since PCLP CDCs have reserves established for loan losses, they should have some say in the decision to initiate an asset sale on a defaulted CDC loan. SBA's loss exposure in a defaulted CDC debenture is larger than that of the PCLP CDC. Therefore, the Agency believes it is in the SBA's best interest to take control of the disposition of the defaulted asset. In those instances where a PCLP CDC can demonstrate to SBA's satisfaction that an asset sale should be withheld in favor of an imminent liquidation event, SBA may further examine its avenues for recovery. Notwithstanding these circumstances, SBA will determine the course of disposition for the defaulted debenture. The regulation is therefore adopted without change. New Sec. 120.546(c)(2) grants SBA, upon its purchase of a Debenture, and in its sole discretion, the right to sell the defaulted SBA loan in an asset sale. Thirteen comments objecting to this proposed rule were received. The comments centered on the perceived loss of a local presence to coordinate an orderly liquidation of the loan and the diminution of value that would result from an SBA asset sale. However, SBA may solicit from the CDC that originated a particular loan the CDC's views concerning how to best maximize recovery from the loan with regard to the timing of including that loan in an asset sale. SBA will retain the provision in the final rule granting the Agency the authority, in its sole discretion, to sell a defaulted 504 loan in an asset sale. Amended Sec. 120.826 revises the basic requirements for operating a CDC to include, if authorized by SBA, liquidating and litigating 504 loans. SBA received one comment in support of the regulation and nine opposed to the proposal. Those opposed to the proposed revision cite a lack of preparedness, training and source of income for CDCs to perform these functions. One commenter felt that the agency must issue more specific Loan Program Requirements for CDCs before attempting to mandate that CDCs adhere to what are now somewhat general standards. Another stated that since there are published guidelines for liquidation, SBA should provide CDCs with a litigation plan format for use in submitting such plans. A small CDC acknowledged that it does not have the staff, expertise or funds to properly maintain litigation and liquidation functions, stating that if the CDC were to be forced to pay for the liquidation procedure out of pocket without compensation from the SBA, it would cause serious hardship for the CDC. Much of the revised text in the regulation incorporates the Loan Program Requirements definition discussed above and the authorization of CDC liquidators. Commenters are concerned that some of the identified source documents are outdated and may lead to inadvertent confusion with CDCs attempting to assume liquidation and litigation activities. SBA is well aware of the need for CDC training and will work with the industry to develop comprehensive course materials to provide a baseline competency level. SBA legal staff likewise will assist in the development of training materials and reporting requirements to SBA. This support will help those CDCs that recognize the importance of their contribution to this exercise and give each CDC an opportunity to comply with this regulation. As noted above in the discussion of Sec. 120.546, SBA has revised the rule to allow for compensation in some instances. In all other respects, SBA will retain the regulation as proposed. Revised Sec. Sec. 120.841, 120.845, and 120.846 were revised to make minor changes to incorporate the use of the Loan Program Requirements definition in the qualification for ALP and PCLP status. No substantive comments were received and the regulations are adopted as proposed. Amended Sec. 120.848 revised subparagraphs (a) and (f) to incorporate the use of the Loan Program Requirements definition and to cross-reference this regulation with the servicing regulations now contained in Subpart E. With just two comments received among the 138 respondents over the expanded 60 day review period, SBA adopts the regulation as proposed. Section 120.854(a)(2) was amended in the proposed rule to identify material non-compliance with any Loan Program Requirement as grounds for enforcement action against a CDC. SBA received a number of general comments opposing this regulation on the grounds that the statement is too vague, open to interpretation, and needs clarification. The revised paragraph proposed is only a technical change in the wording of what is already established as the determinants for enforcement actions against a CDC. Thus, the regulation is adopted as proposed. Amended Sec. 120.970(a) was a minor revision proposed to incorporate the use of the Loan Program Requirements in the general subparagraph and to cross-reference this regulation with servicing regulations now contained in Subpart E. SBA received no substantive comments on this revision and adopts the text in the final rule. New Sec. 120.975 identified the CDC entities that are eligible to become Authorized CDC Liquidators. Section 120.975(a) covered those requirements for PCLP CDCs to be designated Authorized CDC Liquidators. Five comments were received in opposition to the proposed regulation, two were received in support. One commenter objecting to the proposed regulation stated that there is no rationale for requiring them to handle non-PCLP liquidation cases just because they are involved in the PCLP program. Another commenter said that all CDCs, not just PCLP CDCs, should be engaged in 504 loan liquidation and litigation either directly with qualified staff, or by agreement with a qualified third- party provider acceptable to SBA. Those commenters in support of the proposal have the existing capability to perform the functions and simply request that the compensation be reflective of the effort involved in the exercise. In proposing the regulation, SBA adhered to the provisions of Sec. 510(b)(1)(ii) of the Small Business Investment Act (``the SBI Act''). That statute specifies that all PCLP CDCs operating under Sec. 508 of the SBI Act be deemed eligible, subject to having experienced staff or using an approved contractor. The statute does not limit PCLP CDCs to liquidating and litigating only PCLP loans. The regulation conditions PCLP CDCs' authority to liquidate and litigate their non-PCLP loans by requiring the entity to meet one of two operational criteria. SBA believes most, if not all PCLP CDCs, would meet one of these two criteria and would be required to use their delegated authority to liquidate and handle debt collection litigation. Given the diversity of opinion on this proposal, and the decreased SBA staff devoted to 504 loan liquidation and litigation activity, SBA has decided to retain Sec. 120.975(a) as proposed in the final rule. New Sec. 120.975(b) provided guidance on all other CDCs becoming Authorized CDC Liquidators. Eight comments were filed on this subparagraph, two in support and six in opposition to the regulation. Some of those objecting to the proposal stressed the limited resources they have for fulfilling this [[Page 18356]] function and the hardship it will likely cause. Others felt no need to promulgate separate qualification requirements because they support having all CDCs as Authorized CDC Liquidators. Once again, the criteria followed the language of the SBI Act, and thus are retained as proposed. SBA recognizes the concerns expressed by smaller CDCs and will work closely with industry leaders to ensure that training resources are available and to identify qualified third-party providers for those unable to staff these functions internally. New Sec. 120.975(c) added a legal counsel qualification requirement to ensure that SBA is aware of the parties engaged in debt collection litigation on behalf of the Agency. No meaningful comments were received regarding this requirement and the regulation is adopted as proposed. New Sec. 120.975(d) established the process for CDCs to make application for authority to liquidate and litigate. No substantive comments were received on this subparagraph and the regulation is adopted as proposed. Compliance With Executive Orders 12866, 12988, and 13132, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 U.S.C., Ch. 35). Executive Order 12866 The Office of Management and Budget has determined that this rule constitutes a ``significant regulatory action'' under Executive Order 12866 thus requiring Regulatory Impact Analysis, as set forth below. A. Regulatory Objective of the Final Rule The objective of the final rule is to clarify and make uniform SBA's existing regulations governing lenders participating in the 7(a) business loan program (Lenders) and Certified Development Companies (CDCs) that are performing loan servicing, liquidation and debt collection litigation. Parts of the rule have been drafted in response to a statutory directive arising from Pub. L. 106-554. Other parts of the final rule have been written as a codification of both longstanding Agency policy, and new direction in the area of liquidation and debt collection. The final rule will promote better understanding of Agency requirements by Lenders and CDCs, and improve oversight and management by SBA of Lender and CDC liquidation and debt collection litigation. B. Baseline Costs of Existing Regulatory Framework SBA 7(a) loan programs presently require Lenders to submit liquidation plans for most defaulted loans, except for those made pursuant to the SBAExpress program. SBA estimates that these requirements currently result in the submission of about 4,000 liquidation plans per year. The approximate time needed for lenders to complete a liquidation plan is two hours at an average cost of $30 per hour, resulting in a total annual cost to Lenders of $240,000. Presently, CDCs that are authorized to perform liquidation activities on 504 loans submit about 100 liquidation plans per year. The approximate time needed for CDCs to complete a liquidation plan is two hours at an average cost of $30 per hour, resulting in a total annual cost to CDCs of $6,000. SBA's 7(a) loan programs also presently require Lenders to submit litigation plans to SBA for approval. Lenders currently submit to SBA approximately 3,000 litigation plans per year. Preparation of each plan takes about one hour, at an average cost of $150 per hour for private counsel time, for a total annual cost to Lenders of $450,000. SBA reimburses Lenders for their share of reasonable, customary and necessary attorney fees, including those incurred for the preparation of litigation plans. CDCs submit to SBA only a small number of litigation plans presently, because SBA currently handles most litigation involving 504 loans. SBA takes an average of one hour to review and respond to each liquidation and litigation plan submitted by Lenders and CDCs. This equates to 4,000 hours for Lender liquidation plans at an average cost of $30 per hour, for a total of $120,000. For review of CDC liquidation plans by SBA, 100 hours is required at an average cost of $30 per hour, for a total of $3,000. For Lender litigation plans, 3,000 hours of SBA review time is required at an average cost of $30 per hour, for a total of $90,000. SBA processes approximately 54,000 servicing and liquidation actions per year for Lenders and CDCs. The average action takes one-half hour for SBA to process, for a total of 27,000 hours processing time. At $30 per hour, this equates to a total cost to SBA of $810,000. Therefore, the total administrative cost to SBA under the current regulatory framework for these activities is approximately $1,023,000. C. Potential Benefits and Costs of the Final Rule 1. Potential Benefits and Costs to Lenders The rule would provide benefits for Lenders because it reduces the costs associated with submitting liquidation plans to SBA for review and approval. The only subprogram unaffected by the final rule would be for those loans approved under the Certified Lenders Program which by statute require the submission of a liquidation plan to SBA. Submission of liquidation plans is currently required for most lending programs by SBA procedures and regulations. SBA estimates that ending this requirement will enable Lenders to eliminate the preparation and submission to SBA of at least 4,000 liquidation plans a year. The approximate time to complete and submit a plan to SBA is about two hours at an average cost of $30 per hour. Consequently, eliminating the requirement to submit liquidation plans will save Lenders about $240,000 per year. Other benefits for Lenders would result from the proposal to raise the dollar threshold for non-routine litigation (for which submission to SBA for pre-approval is required) from $5,000 to $10,000. With the higher dollar threshold, Lenders would be required to submit fewer litigation plans to SBA. The Agency anticipates that approximately 500 fewer plans annually would be required to be submitted to the Agency as a result of this change. Because preparation of each plan takes about one hour at an average cost of $150 per hour, SBA estimates that the enactment of the final rule would result in a cost savings of $75,000. Finally, the final rule would reduce the operational costs associated with preparing requests for loan servicing and liquidation actions taken by Lenders that require prior SBA approval. These changes would simplify and reduce the costs of loan servicing and liquidation processes for Lenders. SBA does not know of any specific costs that would be imposed on Lenders as a result of this rule except for the loss of income that would result from the limitation of interest on guarantees purchased by SBA to 120 days. It has, however, been SBA's experience in tracking the receipt of completed guarantee purchase request filings that such a limitation would affect only a small percentage (estimated at around 10%) of SBA guaranty purchases. In review of the comments to the proposed rule, Lenders objected to this limitation, viewing it as an encroachment on a source of income. SBA would like to note that current accounting practices generally limit the accrual of interest on defaulted loans to 90 days, and that after that date the loan would be placed in non-accrual status. This loss expressed by Lenders in their comments to the proposed rule relates to SBA bringing its [[Page 18357]] program provisions into greater conformance with more traditional banking practices. In the proposed rule, SBA sought comment on any monetized quantitative or qualitative costs of Lenders' compliance with the rule. One comment filed by the Chairman of the House Small Business committee felt the proposed rule did not properly detail the indirect effects of the rule on small businesses. The thrust of the comment centered on the adverse impact the rule would have on small lenders and CDCs, and consequently local small business concerns. The committee Chairman felt the increased administrative burden resulting from these proposed changes to existing regulations would drive Lenders and CDCs from the program thus contracting the available sources of small business capital. According to the comment, this second order level of analysis must be performed lest the Congress initiate legislation to enjoin the regulations from taking effect. SBA wishes to thank the Chairman for providing comment to the proposed rule, and would like to outline its response. In his comment letter, the Chairman identified the proposed rule as a modification of the existing regulatory structure that has proven successful in implementing the Small Business Act and the Small Business Investment Act. As it is, the final rule pertaining to CDC liquidation and debt collection activity performed by qualified CDCs is consistent with the statutory requirements mandated by Sec. 510 of the Small Business Investment Act. In the preamble to the proposed rule, SBA explained the basis for the lengthy delay in fulfilling the legal mandate to promulgate regulations consistent with the statute. This final rule fulfills the Agency's responsibility to Congress under the Act. CDCs will retain the option to conduct their own liquidation and debt collection activity or to utilize a services of another CDC. The final rule also devises a form of compensation that offsets the additional operational costs associated with implementation of a liquidation function. SBA acknowledges the Chairman's comments regarding the adverse impact the proposed rules could have on small 7(a) lenders that would be required to liquidate all collateral before seeking SBA purchase of the guarantee. SBA has decided to modify the final rule to require only the liquidation of business personal property (chattels) prior to seeking purchase. If a Lender only has business real property pledged against the SBA loan, the Lender can seek either a request for guarantee purchase or may elect to liquidate the property first. This option is presently available in the existing regulations cited in the comments as being successful in implementing the Small Business Act and the Small Business Investment Act. 2. Potential Benefits and Costs to CDCs As provided by statute, this final rule would enable qualified CDCs to seek authority to perform liquidation and debt collection litigation, and by doing so, qualified CDCs would be determining that the benefits of conducting their own recovery on defaulted loans would outweigh any burdens associated with the preparation and submission to SBA of liquidation and litigation plans as set forth in the final rule. Such benefits would include the ability to pursue quicker liquidations and possibly achieve higher recoveries as a result. SBA expects that CDCs would incur some additional costs as a result of this rule. SBA anticipates that CDCs would be required to submit to the Agency for approval about 300 liquidation plans per year, an increase of 200 from the approximately 100 liquidation plans CDCs currently submit annually. SBA estimates that the average time for completion of each plan would consist of two hours at an average cost of $30 per hour. Therefore, the annual cost of submitting the plans under the final rule would be $18,000 per year, for an overall cost increase of $12,000 from the $6,000 annual cost under the current regulatory framework. CDCs that receive delegated liquidation authority under the final rule would also incur added costs through acquiring resources and creating the necessary internal structures to engage in liquidation and litigation activities. SBA had sought comments from the public on any other monetized, quantitative or qualitative costs of CDCs' compliance with this rule and has decided on a compensation structure detailed below. 3. Potential Benefits and Costs for SBA and the Federal Government The final rule would benefit SBA because it would eliminate the need for most Lenders to submit liquidation plans to SBA (the exception is for Lenders under the Certified Lenders Program, which are required to submit liquidation plans by statute; the number of liquidation plans submitted by such Lenders currently is minimal, and SBA expects even further reduction under the rule). SBA estimates that ending this requirement would eliminate the need for SBA to review about 4,000 liquidation plans a year. The approximate time required for SBA to review a liquidation plan is one hour at an average cost of $30 per hour. Consequently, there would be a cost savings to SBA of $120,000 per year. Another benefit for SBA would result from the proposal to raise the dollar threshold for non-routine litigation (for which submission to SBA for pre-approval is required) from $5,000 to $10,000. SBA anticipates that approximately 500 fewer plans annually would be required to be submitted to the Agency as a result of this change. Because review of each plan takes about one hour at an average cost of $30 per hour, SBA estimates that the final rule would result in a cost savings of $15,000. In addition, SBA would not be required to reimburse Lenders for the Agency's proportionate share of the costs incurred by Lenders in connection with the preparation of these litigation plans, resulting in a further savings of approximately $50,000. Although under the final rule SBA would be required to review liquidation plans submitted by qualified CDCs (estimated at 300 liquidation plans per year), this would not represent a significant increase in SBA administrative costs because currently SBA reviews approximately 100 such plans per year as well as provides assistance to CDCs on the preparation of such plans. The final rule would also reduce SBA administrative costs associated with oversight of the Agency's business loan assistance programs by delegating greater servicing and liquidation responsibilities to Lenders and CDCs, and reducing their need to seek the prior approval of SBA for their proposed recovery activities and for various specific liquidation actions. This would decrease the amount of time required for SBA personnel to manage these programs. It is estimated that reviews of at least 30% (16,200) of the approximately 54,000 servicing and liquidation actions SBA currently processes annually would be eliminated. This would save an average of one-half hour processing time per action for a total time savings of 8,100 hours at $30 per hour, or $243,000. In addition to increasing consistency among SBA's loan programs and creating more uniformity in processing guaranty purchase requests, the final rule would save taxpayer dollars by limiting payment of interest on purchased loans to 120 days, except for loans where the guaranteed portion has been sold in the Secondary Market. This change would not be a burden on Lenders because Lenders typically place loans on interest non-accrual after 90 days of delinquency and SBA already [[Page 18358]] limits interest purchased to 120 days in the fastest growing program (SBAExpress). However, it is estimated that such a limitation in the proposed rule would affect only a small percentage (estimated at around 10%) of future SBA guaranty purchases. Finally, the proposed rule would facilitate SBA's transformation initiative by enabling the sale of groups of 7(a) and 504 loans in asset sales. To this end, the rule provides that Lenders which do not purchase the guaranteed portion of a defaulted 7(a) loan from a Registered Holder in the Secondary Market and have SBA purchase the guaranteed portion will have provided their consent for SBA to include the loan in an asset sale. This may turn out to be the most cost- effective approach for Lenders, particularly those with limited capital or operational resources to complete the liquidation exercise. Asset sales would also be available to CDCs, including those operating with limited funding since a sale may be the most expedient approach to disposing of defaulted loans. Costs imposed on SBA as a result of the rule would include personnel and administrative costs associated with implementing appeals processes to which Lenders and Authorized CDC Liquidators may be entitled under the final rule when they disagree with a decision by an SBA field office or servicing center regarding a liquidation or litigation plan, when they disagree with an SBA determination to deny reimbursement of liquidation or litigation fees or costs, or when SBA denies applications from non-PCLP CDCs requesting authority to handle liquidation and debt collection litigation. D. Final Rule Is the Best Available Means To Reach the Regulatory Objective This final rule is SBA's best available means for achieving its regulatory objective of clarifying and making uniform existing SBA regulations and policy, which currently only partially address liquidation and debt collection litigation and vary across Agency lending programs. With respect to CDCs that are eligible for and request liquidations and debt collection authority from SBA, the rule merely implements Sec. 307(b) of Pub. L. 106-554, which requires SBA to promulgate regulations to carry out Sec. 510 of the SBI Act, 15 U.S.C. 697g, regarding CDC liquidation and debt collection litigation authority. SBA considers those statutory provisions applicable to CDCs to be mandatory, and SBA has not identified any reasonable alternative to this proposed rule implementing the statutory mandate. Executive Order 12988 This final action meets applicable standards set forth in Sec. Sec. 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden. In particular, the regulations provide for rights of appeal to Lenders and CDCs in the event they are aggrieved by an Agency decision, thereby limiting the possibility of litigation by these entities. The final action does not have retroactive or preemptive effect. Executive Order 13132 This final rule 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. Therefore, for the purposes of Executive Order 13132, SBA has determined that the rule has no federalism implications warranting preparation of a federalism assessment. The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. This rule directly affects only those CDCs that are eligible for and that request, authority from SBA to conduct liquidation and debt collection litigation, along with an unknown number of small lending institutions. SBA assumes, therefore, that this final rule may have an impact on a substantial number of small entities. However, the rule merely implements statutory mandates and, further, SBA has determined that the impact on entities affected by the rule will not be significant for the reasons set forth below. The final rule would enable qualified CDCs to seek authority to perform liquidation and debt collection litigation, and by doing so, qualified CDCs would be determining that the benefits of conducting their own recovery on defaulted loans would outweigh any burdens associated with the preparation and submission to SBA of liquidation and litigation plans as set forth in these regulations. Such benefits include the ability to pursue liquidations more quickly and potentially achieve higher loan recoveries. In the loan liquidation pilot program established by the Small Business Programs Improvement Act of 1996, CDCs that conducted their own liquidation achieved a slightly higher overall recovery rate than did SBA in the comparison group of cases handled directly by the Agency. Subject to the new provisions contained in Sec. 120.542, SBA would also be