Liquidation and Debt Collection Activities, 18349-18365 [E7-6946]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 72, Number 70 (Thursday, April 12, 2007)]
[Rules and Regulations]
[Pages 18349-18365]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-6946]


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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.

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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