Lender Oversight Program, 61752-61785 [E7-20932]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 72, Number 210 (Wednesday, October 31, 2007)]
[Proposed Rules]
[Pages 61752-61785]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-20932]



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Part III





Small Business Administration





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13 CFR Part 120



Lender Oversight Program; Proposed Rule

Federal Register / Vol. 72, No. 210 / Wednesday, October 31, 2007 / 
Proposed Rules

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE14


Lender Oversight Program

AGENCY: Small Business Administration (SBA).

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: SBA is proposing a rule to incorporate SBA's risk-based lender 
oversight program into SBA regulations. Specifically, the proposed rule 
would establish the role and responsibilities of SBA's Office of Credit 
Risk Management within a new subpart of the business loan regulations. 
It would codify in SBA regulations SBA's process of risk-based 
oversight including: (i) Accounting and reporting requirements; (ii) 
off-site reviews/monitoring; (iii) on-site reviews and examinations; 
and iv) capital adequacy requirements. The proposed rule would also 
list the types of, grounds for, and procedures governing SBA 
enforcement actions within consolidated enforcement regulations for all 
7(a) Lenders, Certified Development Companies, Microloan 
Intermediaries, and Non-Lending Technical Assistance Providers. This 
rule is necessary to provide coordinated and effective oversight of 
financial institutions that originate and manage SBA guaranteed loans.

DATES: Comments must be received on or before December 31, 2007.

ADDRESSES: You may submit comments, identified by [RIN number 3245-
AE14] by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Bryan Hooper, Director for Office of Credit Risk 
Management, U.S. Small Business Administration, 409 3rd Street, SW., 
8th Floor, Washington, DC 20416.
     Hand Delivery/Courier: Bryan Hooper, Director for Office 
of Credit Risk Management, U.S. Small Business Administration, 409 3rd 
Street, SW., 8th Floor, Washington, DC 20416.

    All comments will be posted on https://www.Regulations.gov. If you 
wish to include within your comment, confidential business information 
(CBI) as defined in the Privacy and Use Notice/User Notice at https://
www.Regulations.gov and you do not want that information disclosed, you 
must submit the comment by either Mail or Hand Delivery and you must 
address the comment to the attention of Linda RU.S.C.he, Supervisory 
Financial Analyst, Office of Credit Risk Management. In the submission, 
you must highlight the information that you consider is CBI and explain 
why you believe this information should be held confidential. SBA will 
make a final determination, in its sole discretion, of whether the 
information is CBI and, therefore, will not be published or not.

FOR FURTHER INFORMATION CONTACT: Linda RU.S.C.he, Supervisory Financial 
Analyst, at (816) 426.4860, or Bryan Hooper, Director, Office of Credit 
Risk Management, (202) 205.3049.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory

    Section 7(a) of the Small Business Act (the Act), 15 U.S.C. 636, 
authorizes SBA to guarantee loans made by Lenders (7a Lenders) to 
eligible small businesses. Under Section 504 of the Small Business 
Investment Act, 15 U.S.C. 697a, SBA guarantees Certified Development 
Company (CDC) debentures. Section 7(m) of the Act authorizes SBA to 
make direct loans to Microloan Intermediaries, who use proceeds to make 
loans to very small businesses, and also authorizes SBA to make 
technical assistance grants to non-lending technical assistance 
providers (NTAPs). 15 U.S.C. 636(m). With this authority to offer 
government guarantees and related grants, Congress has also provided 
SBA with authority to support appropriate Lender, CDC, Microloan 
Intermediary, and NTAP supervision. 15 U.S.C. 650; 15 U.S.C. 634 note, 
citing Public Law 104-208, Division D, Title I, Sec.  103(h); 15 U.S.C. 
634(b)(14); 15 U.S.C. 634(b)(7); 15 U.S.C. 636(a)(31); 15 U.S.C. 
687(f); 15 U.S.C. 696(3)(A); 15 U.S.C. 697(a)(2); 15 U.S.C. 697e(c)(8); 
and 15 U.S.C. 634(b)(6).
    The provisions cited include both direct and indirect authority to 
supervise, regulate, and examine Small Business Lending Companies 
(SBLCs) and Non-Federally Regulated Lenders (NFRLs). 15 U.S.C. 650; 15 
U.S.C. 634(b)(14); 15 U.S.C. 636(a)(31); and 15 U.S.C. 634(b)(6) and 
(7). The cites also include both direct and indirect provisions that, 
together, authorize SBA oversight of and reviews of the SBA operations 
of other 7(a) Lenders (including national banks and other federally 
regulated financial institutions), CDCs, Microloan Intermediaries, and 
NTAPs. 15 U.S.C. 634 note, citing Public Law 104-208, Division D, Title 
I, Sec.  103(h); 15 U.S.C. 634(b)(14); 15 U.S.C. 634(b)(6) and (7); 15 
U.S.C. 636(a)(31); 15 U.S.C. Sec.  687(f); 15 U.S.C. 696(3)(A); 15 
U.S.C. 697(a)(2); and 15 U.S.C. 697e(c)(8).

B. History

    Currently, there are over 5,000 7(a) Lenders and CDC s (together, 
SBA Lenders) authorized to make SBA-guaranteed loans and issue SBA-
guaranteed debentures. These SBA Lenders hold approximately $60 billion 
of 7(a) and 504 loans outstanding (in gross dollars). SBA has delegated 
increasingly more authority to its SBA Lenders such that the number of 
loans originated under delegated authority has grown from approximately 
20% of SBA's loan volume in 1992 to over 75% of SBA's loan volume as of 
2006. As SBA continues to place more responsibility and independence on 
its SBA Lenders, SBA must have the necessary controls to ensure that 
SBA Lenders' SBA operations are well-managed and avoid unnecessary 
losses. A comprehensive oversight process provides this control for the 
Agency.
    Prior to 1999, SBA's risk management, lender monitoring, and lender 
oversight activities were conducted by SBA's Office of Financial 
Assistance (OFA) and SBA's District Offices, which were also 
responsible for developing and promoting the Agency's business loan 
programs. With the increase in lending authority given to SBA Lenders 
and lending volume, SBA needed a separate division to perform risk 
management and lender oversight.
    Therefore, in 1999 SBA established the Office of Lender Oversight 
(OLO) for the primary purpose of ensuring the ``consistent and 
appropriate supervision of SBA's lending partners.'' At the time it was 
initially established, OLO's major responsibilities were defined as: 
``evaluating existing oversight regulations, policies and procedures 
and promulgating new ones where appropriate; monitoring changes in the 
accounting, banking and financial industries, and recommending 
appropriate modification of SBA oversight policy; coordinating all 
headquarters and field office activities with respect to Lender 
reviews; [and] evaluating new programs and changes to existing programs 
to assess their risk potential * * *'' The head of the office, the 
Associate Administrator for OLO, was to serve as a member of SBA's Risk 
Management Committee and a key member of the group developing and 
implementing the Agency's lender monitoring and oversight system.
    Subsequent to its establishment, OLO assumed responsibility for 
conducting ``safety and soundness'' examinations of the SBLCs and 
compliance reviews for Preferred Lenders Program (PLP) Lenders. OLO 
then began developing a risk-based review process for all SBA

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Lenders. OLO, in 2003, developed and implemented a Loan and Lender 
Monitoring System (L/LMS). In late 2004, Congress provided SBA specific 
supervision and enforcement authorities over SBLCs and NFRLs (together, 
SBA Supervised Lenders). In April 2005, SBA published Delegations of 
Authority that delineated the responsibilities of OLO and a new Lender 
Oversight Committee (LOC) consistent with new authorities. 70 FR 21262 
(April 25, 2005). On May 5, 2007, SBA published a final rule governing 
7(a) Lender review/examination fees. 72 FR 25189. On May 16, 2007 OLO 
published a final rule on SBA's Lender Risk Rating System. 72 FR 27611. 
Also, in May 2007, SBA reorganized and renamed the office to the Office 
of Credit Risk Management (OCRM). Most recently, SBA has reviewed the 
Agency's current oversight regulations and is now proposing this rule 
to incorporate OCRM's new authorities and SBA's risk-based lender 
oversight program into SBA's regulations. A discussion of the proposed 
rule, consisting of an overview and key provisions, follows.

II. Proposal

A. Overview

    The proposed rule would incorporate SBA's risk management/lender 
oversight program into SBA's business loan program regulations by: (i) 
Adding risk management definitions to Part 120 (13 CFR 120.10); (ii) 
incorporating risk management/lender oversight metrics and tools into 
program participation criteria and requirements (13 CFR 120.410, 
120.424, 120.433, 120.434, 120.451, 120.710, 120.812, 120.820, 120.826, 
120.830, 120.839, and 120.841); (iii) updating provisions to include 
key OCRM Delegations of Authority (13 CFR 120.451, 120.461, 120.702, 
120.710, and 120.845); and (iv) consolidating loan program oversight 
and enforcement regulations into subpart I, designated Risk-Based 
Lender Oversight. (See below chart on Regulations Relocated). Subpart I 
would cover the role and responsibilities of OCRM, the Risk Rating 
System, off-site reviews/monitoring, on-site reviews and examinations, 
and enforcement actions against SBA Lenders, Microloan Intermediaries, 
and NTAPs.

                     Chart of Regulations Relocated
------------------------------------------------------------------------
                               Regulation subject    Proposed regulatory
 Current regulatory citation         matter               citation
------------------------------------------------------------------------
Sec.   120.414..............  SBA access to 7(a)    Sec.   120.1010.
                               Lender files.
Sec.   120.415..............  7(a) program--        Sec.   120.1400
                               Suspension or         (grounds).
                               revocation of        Sec.   120.1500
                               eligibility to        (types of
                               participate.          enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.442..............  Suspension or         Sec.   120.1400
                               revocation of CLP     (grounds).
                               status.              Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.454..............  PLP performance       Sec.   120.1000(a)
                               review.               (Risk-Based Lender
                                                     Oversight).
                                                    Sec.   120.1025 (off-
                                                     site reviews/
                                                     monitoring).
                                                    Sec.   120.1050 (on-
                                                     site reviews and
                                                     examinations).
Sec.   120.455..............  Suspensions or        Sec.   120.1400
                               revocations of PLP    (grounds).
                               status.              Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.470(b)(3)........  Minimum SBLC capital  Sec.   120.471
                               requirement.          (minimum capital
                                                     requirement).
                                                    Sec.   120.472
                                                     (higher individual
                                                     minimum capital
                                                     requirement).
                                                    Sec.   120.473
                                                     (procedures for
                                                     higher individual
                                                     minimum capital
                                                     requirement).
Sec.   120.470(b)(4)........  SBLC capital          Sec.   120.462(d).
                               impairment.
Sec.   120.470(b)(5)........  SBLC issuance of      Sec.   120.471(d).
                               securities.
Sec.   120.470(b)(6)........  SBLC voluntary        Sec.   120.471(c).
                               capital reduction.
Sec.   120.470(b)(7)........  SBLC reserve for      Sec.   120.463(e).
                               losses.
Sec.   120.470(b)(8)........  SBLC internal         Sec.   120.460(b).
                               controls.
Sec.   120.470(b)(9)........  SBLC dual control...  Sec.   120.470(d).
Sec.   120.470(b)(10).......  SBLC fidelity         Sec.   120.470(e).
                               insurance.
Sec.   120.470(b)(11).......  SBLC common control.  Sec.   120.470(f).
Sec.   120.470(b)(12).......  SBLC management.....  Sec.   120.470(g).
Sec.   120.470(b)(13).......  SBLC borrowed funds.  Sec.   120.470(h).
Sec.   120.471..............  SBLC recordkeeping    Sec.   120.461.
                               and retention
                               requirements.
Sec.   120.473..............  SBLC change of        Sec.   120.475.
                               control.
Sec.   120.474..............  SBLC prohibited       Sec.   120.476.
                               financing.
Sec.   120.475..............  SBLC Audits.........  Sec.   120.490.
Sec.   120.476..............  SBLC suspension and   Sec.   120.1400
                               revocation.           (grounds).
                                                    Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.716..............  Microloan             Sec.   120.1425
                               Intermediary and      (grounds).
                               NTAP suspension and  Sec.   120.1540
                               revocation.           (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.853..............  CDC reviews.........  Sec.   120.1000,
                                                     Sec.   120.1050.
Sec.   120.854..............  CDC grounds for       Sec.   120.1400
                               taking enforcement    (grounds).
                               action.
Sec.   120.855..............  CDC types of          Sec.   120.1500
                               enforcement actions.  (types of
                                                     enforcement
                                                     actions).
Sec.   120.856..............  CDC enforcement       Sec.   120.1600
                               procedures.           (enforcement
                                                     procedures).
------------------------------------------------------------------------
Chart: This chart is intended to serve as a reference tool for locating
  regulatory provisions repositioned under the proposed rule. In some
  instances, the relocation involves simply moving text from one
  regulatory section to another. In other instances, SBA is proposing
  substantive changes with the move.


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B. Key Provisions

    The following is a discussion of key provisions of the proposed 
rule. They are as follows: (i) SBA Supervised Lender regulation; (ii) 
capital regulation; (iii) incorporation of a risk rating system; (iv) 
the addition of the CDC Single Audit Act provision; (v) the 
codification of the risk-based on-site review and examination program; 
and (vi) the coordination and development of enforcement policies and 
procedures. These key provisions are highlighted because they generally 
cover more than one regulation within the proposed rule. In addition, 
their discussion will provide a useful background for regulation 
review.
1. SBA Supervised Lender Regulation
    Public Law 108-447, Division K, Title I (December 2004) effectively 
created a new category of SBA Lender--an SBA Supervised Lender. SBA 
Supervised Lenders consist of SBLCs and NFRLs. P.L 108-447 generally 
treated these 7(a) Lenders the same for purposes of regulation, 
supervision, and enforcement. Accordingly, SBA has drafted a group of 
regulations applicable to SBA Supervised Lenders in general (Sec. Sec.  
120.460-120.465). The SBA Supervised Lender regulations would cover for 
example; internal controls, record retention, accounting and reporting, 
and capital adequacy. Many of these new regulations governing SBA 
Supervised Lenders, especially those related to capital, are similar to 
that of either the Federal Deposit Insurance Corporation; the Federal 
Reserve Board; the Office of the Comptroller of the Currency; the 
Office of Thrift Supervision; the National Credit Union Administration; 
or the Farm Credit Administration (each a Federal Financial Institution 
Regulator).
2. Capital Regulation
    Essential to the success of a government guaranteed loan program is 
the financial strength of its lenders. Capital is a common metric for 
measuring financial strength. The proposed rule would incorporate 
capital more fully into the 7(a) program. Specifically, the proposed 
rule would explicitly make having sufficient permanent capital a 
requirement for 7(a) program participation (Sec.  120.410(a)). For 7(a) 
Lenders with a Federal Financial Institution Regulator, meeting capital 
requirements for an adequately capitalized financial institution would 
be considered sufficient permanent capital to support SBA lending 
activities. For SBA Supervised Lenders, adequate capital would mean 
meeting its minimum capital requirement (For an SBLC--this would mean 
meeting SBA's Sec.  120.471 minimum or Sec.  120.472 higher individual 
minimum capital requirement, as applicable. For an NFRL--this would 
mean meeting the minimum capital requirement set by its state of 
incorporation regulator). While the proposed rule does not revise the 
minimum capital requirement for all SBLCs, SBA is considering updating 
this requirement. SBA seeks comments as to the appropriate minimum 
capital requirement for SBLCs.
    In addition to an SBLC minimum capital requirement, the proposed 
regulations would allow SBA to set a higher individual minimum capital 
requirement for an SBLC, where appropriate. (Sec.  120.472). SBA would 
set such a higher minimum capital requirement after consideration of 
certain risk-related factors described in proposed Sec.  120.472 and 
pursuant to procedures contained in proposed Sec.  120.473. The 
proposed rule would also require SBA Supervised Lenders to maintain a 
minimum capital adequacy plan (Sec.  120.462(b)), and to quarterly 
certify as to compliance with minimum capital requirements. (Sec.  
120.462(c)). Capital impairment would be redefined under the proposed 
rule for SBA Supervised Lenders, as failing to meet its applicable 
minimum capital requirement. (Sec.  120.462(d)). Under the proposed 
rule, if an SBA Supervised Lender fails to meet its minimum capital 
requirement (i.e., is capitally impaired), it must file with SBA a 
capital restoration plan (Sec.  120.462(e)) and then timely implement 
the approved plan. SBA could take enforcement action under the proposed 
enforcement regulations (Sec. Sec.  120.1400-1600) against an SBA 
Supervised Lender that fails to submit a capital restoration plan that 
is acceptable to SBA or fails to implement, in any material respect, 
its capital restoration plan in a timely manner. The proposed capital 
regulations contain provisions similar to those maintained by some 
Federal Financial Institution Regulators.
3. Incorporation of a Risk Rating System
    With the assistance of private industry leaders in predictive 
modeling and risk rating systems, SBA has developed an SBA Lender Risk 
Rating System. The proposed SBA Lender Risk Rating System was published 
for comment in the Federal Register at 71 FR 25624 (May 1, 2006). On 
May 16, 2007 OLO published the final rule on SBA's Lender Risk Rating 
System. 72 FR 27611. The SBA Lender Risk Rating System is an internal 
tool for assessing the risk of each SBA Lender's SBA loan operations on 
a uniform basis within its program and for identifying those 
institutions whose SBA loan operations and portfolio require additional 
SBA monitoring or other action. Under the SBA Lender Risk Rating 
System, SBA assigns each SBA Lender a composite rating of one to five 
based on certain portfolio performance factors which may be overridden 
in some cases due to SBA Lender specific factors that may be indicative 
of a higher or lower level of risk. SBA would generally consider an SBA 
assigned Risk Rating (Risk Rating) of either one, two, or three on a 
scale of one to five to be an ``Acceptable Risk Rating''. A ``Less Than 
Acceptable Risk Rating'' would be an SBA assigned Risk Rating of four 
or five. (Sec.  120.10 and Sec.  120.1015). SBA may revise the scale 
for SBA Risk Ratings and related definitions as the program develops. 
Any such changes would be published in the Federal Register for notice 
and comment. SBA plans to develop a risk rating system for Microloan 
Intermediaries and NTAPs and will provide notice before implementation 
of this system.
    SBA has incorporated the SBA Lender Risk Rating System into its on-
site risk-based reviews and examinations as set forth in SOP 51-00 
governing on-site SBA Lender reviews and examinations. The proposed 
rule would incorporate the SBA Lender Risk Rating System and its 
definitions into SBA's loan program regulations. Risk Ratings would be 
considered in determining whether an SBA Lender (and, in the future, a 
Microloan Intermediary, or NTAP) has satisfactory SBA performance for 
purposes of continued participation in the 7(a), 504, Microloan, or 
NTAP programs (including the delegated authority programs) under 
proposed amendments to: Sec. Sec.  120.410 (requirements for 7(a) 
Lenders); 120.424 (securitization requirements); 120.433 (sales and 
sales of participating interests); 120.434 (pledges of SBA loans); 
120.451 (PLP Program); 120.812 (Extensions of CDC probationary periods 
and permanent CDC status); 120.820 (requirements for CDC certifications 
and operation); 120.839 (outside area of operation loan approval); and 
120.841 (ALP status). SBA would also consider a Risk Rating before 
approving a Microloan Intermediary's reduction in its loan loss reserve 
fund (LLRF) under proposed amendments to Sec.  120.710. Under proposed 
Sec.  120.1051, SBA would consider an SBA Lender's, Intermediary's, or 
NTAP's Risk Rating in determining frequency of on-site reviews/
examinations.

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    Under proposed rule Sec.  120.1400(c)(9), a repeated Less Than 
Acceptable Risk Rating (particularly in conjunction with other grounds) 
may evidence increased financial risk to SBA to warrant consideration 
of taking formal enforcement action. A repeated Less Than Acceptable 
Risk Rating may also be evidence of an SBA Lender not performing 
underwriting, closing, disbursing, servicing, liquidation, or 
litigation in a commercially reasonable and prudent manner under 
proposed Sec.  120.1400(c)(4). SBA expects to consider additional 
factors (e.g., on-site review/examination assessment, corrective 
actions implemented, and contribution toward SBA mission) before taking 
formal enforcement action on these Risk Rating grounds. Finally, a 
repeated Less Than Acceptable Risk Rating could be support for SBA not 
renewing program or delegated authorities.
    The incorporation of the Risk Rating System into the regulations is 
consistent with SBA's movement away from considering only the lagging 
indicators of our portfolio benchmark performance measures and towards 
integration of more current and sophisticated performance measurement 
systems developed by private sector leaders.
4. Single Audit Act Provisions
    The proposed rule incorporates Single Audit Act requirements into 
SBA's 504 program regulations. The Single Audit Act (31 U.S.C. 7501-
7507) requires Non-Federal entities, such as non-profit CDCs, that 
expend a total of $500,000 or more of federal awards (e.g. loan 
guarantees) in any fiscal year (including amounts outstanding), to have 
a single audit performed for such fiscal year. The audit must be 
conducted by an independent auditor in accordance with generally 
accepted government auditing standards. The Single Audit Act may also 
require, under certain circumstances, the Non-Federal entity to monitor 
the subrecipients' use of federal awards through site visits, limited 
scope audits, and other means. By including reference to the Single 
Audit Act in SBA regulations, SBA would not intend to extend coverage 
of the Single Audit Act to those CDCs for which the Single Audit Act 
does not apply. Therefore, for example, if a CDC does not meet the 
$500,000 federal award minimum, then the Single Audit Act compliance 
requirement would not apply. However, SBA estimates that virtually all 
active CDCs are covered by the Single Audit Act. SBA also would intend 
to consider CDC compliance with the Single Audit Act, including any 
future amendments to it, as a requirement for participation in the 504 
program and, accordingly would monitor CDC compliance with Single Audit 
Act requirements.
5. Review and Examination Program
    SBA has developed a coordinated risk-based SBA Lender review and 
examination program. SBA regulations need to reflect the updated 
coordinated risk-based review/examination approach. The proposed rule 
would remove current regulatory provisions governing on-site reviews 
and examinations within SBA's loan program regulations (Sec. Sec.  
120.414, 120.454, 120.470, 120.853) and consolidate them within subpart 
I on Risk-Based Lender Oversight. Under the proposed regulations, SBA 
Lenders could now look in one location for consistent regulatory 
guidance on on-site reviews and examinations. In addition, the proposed 
rule would extend such guidance beyond regulatory authorization for 
reviews and examinations. Specifically, the proposed rule would include 
provisions for off-site reviews and monitoring, on-site review and 
examination evaluative components, the frequency of on-site reviews and 
examinations, review and examination reports, and expected responses, 
including, as applicable, corrective actions and capital restoration 
plans. As to the proposed regulation's on-site reviews, if an SBA 
Lender is to be examined by a Federal Financial Institution Regulator 
in the same general timeframe, SBA would try to mutually coordinate the 
timing of the SBA operation review and the supervisor's examination to 
minimize any burden. Finally, the proposed rule also would include 
Microloan Intermediaries and NTAPs in the review regulations, and would 
harmonize the review process between for-profit 7(a) Lenders and non-
profit CDCs, since SBA's partial guaranty of credit risk on individual 
loans for each program is similar.
6. Enforcement Policies and Procedures
    SBA has consolidated within subpart I, the Agency's enforcement 
regulations for SBA Lenders, Microloan Intermediaries, and NTAPs. The 
consolidation would facilitate coordinated enforcement policies. It 
would allow all SBA Lenders, Microloan Intermediaries, and NTAPs to 
look in one place for such regulatory guidance. Finally, consolidation 
within subpart I should provide for greater consistency in taking 
formal enforcement actions.
    SBA has modeled its proposed enforcement provisions after SBA's CDC 
enforcement regulations. Like the current CDC enforcement regulations, 
subpart I's enforcement provisions would consist primarily of three 
main enforcement regulations. The first, proposed Sec.  120.1400, would 
cover grounds for enforcement actions. The second, proposed Sec.  
120.1500, would list types of formal enforcement actions. The third, 
proposed Sec.  120.1600, would set forth the procedures governing each 
type of formal enforcement action. Within each of these proposed 
regulations, the subsections are generally broken down into provisions 
that apply to all SBA Lenders; additional provisions that apply only to 
7(a) Lenders; additional provisions that apply only to SBA Supervised 
Lenders; additional provisions that apply only to SBLCs; and additional 
provisions that apply only to CDCs.
    Enforcement grounds and formal enforcement actions for Microloan 
Intermediaries and NTAPs would be contained in separate regulations 
within the enforcement series, as there was less overlap with these 
participants.

III. Section-by-Section Analysis

    Section 120.10--Definitions. SBA proposes to add ten new 
definitions to this section primarily for purposes of risk management/
lender oversight and enforcement. The new definitions would help to 
clarify categories of SBA Lenders and related parties referenced in the 
proposed regulations. Definitions would be added for 7(a) Lender, SBA 
Lender, Small Business Lending Company (SBLC), Non-Federally Regulated 
Lender (NFRL), SBA Supervised Lender, Other Regulated SBLC, Federal 
Financial Institutions Regulator, and Management Official. SBA would 
also add Risk Rating definitions that would describe an SBA Risk Rating 
and the key rating categories of Acceptable and Less Than Acceptable.
    Section 120.410--Requirements for all participating Lenders. Under 
the proposed rule, the requirement in section 120.410(a) that a 7(a) 
Lender have the continuing ability to evaluate, process, close, 
disburse, service, liquidate, (and litigate) loans would be more 
specifically defined to include (but not be limited to) (i) holding 
sufficient permanent capital (For Lenders with Federal Financial 
Institution Regulators, that would entail being ``adequately 
capitalized.'' For SBLCs, that would entail meeting its SBA minimum 
capital requirement. For NFRLs, that would entail meeting the minimum 
capital requirement of its state of incorporation) and (ii) having 
satisfactory SBA performance. SBA is more specifically defining the

[[Page 61756]]

continuing ability provision to include adequate capital and 
satisfactory SBA performance because sufficient capital and 
satisfactory performance sustain a 7(a) Lender's ability to evaluate, 
process, close, disburse, service, liquidate, and litigate loans.
    In determining satisfactory SBA performance, SBA would consider a 
Lender's Risk Rating, among other factors. The other factors SBA 
anticipates considering may include on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, other performance related measurements and 
information, and contribution toward SBA mission.
    Subsection (a) would also be revised to specify the requirement 
that a 7(a) Lender have the ability to litigate loans. This is 
consistent with SBA's policy on 7(a) Lender litigation of SBA Loans.
    In addition, the OCRM proposed rule would further define SBA's 
requirements to participate in the 7(a) program by adding the following 
7(a) Lender requirements: (i) Good standing (as generally defined under 
Sec.  120.420(f) and with a Lender's state banking regulator and/or 
Federal Financial Institution Regulator, as applicable); (ii) safe and 
sound condition; and (iii) use of commercially reasonable lending 
policies, procedures, and standards employed by prudent lenders. For 
SBA Supervised Lenders, safe and sound condition would be determined by 
SBA. For other 7(a) Lenders, SBA would look to a 7(a) Lender's Federal 
Financial Institution Regulator or state banking regulator, as 
applicable, to ensure safe and sound condition.
    Finally, subsection (d) would be clarified to provide that a 7(a) 
Lender must be supervised and examined by either a Federal Financial 
Institution Regulator, a state banking regulator (satisfactory to SBA) 
or SBA. SBA is clarifying this provision to make clear that a 7(a) 
Lender participating in SBA's program must be supervised and examined 
by a banking regulator, satisfactory to SBA. The clarifications and 
revisions proposed for Sec.  120.410 are intended to minimize losses in 
the 7(a) program.
    Sections 120.420(f)--Participating lender financings, definition of 
``Good Standing''; 120.425(c)(2)--Reinstatement of securitizer PLP 
status; and 120.426--Actions SBA would take if SBA securitizer 
transfers tranche prior to holding period. SBA proposes to change the 
determining authority in these provisions from the Securitization 
Committee to the more recently established Lender Oversight Committee 
(LOC). Proposed changes to Sec.  120.420(f) would also specify the 
LOC's discretion in reviewing an SBA Lender's good-standing in certain 
circumstances involving investigations, indictments, convictions, and 
judgments, to be consistent with the LOC's discretion set forth in 
120.420(f)(4). Finally, SBA proposes to add the words ``In general'' to 
its ``good-standing'' definition to underscore the discretionary nature 
of the ``good-standing'' determination.
    Sections 120.424--What are the basic conditions a Lender must meet 
to securitize; 120.433--What are SBA's other requirements for sales and 
sales of participating interests; and 120.434--What are SBA's 
requirements for loan pledges? SBA is revising the requirements in 
these sections to more explicitly reference the ``good standing'' 
definition in Sec.  120.420(f). SBA is also proposing to add the 
requirement that 7(a) Lenders have satisfactory SBA performance as 
determined by SBA and that Risk Ratings would be considered among other 
factors in determining satisfactory SBA performance. SBA expects to 
consider among the other factors, on-site review/examination 
assessments, historical performance measures like default rate, 
purchase rate and loss rate, other performance-related measures and 
information, and contribution toward SBA mission. This change would 
incorporate SBA's Risk Rating System within SBA's securitization and 
other conveyance regulations.
    Section 120.435--Which loan pledges do not require notice to or 
consent by SBA? SBA proposes to update the cross-reference to ``Sec.  
120.434(e)'' within this section consistent with proposed revisions to 
Sec.  120.434.
    Section 120.451--How does a Lender become a PLP Lender? SBA is 
proposing to amend Sec.  120.451 to add satisfactory SBA performance to 
those items SBA would consider in approving PLP status. Subsection (e) 
on PLP recertification would also be amended to include SBA performance 
(including contribution to SBA mission), a Lender's Risk Rating, 
examination and review results, and other risk-related factors in the 
recertification decision. Section 120.451 would also be amended to 
provide that the recertification decision would be made by the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority. Also, SBA proposes to delete current 
subsections (c) and (f) to conform to existing Agency policy as 
published in Notice 5000-989 dated May 2, 2006 governing PLP 
territories. Finally, these additions incorporate lender oversight and 
related performance metrics and OCRM's Delegations of Authority into 
PLP program participation determinations.
    Section 120.460--What are SBA's additional requirements for SBA 
Supervised Lenders? SBA is proposing a new Sec.  120.460 entitled 
``What are SBA's additional requirements for SBA Supervised Lenders?'' 
In addition to complying with SBA's requirements for 7(a) Lenders, an 
SBA Supervised Lender would be required to meet additional requirements 
set forth in Sec.  120.460 and the sections that follow. Under Sec.  
120.460, SBA would require an SBA Supervised Lender to adopt an 
internal control policy that would provide adequate direction for 
establishing effective control over and accountability for operations, 
programs, and resources. An SBA Supervised Lender that is required to 
maintain an adequate internal control program may be more likely to 
self-identify and self-correct operational deficiencies. Proposed Sec.  
120.460 is similar to a Federal Financial Institution Regulator 
internal control provision in Title 12 of the Code of Federal 
Regulations.
    Section 120.461--What are SBA's additional requirements for filing 
SBA Supervised Lender reports with SBA and for record retention? This 
proposed regulation would require that SBA Supervised Lender specific 
reports be filed with the appropriate Office of Capital Access official 
in accordance with Delegations of Authority. This is consistent with 
current Delegations of Authority. This section would also extend the 
recordkeeping requirements for SBLCs to NFRLs. Record retention is 
required for SBA to be able to perform safety and soundness 
examinations or Lender reviews and to monitor that SBLC licensing 
requirements are maintained. Finally, this proposed section would newly 
specify certain time periods for retrieving certain documents (i.e., 1 
day for documents that must be immediately retrievable and 15 days for 
originals of documents that are stored electronically). Consequently, 
an SBA Supervised Lender must be able to produce needed records when 
required, and within a reasonable period of time, as defined here.
    Section 120.462--What are SBA's additional requirements on capital 
maintenance for SBA Supervised Lenders? A financial institution is 
expected to maintain capital commensurate with its existing and 
potential risk exposure and the ability of management to identify, 
measure, monitor, and control exposures. Given this, many SBA 
Supervised Lenders do,

[[Page 61757]]

and should be expected to, maintain capital levels above specified 
minimums. Therefore, SBA is proposing a new Sec.  120.462 which would 
guide SBA Supervised Lenders to maintain their own capital adequacy 
goals and plans, typically at a level above SBA's minimum. The 
provision would also provide guidance as to factors an SBA Supervised 
Lender should consider in determining the total amount of capital 
needed to assure the SBA Supervised Lender's continued financial 
viability and to provide for any necessary growth.
    Given the importance of maintaining adequate capital, the proposed 
rule would further require that all SBA Supervised Lenders, within 45 
days of the end of each fiscal quarter, furnish SBA with a calculation 
of its compliance with its minimum regulatory capital requirement. 
Under proposed Sec.  120.462(c), SBA would require the SBA Supervised 
Lender's chief financial officer to certify the calculation as correct.
    Section 120.462 would extend to NFRLs SBA's requirement to timely 
notify SBA in writing of capital impairment. Under proposed Sec.  
120.462(d), SBA would redefine capital impairment as any failure by an 
SBA Supervised Lender to meet its minimum capital requirements. SBA is 
proposing this revision to provide SBA early notice of a Supervised 
Lender's deteriorating capital position below required minimums. Unless 
otherwise waived by SBA in writing, an SBA Supervised Lender would be 
prohibited from presenting any loans to SBA for guarantee until the 
capital impairment is cured.
    Finally, the proposed rule would require an SBA Supervised Lender 
that fails to meet its minimum capital requirement to submit a capital 
restoration plan. Proposed subsection (e) would detail the plan 
content, how SBA would respond, amendments to the capital plan, and 
consequences of failure to: (i) Submit an acceptable plan within the 
required timeframe or (ii) implement in any material respect an 
approved capital restoration plan within the plan timeframe.
    Section 120.463--Regulatory accounting. To facilitate accurate and 
reliable financial reporting, the proposed rule contains a new Sec.  
120.463 on regulatory accounting. The proposed regulation would require 
that an SBA Supervised Lender's (i) books and records be kept on an 
accrual basis in accordance with Generally Accepted Accounting 
Principles (GAAP) as supplemented by Regulatory Accounting Principles 
(RAP) and (ii) financial statements be audited annually in accordance 
with generally accepted auditing standards by an independent certified 
public accountant experienced in auditing financial institutions.
    Proposed subsection (d) would require an SBA Supervised Lender that 
discharges its auditor to notify SBA within ten days of discharge and 
provide SBA with the name, address, and telephone number of the 
discharged auditor. If the discharge involved a dispute over the 
financial statements, the SBA Supervised Lender would also have to 
provide additional information, including but not limited to, a 
detailed reason for the discharge and the effect of each party's 
position on the financial statements.
    Proposed subsection (e) would extend the SBLC requirement for 
maintenance of an allowance for losses on loans to NFRLs. Under 
proposed Sec.  120.463(e), an SBA Supervised Lender would be required 
to maintain documentation of its loan loss allowance calculations and 
analysis in sufficient detail to permit the SBA to review assumptions 
used and their application. SBA would also require, under subsection 
(e) that the unguaranteed portions of loans identified as uncollectible 
be charged off promptly. If the portion determined to be uncollectible 
by the SBA Supervised Lender would differ from that determined by its 
auditors or the SBA, the SBA Supervised Lender would be required to 
charge-off such amount as the SBA may direct. Each SBA Supervised 
Lender would also be required to classify loans as nonaccrual or 
formally restructured in accordance with stated guidelines. Under the 
proposed subsection, if one loan to a given borrower would be 
classified as nonaccrual or formally restructured, all loans to that 
borrower would be required to be so classified unless the SBA 
Supervised Lender could document that the loans have independent 
sources of repayment.
    Finally, Sec.  120.463, subsection (f), would require that SBA 
Supervised Lenders account for loan sales transactions and the 
valuation of loan servicing rights in accordance with GAAP. At the end 
of each quarter, assumptions used in the valuation would be reviewed by 
the SBA Supervised Lender for reasonableness in the existing 
environment. In evaluating the assumptions, the SBA Supervised Lender 
would be required to give particular attention to interest rate and 
repayment rate assumptions. Assumptions considered no longer reasonable 
would be required to be modified and reflected in the valuation and 
would have to be documented and supported by a market analysis. Under 
subsection (f), SBA could require an SBA Supervised Lender to use 
industry averages for the valuation of servicing rights, in lieu of any 
other assumptions found unacceptable by SBA.
    Section 120.464--Reports to SBA. Proposed Sec.  120.464 would 
extend to NFRLs, SBA's current SBLC reporting requirements covering 
audited financial statements, administrative and legal proceedings, 
reports to stockholders, summaries of changes (in organization and 
financing), stock pledges, and other reports, as listed in current 
Sec.  120.472.
    Proposed Sec.  120.464 would also clarify current reporting 
requirements by, for example, detailing required statements to 
accompany the Annual Report (audited financial statements); inserting 
filing time requirements where presently not stated (Stockholder Report 
and Report of Changes); detailing the form and format of financial 
reporting (e.g. for Annual Reports, Quarterly Condition Reports, and 
Reporting of Changes--to be in accord with GAAP, include footnotes, and 
utilize accrual accounting), and specifying that any legal or 
administrative proceedings must be included in other required reporting 
(e.g., Annual Report, Quarterly Condition Report, any Capital plan 
report, etc.) until such matter is resolved.
    Proposed Sec.  120.464 would also introduce two additional SBA 
Supervised Lender reports: (i) The Quarterly Condition Report and (ii) 
the Reports of Changes in Financial Condition. SBA Supervised Lenders 
would report quarterly financial status in Quarterly Condition Reports. 
The Quarterly Condition Report under proposed Sec.  120.464 would 
contain quarterly financial statements that could be internally 
prepared and which would likely include the required certification of 
compliance with capital requirements under proposed Sec.  120.462(c). 
Reports of Changes in Financial Condition would report material changes 
in an SBA Supervised Lender's financial condition (such as 
unanticipated reductions in asset values due to unanticipated events 
such as natural disasters or uninsured hazard loss). Generally, SBA 
would require the SBA Supervised Lender to file the Report of Changes 
in Financial Condition within 10 days of becoming aware of such a 
material financial change, except in cases of capital impairment which 
would be 30 days from the month-end in which the impairment occurred, 
in accordance with proposed Sec.  120.462(d), as clearly specified in 
the Regulation language. These two financial reports would result in 
timelier financial reporting.

[[Page 61758]]

    Subsection (c) would require that SBA Supervised Lenders certify 
each report of financial condition (e.g., the Quarterly Condition 
Report, the Changes in Financial Condition Report and the Annual 
Report) as having been prepared in accordance with applicable 
regulations and instructions and to be a true, accurate, and complete 
representation of the SBA Supervised Lender's financial condition and 
performance. Accurate financial reporting is essential to an 
institution's safety and soundness. Reliable financial reports are 
necessary for an SBA Supervised Lender to raise capital. They provide 
data to stockholders and potential investors on the company's financial 
position and results of operations. Such information is critical to 
effective market discipline. Accurate financial information also 
enables management to effectively manage the institution's risks and 
make sound business decisions. Further, the compilation and submission 
of accurate financial information on a regular basis in a consistent 
format allows SBA to perform more timely and effective risk-based 
supervision to support examination functions, off-site monitoring, 
assessments of an institution's capital adequacy and financial 
strength, and comparisons between SBA Supervised Lenders.
    Finally, proposed Sec.  120.464 would provide for a waiver 
provision for any reporting requirement for good cause. Good cause may 
include, but is not limited to, where an SBA Supervised Lender has a 
relatively small SBA loan portfolio, consistently-acceptable Risk 
Ratings, portfolio performance that exceeds SBA's portfolio or peer 
group averages, etc. This waiver would be determined by SBA, in its 
sole discretion. In making this determination based on portfolio size, 
SBA expects to consider the value of the report to SBA given the size 
of SBA Supervised Lender's SBA loan portfolio and relative to other SBA 
Supervised Lender's portfolios individually and in the aggregate and 
other risk related factors. Authority for such actions will be in 
accordance with SBA's Delegations of Authority.
    Section 120.465--Civil penalty for late submission of required 
reports. Congress recognized the importance of reporting to effective 
oversight and legislated civil monetary penalties of up to $5,000 per 
day for SBA Supervised Lenders that fail to meet reporting requirements 
(15 U.S.C. 650(j)). Proposed Sec.  120.465 would codify in SBA 
regulations the statutory civil monetary penalties. The proposed 
regulation would provide that penalties would automatically accrue from 
the report due date until the SBA Supervised Lender submits a complete 
report. If a submitted report is not complete, it would be deemed not 
filed for purposes of civil monetary penalty assessment. Under the 
proposed rule, if SBA discovers after the due date (e.g., during an 
examination) that the report was submitted only in part or was not 
filed, penalties would be assessed dating back to the original due 
date. Finally, proposed Sec.  120.465 would provide procedures for 
requesting: (i) Due date extension and waiver of automatic penalty up 
to a new due date, (ii) reduction or exemption from the automatic 
penalty, and (iii) reconsideration of SBA decisions on extensions and 
reductions/exemptions and would include factors that would be 
considered in the SBA approval (e.g. determination of reasonable cause 
such as natural disaster or other conditions beyond the control of 
management, that failure was not due to willful neglect, demonstration 
of modified internal procedures to comply with reporting in the future, 
etc.). SBA seeks comments on the factors SBA would consider as 
discussed in the proposed rule.
    Section 120.470--What is an SBLC? As part of the rewrite of the 
SBLC regulations, SBA is proposing to amend the title and certain 
content of current Sec.  120.470. Under the proposed rule, the subject 
matter in several provisions of Sec.  120.470 would be moved elsewhere 
in Part 120 (See Chart of Regulations Relocated in the Proposal section 
of the preamble) and some remaining provisions would be updated, 
reorganized, or expanded. Updates would include, for example: The 
addition of limited liability companies and limited partnerships as 
allowable business structures; an increase to $2 million for required 
Fidelity Bond insurance; incorporation of new definitions of 7(a) 
Lender and Intermediary into subsection (a)(2) on lending requirements; 
a statement on SBA's policy on capitalization with borrowed funds. The 
Fidelity Bond increase would update the insurance requirements 
consistent with the current maximum loan amount that SBA can guarantee. 
SBA would expand guidance, in particular, on SBA's policy against 
capitalization with borrowed funds. Borrowed funds may result in a 
weaker capital position of the SBLC due to the potential for required 
repayment. SBA would also expand guidance in the proposed subsection on 
common control--providing terms and definitions, requirements for 
divestitures, and a clearer statement on common control and 
presumptions.
    Section 120.471, 120.472, 120.473, and 120.474--SBLC minimum 
capital requirements. SBA sets SBLC capital standards pursuant to 15 
U.S.C. 650(a)(2) and 15 U.S.C. 634(b)(7) in conjunction with 15 U.S.C. 
636. Proposed Sec. Sec.  120.471 through 120.474 would govern SBLC 
minimum capital standards. Proposed Sec.  120.471 would state SBA's 
baseline minimum capital standard for SBLCs. Under proposed Sec.  
120.471, the baseline would remain at the current level stated in Sec.  
120.470(b)(3). However, SBA is considering revising the baseline 
minimum capital standard and seeks comments on the appropriate minimum 
capital level.
    Proposed Sec.  120.471 would provide more detailed guidance on 
those items that SBA would include in calculating an SBLC's capital 
under the capital requirement. The capital calculation would generally 
consist of the following items: (i) Common stock; (ii) preferred stock 
that is non-cumulative as to dividends and does not have a maturity; 
(iii) additional paid-in-capital for stock in excess of the par value; 
(iv) retained earnings; and (v) for limited liability companies and 
limited partnerships, those capital contributions that are not subject 
to repayment at any specific time, are not subject to withdrawal and 
have no cumulative priority return. The inclusion of retained earnings 
and limitations on preferred stock in the proposed rule is consistent 
with Federal Financial Institution Regulator policies.
    In some cases, SBA may determine that the baseline minimum capital 
formula may not be sufficient to support the risk associated with a 
particular SBLC's portfolio. Consequently, proposed Sec.  120.472 would 
provide that SBA may require a higher individual minimum capital 
requirement for an SBLC. Proposed Sec.  120.472 would provide examples 
of risk-related factors that SBA might consider in making that 
determination. An SBLC individual minimum capital requirement would be 
established pursuant to procedures set forth in proposed Sec.  120.473 
or through written agreement or a cease and desist proceeding as stated 
in proposed Sec.  120.474. The proposed individual minimum capital 
requirement procedures are similar to those provided by some Federal 
Financial Institution Regulators.
    Finally, the SBLC capital regulations would include a change in 
policy for approving issuances of securities (currently in Sec.  
120.470(b)(5) and proposed in Sec.  120.471(d)). The proposed 
provisions would delete the last part of

[[Page 61759]]

current Sec.  120.470(b)(5). This deletion would have the effect of 
making it a requirement for an SBLC to obtain prior written approval 
for issuances of common stock, including issuances for cash or direct 
obligations of or obligations fully guaranteed as to principal and 
interest by the United States government. This is consistent in general 
with SBA's policy of prior approval for other types of financings (e.g. 
warehouse lines, participations, and securitizations). For further 
information on proposed rule capital provisions see the Capital 
Regulation provision in the Proposal section of the preamble.
    Section 120.475--Change of ownership or control. SBA proposes to 
relocate current Sec.  120.473 governing change of ownership and 
control for SBLCs to Sec.  120.475. In addition, the proposed rule 
would shift approval authority from the D/FA to the appropriate Office 
of Capital Access official in accordance with Delegations of Authority 
to reflect changes in internal agency procedure. Further, if a transfer 
of ownership or control is subject to approval of any State or Federal 
chartering, licensing, or other regulatory authority, copies of any 
documents filed with such authority would also have to be transmitted 
to the appropriate Office of Capital Access official in accordance with 
Delegations of Authority.
    Section 120.630--Qualifications to be a Pool Assembler. SBA 
proposes to add an additional requirement applicable only to SBA 
Lenders. Specifically, SBA would require SBA Lenders seeking to become 
a Pool Assembler to have satisfactory SBA performance, as determined by 
SBA. SBA would consider an SBA Lender's Risk Rating, among other 
factors, in determining satisfactory SBA performance. The other factors 
that SBA anticipates considering may include on-site review/examination 
assessments, historical performance measures (e.g., default rate, 
purchase rate, and loss rate), loan volume to the extent that it 
impacts performance measures, and other performance related 
measurements and information. SBA considers these factors as relevant 
to the expected performance of a Pool Assembler. SBA is revising this 
regulation to incorporate SBA loan program performance for SBA Lenders/
pool assemblers into pool assembler eligibility criteria.
    Section 120.702--Limitations on where an Intermediary may operate? 
Current Sec.  120.702 provides that Microloan Intermediaries may 
operate in only one state unless SBA determines that it would be in the 
best interests of the small business community for it to operate across 
state lines. The proposed rule would shift approval authority for 
expansions from the D/FA to the appropriate Office of Capital Access 
official in accordance with Delegations of Authority to reflect changes 
in internal agency procedure.
    Section 120.710(c) and (d)--Microloan Intermediary Loan Loss 
Reserve Fund (LLRF) approval authority. SBA proposes amending Sec.  
120.710(c) and (d) to shift approval authority for a reduction in the 
LLFR calculation from the D/FA to the appropriate Office of Capital 
Access official in accordance with Delegations of Authority. This 
revision would reflect changes in internal agency procedure.
    Sections 120.710(e)(1), 120.812, 120.820, 120.839, and 120.841--
Microloan Intermediary LLRF reduction and selected CDC authority 
criteria. SBA proposes amending Sec. Sec.  120.710(e)(1) (Microloan 
Intermediary reduction of LLRF); 120.812 (Extension of CDC probationary 
periods and permanent CDC status); 120.820 (Requirements for CDC 
certification and operation); 120.839 (Outside area of operation loan 
approval); and 120.841 (ALP status), to incorporate that SBA would 
consider an Intermediary's or SBA Lender's performance (which will 
include its Risk Rating, among other factors) in making determinations 
under these regulations. SBA expects to consider in determining 
satisfactory SBA performance on-site review assessments; historical 
performance measures; loan volume to the extent that it impacts 
performance measures; other performance related measurements and 
information, and contribution toward SBA mission. Proposed Sec.  
120.841(c) (ALP status) would also add the requirement that an ALP CDC 
must have a risk-based review assessment of ``acceptable'' or 
``acceptable with corrective actions required'' to be considered for 
ALP status.
    Section 120.826--Basic requirements for operating a CDC. The 
proposed rule adds to Sec.  120.826 internal control requirements 
similar to those proposed for SBA Supervised Lenders. Under the 
proposed rule, a CDC would be required to adopt an internal control 
policy to include maintenance of a loan review program, in conjunction 
with its SBA-guaranteed debenture financings. In addition, a CDC would 
have to have its financial statements annually audited by an 
independent certified public accountant since this would establish 
consistency in application of GAAP (a requirement) for CDC audits. 
Proposed Sec.  120.826 would also incorporate the Single Audit Act 
requirements into SBA's 504 program regulations.
    Section 120.830--Reports a CDC must submit. SBA is proposing an 
amended Sec.  120.830 to clarify the current annual report requirement 
by detailing the statements that must be included.
    Section 120.845(b)--PCLP status. Section 120.845(b) would be 
revised to provide that final determinations under this section would 
be made by the appropriate Office of Capital Access official in 
accordance with Delegations of Authority. This proposed revision would 
reflect changes in internal agency procedure.
    Section 120.853--Oversight and evaluation of CDCs. Section 120.853 
currently covers both SBA reviews and Inspector General audits of CDCs. 
The proposed rule would move the CDC review portion of the regulation 
to subpart I--Lender Oversight (proposed Sec.  Sec.  120.1000 and 
120.1050--On-site Reviews and Examinations). The proposed rule would 
retitle Sec.  120.853 ``Inspector General Audits of CDCs'' consistent 
with the revised subject matter.
    Section 120.956--Suspension or revocation of brokers and dealers. 
The proposed rule would revise Sec.  120.956 to provide that the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority (rather than the D/FA) would be responsible 
for suspensions and revocations of broker/dealer participation in the 
Secondary Market. This is consistent with SBA's Delegations of 
Authority for oversight and enforcement responsibilities. In addition, 
the proposed rule deletes the last sentence on suspension of appeal 
rights.
    Subpart I--Risk-Based Lender Oversight. SBA is significantly 
enhancing subpart I in Part 120 introduced on May 4, 2007 with SBA's 
published final rule on its Lender oversight fees. 72 FR 25194. The 
enhancements would consolidate SBA's supervision and enforcement 
authorities for SBA Lenders, Microloan Intermediaries and NTAPs. This 
consolidation would facilitate more coordinated and effective lender 
oversight.
    Section 120.1000--Risk management/Lender oversight. SBA is 
proposing a new Sec.  120.1000 entitled ``Risk management/Lender 
oversight'' that would describe lender oversight functions and the 
financial institutions supervised under the subpart.
    Section 120.1005--Bureau of PCLP Oversight. In Public Law 108-232 
(May 28, 2004), the ``Premier Certified Lenders Program Improvement Act 
of 2004'', Congress established two

[[Page 61760]]

alternative loss reserve pilot programs for certain Premier Certified 
Lenders (PCLP CDCs) loan loss reserve funds (LLRF). The public law also 
established the Bureau of PCLP Oversight in SBA to carry out such 
functions as the Administrator designates towards implementing the 
pilot programs. On May 26, 2006, SBA published a proposed rule 
governing the LLRF pilot programs. See, 71 FR 30323. Under the 
published proposed regulations, the Bureau of PCLP Oversight (Bureau) 
would approve the independent auditor that a pilot participant would 
engage to calculate its required LLRF. The Bureau would also review and 
make a determination as to a pilot participant's process for analyzing 
the risk of loss associated with the pilot participant's outstanding 
PCLP debentures (and the underlying loans) and the sufficiency of the 
LLRF. SBA anticipates publishing a final PCLP rule in the future.
    Proposed Sec.  120.1005 as contained in today's proposed lender 
oversight rule would include the Bureau of PCLP Oversight within 
subpart I, SBA's consolidated lender oversight regulations. Proposed 
Sec.  120.1005 would provide that the Bureau monitor the capitalization 
of PCLP CDC pilot participants' LLRFs, and perform other related 
functions. SBA may expand Bureau functions in the future consistent 
with SBA's statutory authority.
    Section 120.1010--SBA access to SBA Lender, Microloan Intermediary, 
and NTAP files. Proposed Sec.  120.1010 governs SBA access to SBA 
Lender, Microloan Intermediary, and NTAP files. SBA is relocating its 
current file access regulation from Sec.  120.414 and expanding this 
codification of authority to explicitly include CDCs, Microloan 
Intermediaries, and NTAPs. This provision is intended to facilitate 
lender oversight.
    Section 120.1015--Risk Rating System. SBA is proposing a new Sec.  
120.1015 entitled ``Risk Rating System.'' Under proposed Sec.  
120.1015, SBA could assign a Risk Rating to all SBA Lenders, Microloan 
Intermediaries, and NTAPs on a periodic basis (currently quarterly for 
SBA Lenders). This SBA Risk Rating process is detailed separately in 
final Federal Register notice at 72 FR 27320 (May 16, 2007). Risk 
Ratings range from one to five, with one indicating the least risk and 
five the most risk to SBA. OCRM would, from time to time, define the 
numeric definitions of acceptable and unacceptable levels of risk. For 
additional discussion of the Risk Rating System within this proposed 
r