Lender Oversight Program, 75498-75527 [E8-29197]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 73, Number 239 (Thursday, December 11, 2008)]
[Rules and Regulations]
[Pages 75498-75527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-29197]



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Part II





Small Business Administration





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13 CFR Part 120



Lender Oversight Program; Final Rule

Federal Register / Vol. 73, No. 239 / Thursday, December 11, 2008 / 
Rules and Regulations

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE14


Lender Oversight Program

AGENCY: Small Business Administration (SBA).

ACTION: Interim Final Rule with request for comments.

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SUMMARY: This interim final rule incorporates SBA's risk-based lender 
oversight program into SBA regulations. Specifically, the rule codifies 
in SBA regulations SBA's process of risk-based oversight including: 
Accounting and reporting requirements; off-site reviews/monitoring; on-
site reviews and examinations; and capital adequacy requirements. It 
also codifies SBA Supervised Lender regulation and updates SBA's 
business loan program regulations to specify program standards. 
Finally, the rule lists the types of, grounds for, and procedures 
governing SBA enforcement actions against 7(a) Lenders, Certified 
Development Companies, Microloan Intermediaries, and Non-Lending 
Technical Assistance Providers within consolidated enforcement 
regulations. SBA previously published a Notice of Proposed Rulemaking 
(NPRM) addressing all of the topics and issues covered by this interim 
final rule. SBA has already allowed for public comment, reviewed the 
comments and made changes accordingly. SBA is publishing this rule 
interim final rather than proceeding to a final rule, however, in order 
to provide the public with an additional opportunity to comment and to 
allow for any necessary adjustments as the industry moves through the 
economic cycle.

DATES: Effective Date: January 12, 2009.
    Comment Date: Comments must be received on or before March 11, 
2009.

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 Rusche, 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 discretion, of whether the 
information is CBI and, therefore, will be published or not.

FOR FURTHER INFORMATION CONTACT: Linda Rusche, Supervisory Financial 
Analyst, at (816) 426.4860 or linda.rusche@sba.gov, or Bryan Hooper, 
Director, Office of Credit Risk Management, at (202) 205.3049 or 
bryan.hooper@sba.gov.

SUPPLEMENTARY INFORMATION:

I. Background Information

SBA Mission and Lender Oversight

    In 1953, Congress established the Small Business Administration. 
The SBA's mission is to aid, counsel, and assist America's small 
businesses. Central to the mission is the intention that SBA assists 
America's small businesses' access to capital to start, continue 
operations and grow. SBA assists small businesses' access to credit 
through numerous finance programs, including but not limited to the 
section 7(a) guaranty loan program, the section 504 Certified 
Development Company debenture program, and SBA's Microloan Intermediary 
program authorized under 15 U.S.C. 636 and 15 U.S.C. 697a. In each of 
these programs Lenders/Intermediaries partner with SBA to provide 
America's small businesses with needed access to capital to support our 
nation's economy. In partnering, SBA delegates to many Lenders the 
authority to originate, service, and liquidate SBA guaranteed loans.
    Today approximately 4,500 7(a) Lenders, Certified Development 
Companies (CDCs) and Intermediaries participate in SBA lending 
programs. These Lenders hold approximately $67 billion in 7(a) and 504 
loans outstanding. As the SBA portfolio grows and SBA places increasing 
responsibility on Lenders, SBA must have the necessary controls to 
ensure that SBA Lenders' SBA operations are well managed and to avoid 
undue losses. Such controls provide for the long-term health of the 
business loan programs and sustain our ability to meet our statutory 
mission to assist small businesses in obtaining access to capital.
    Central to the establishment of lender oversight controls are their 
incorporation in SBA rules and regulations. Therefore, on October 31, 
2007, SBA published in the Federal Register SBA's Proposed Lender 
Oversight Program rule. (72 FR 61751) The proposed rule was 
comprehensive, covering 7(a) program, 504 program, and Microloan 
program monitoring and enforcement and also included updates to 
business loan program regulations consistent with the oversight 
program. On December 20, 2007, SBA published a notice extending the 
comment period for the proposed rule to February 29, 2008 allowing the 
public additional time to provide feedback. (72 FR 72264) Finally, in 
April 2008, SBA held public meetings on the proposed rule in eight 
cities nationwide to obtain a fuller understanding of the proposed rule 
comments. Those cities included: San Francisco, CA; Los Angeles, CA; 
Boston, MA; Philadelphia, PA; Atlanta, GA; Dallas, TX; Kansas City, MO; 
and Chicago, IL.

II. Comments Received and Changes Made

    SBA received approximately 220 comments on the proposed 
regulations. One hundred and eighty-seven comments were from SBA 
Lenders, including approximately 100 comments from 7(a) Lenders, 80 
comments from CDCs, six comments from SBA Supervised Lenders, and one 
comment from a Microloan Intermediary. SBA also received approximately 
20 comments from non-Lenders, including five comments from trade 
organizations and several comments from legal and accounting 
professionals, consultants, and state government organizations. The 
remaining comments were anonymous.
    Overall, both the written and oral comments were supportive of 
lender oversight. Commenters affirmed their support for lender 
oversight and recognized SBA's ``substantial progress'' in the audit 
and review process areas. Commenters agreed that many of the provisions 
of the proposed rule were indeed necessary. Comment discussions on 
individual regulations within the rule tended to be concentrated on 
certain specific topics (e.g., the Single Audit Act, specificity on 
what constitutes ``satisfactory SBA performance'', CDC annual report 
submissions, Risk Rating System implementation, and administrative 
appeals).

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    SBA appreciated the comments received and has incorporated many 
comment suggestions into this interim final rule. Among the provisions 
where SBA either adopted suggestions or made revisions are provisions 
on the Single Audit Act, criteria for satisfactory SBA performance, CDC 
annual report submissions, and Risk Rating System implementation. 
Comments pertaining to specific provisions are summarized below, along 
with any changes made to those provisions. Provisions not included in 
this analysis did not receive significant comments or, in most cases, 
received no comments; therefore they are adopted as proposed. A 
detailed discussion of the significant comments and changes made by 
section follows.
    Multiple sections--Agency Discretion. The proposed rule included 
several references to SBA's ``sole discretion'' in Agency 
determinations. Approximately 130 commenters objected to this 
terminology. It is not uncommon for SBA to provide the public notice in 
its regulations as to those matters that involve some degree of Agency 
judgment. Some commenters were concerned that these references to 
``discretion'' or ``sole discretion'' implied that the Agency could 
make determinations not subject to any form of review. That is simply 
not the case. While courts will often defer to an agency when it takes 
actions involving the use of agency discretion, such actions may not be 
arbitrary or capricious. Nevertheless, in finalizing these regulations, 
SBA deleted the reference to ``sole'' before discretion. SBA deleted 
the language because we do not believe that it imparted to the Agency 
any meaningful distinction than regular Agency discretion.
    Multiple sections--Satisfactory SBA Performance. Approximately 125 
commenters requested that SBA provide information on the factors it 
expects to consider in addition to the Risk Rating when evaluating 
satisfactory SBA performance. As stated in the preamble in the Notice 
of Proposed Rulemaking published October 31, 2007, 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. In response to the 
comments, SBA has incorporated these examples of other factors in the 
interim final rule.
    These same commenters also requested that SBA provide the relative 
weight of the factors it will consider when evaluating satisfactory SBA 
performance. SBA has considered these comments, but cannot publish the 
relative weights of the Risk Rating and any other factors it may 
consider in determining satisfactory SBA performance. Satisfactory SBA 
performance is not determined by using any arithmetic function. The 
weight attributed to any factor in evaluating a Lender's SBA 
performance may vary depending on the particular circumstances, and as 
a result may need to be determined on a case by case basis. However, 
SBA does plan to provide additional guidance in its Standard Operating 
Procedures (SOPs). In the public meetings, SBA requested comments 
regarding the consideration of contribution toward SBA mission in the 
determination of satisfactory SBA performance; however, no substantive 
comments were received. Similarly, the Agency requests comments in this 
interim final rule regarding how to best consider contribution toward 
SBA mission in the determination of SBA performance.
    Section 120.10--Definitions. In the interim final rule, SBA has 
added a definition of ``Lender Oversight Committee,'' made a technical 
change to the definition of ``Less Than Acceptable Risk Rating'' and 
has revised the definition for Non-Federally Regulated Lender to more 
closely conform to the definition in section 3(r) of the Small Business 
Act. (15 U.S.C. 632) SBA has also added a definition of ``Person,'' 
which had previously been defined with reference to Sec.  145.985 or 
its successor regulation. Section 145.985 was removed from Title 13 of 
the Code of Federal Regulations effective September 18, 2007, and now 
appears in the government-wide non-procurement debarment and suspension 
regulations at 2 CFR Parts 180 and 2700. Rather than reference a 
definition outside of 13 CFR, SBA determined to incorporate the 
definition of ``Person'' within Sec.  120.10.
    Section 120.451--PLP Status Approvals. The proposed rule provided 
that PLP status approvals and renewals would be made by the appropriate 
official in the Office of Capital Access in accordance with SBA's 
published Delegations of Authority. Some commenters requested that such 
approvals be made by the Director of Financial Assistance with input 
from the Director in the Office of Credit Risk Management and that the 
regulations include a specific statement to that effect. The foregoing 
is a matter of agency organization, procedure, and practice and as such 
it is appropriate for inclusion in the Agency's published Delegations 
of Authority. To include such specificity in the regulations would 
unduly limit the Administrator's flexibility to manage internal agency 
procedures. Therefore, SBA is adopting Sec.  120.451 as it was 
proposed.
    Sections 120.460-120.465--SBA Supervised Lender Regulation. 
Approximately 70 commenters supported greater regulatory oversight for 
SBA Supervised Lenders in general. However, a few commenters requested 
that SBA reduce the reporting requirements in proposed Sec.  120.464. 
SBA must have access to certain information to properly supervise SBA 
Supervised Lenders, and the reports required in this rule provide SBA 
with the needed information. SBA does understand the need to minimize 
Lender costs where appropriate. Consequently, the proposed rule 
provided for a waiver of certain reporting requirements for good cause. 
In addition, SBA will work to try to reduce the burden by coordinating 
with other bank regulators and by working with Lenders to accept 
electronic transmissions of the information to be collected. SBA thus 
specifically requests comments on how to further reduce such reporting 
requirements without sacrificing proper oversight.
    Section 120.463(b)--Regulatory accounting for SBA Supervised 
Lenders. The interim final rule includes a technical correction in 
Sec.  120.463(b). Specifically, SBA has clarified that SBA Supervised 
Lenders that are non-public companies must adhere to generally accepted 
auditing standards adopted by the American Institute of Certified 
Public Accountants (AICPA), and SBA Supervised Lenders that are public 
companies must adhere to the standards adopted by the Public Company 
Accounting Oversight Board (PCAOB). The PCAOB was established by the 
Sarbanes-Oxley Act of 2002.
    Section 120.472--Higher Individual Capital Requirement. SBA 
received approximately 65 comments supporting the proposed capital 
requirements for Small Business Lending Companies (SBLCs). Section 
120.472, based on current regulations of a Federal Financial 
Institution Regulator, contains six specific factors that SBA would 
consider in determining whether an SBA Supervised Lender should have a 
higher capital requirement. The commenters also suggested, however, 
that some of the factors that SBA listed in Sec.  120.472 may be overly 
broad and vague. In particular, two factors were cited by commenters as 
broad or vague: management views of senior management, and other risk 
related factors. SBA does not agree. Examples of ``management views of 
senior

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management'' and ``other risk related factors'' would include, for 
example, public announcements by management regarding the net equity 
value of the SBA Supervised Lender or the writedown of the value of the 
SBA Supervised Lender's assets. SBA expects to provide further guidance 
on the factors in the SOPs.
    Several commenters also suggested that the Lender Oversight 
Committee (LOC) rather than the Associate Administrator of Capital 
Access make the determination as to whether to require additional 
capital. The provision in proposed Sec.  120.472 is consistent with 
statutory authority, which limits delegation of authority to issue a 
capital directive to the Associate Deputy Administrator level, retitled 
as the Associate Administrator level. Because it is consistent with the 
statute, SBA is adopting the provision as proposed.
    Section 120.826--CDC Basic Requirements. SBA received a large 
number of comments on proposed Sec.  120.826, which governs basic 
requirements for operating a CDC. As detailed below, comments focused 
mainly on subparts (b), (c), and (e): internal control requirements, 
annual audited financial statements, and Single Audit Act requirements.
    Section 120.826(b)--CDC Internal Control Policy. Section 120.826(b) 
requires each CDC's board of directors to adopt an internal control 
policy. The majority of commenters recognized the need for internal 
control requirements generally, but approximately 45 commenters 
requested that SBA consider the size and organizational structure of 
CDCs when reviewing compliance, particularly compliance with separation 
of duties requirements. Some commenters stated that SBA's proposed 
internal control requirements were comparable to those of a commercial 
lending institution; they expressed concern that the requirements would 
be excessive given the generally smaller size of CDCs. In addition, 
several CDCs requested that SBA provide a sample internal control 
policy. SBA recognizes that CDCs vary in size and sophistication, and 
thus expects that CDCs' levels of internal controls will vary 
accordingly. We believe that the proposed rule allows for such 
flexibility. Consequently, the provision will be adopted in this 
interim final rule as proposed. Nevertheless, SBA will work with 
representatives of the CDC industry to identify resources to assist 
CDCs in developing internal controls appropriate for their various 
sizes and structures.
    Section 120.826(c)--CDC Annual Report Submission. In Sec.  
120.826(c), SBA proposed requiring all CDCs to submit annual audited 
financial statements. Current SBA policy does not require audited 
financial statements from CDCs with 504 loan portfolios of less than 
$20 million outstanding. Approximately 40 commenters suggested that the 
level of risk by CDCs with small portfolios did not justify the 
increase in costs associated with an annual audit. SBA has considered 
these comments and has decided to keep the audit requirement at the 
current level but retain the proposed rule's requirement for the 
qualifications of the accountant as specified in Sec.  120.826(d). 
Accordingly, the interim final rule has been revised to state that CDCs 
with portfolios of $20 million or more in outstanding 504 loans submit 
audited annual financial statements, and that CDCs with portfolios of 
less than $20 million submit annual financial statements reviewed by an 
independent CPA.
    Section 120.826(e)--Single Audit Act. SBA received approximately 70 
comments from CDCs concerning proposed Sec.  120.826(e), which would 
have required not-for-profit CDCs to comply with the audit requirements 
contained in the Single Audit Act (31 U.S.C. 7501 et seq.) and OMB 
Circular A-133, ``Audits of States, Local Governments, and Non-Profit 
Organizations.'' Commenters were overwhelmingly opposed to this 
provision. Commenters argued that the Single Audit Act should not be 
applicable to CDCs given the unique nature of the program funding, that 
the audit would be duplicative of SBA's on-site CDC reviews, and that 
the requirement would impose significant increases in annual audit 
costs. CDCs also anticipated difficulty in procuring auditors qualified 
to perform Single Audit Act audits, particularly for CDCs located in 
rural areas.
    SBA consulted with OMB throughout the comment period concerning the 
applicability of the Single Audit Act to CDCs. OMB is responsible for 
providing interpretations of Single Audit Act policy requirements 
(stated in OMB Circular A-133), and assistance to Federal agencies to 
ensure uniform, effective, and efficient implementation of the Single 
Audit Act. In light of the more than 25 year successful history of the 
CDC program, the unique nature of the program funding and the CDCs' 
administrative and financial role in it, and the comprehensive 
oversight SBA currently performs on CDCs for program compliance and 
results, OMB and SBA have determined that the Single Audit Act does not 
apply to the CDC program. SBA's current oversight includes: Annual CDC 
financial reporting, quarterly off-site monitoring of all CDCs' 
portfolio performance and risk, more detailed on-site reviews of all 
larger CDCs and certain smaller CDCs identified as high-risk, 
corrective action plans for SBA findings from on-site reviews, and 
regular program reviews on CDC status and program compliance. This 
determination applies only to SBA's CDC program; CDCs that participate 
in other Federal programs may still be subject to the Single Audit Act 
as a result of their activities in those programs. Because the Single 
Audit Act does not apply to SBA's CDC program, proposed Sec.  
120.826(e) is deleted in the interim final rule.
    Section 120.830--CDC Annual Report Deadline. SBA received 
approximately 75 comments regarding proposed Sec.  120.830(a), which 
would have required each CDC to submit its annual report to SBA within 
90 days after the end of the CDC's fiscal year. Commenters were 
unanimously opposed to this proposed provision, and recommended that 
SBA keep the current report submission deadline of 180 days. Some 
commenters stated that accelerating the report submission deadline 
would create a financial hardship, particularly for smaller rural CDCs 
with limited access to auditors. Other commenters noted that some CDCs 
have a lengthy and complex audit process because they are part of 
larger organizations, such as councils of governments. Numerous CDCs 
stated that their fiscal year ends in September, which is a very busy 
time for CPA firms. Finally, many commenters noted that SBA had a 90 
day reporting deadline prior to 2003, when the deadline was extended to 
180 days in order to permit CDCs more time to provide financial 
statements with the required level of review. SBA has considered these 
comments, and has decided not to adopt proposed Sec.  120.830(a); the 
CDC annual report submission deadline will remain unchanged at 180 
days. In addition, Sec.  120.830(a) has been revised to reflect the 
different reporting requirements for audited and reviewed financial 
statements.
    Section 120.1005--Bureau of PCLP Oversight. Section 120.1005, which 
establishes the Bureau of PCLP Oversight, received a large amount of 
support from commenters. SBA received approximately 50 comments in 
favor of the proposed provision. In addition, approximately 55 
commenters suggested that the Bureau of PCLP Oversight conduct random 
audits of loans submitted by PCLP CDCs to ensure compliance with SBA 
policies and regulations, particularly environmental and appraisal 
report documentation

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requirements. SBA has reviewed these comments and is considering 
conducting audits of PCLP CDC loans through the Bureau of PCLP 
Oversight or otherwise. Section 120.1005 is adopted as proposed.
    Section 120.1015--Risk Rating System. SBA received approximately 
170 comments on proposed Sec.  120.1015, which incorporates SBA's Risk 
Rating System into the loan program regulations. Commenters questioned 
the incorporation of the Risk Rating System into SBA's regulations at 
this time, citing concerns regarding the effectiveness and 
appropriateness of using this sophisticated tool developed by private 
sector leaders to evaluate business loan portfolios. Many commenters 
also noted that the Risk Rating System has not yet been through an 
entire economic cycle. In addition, approximately 100 commenters 
requested that SBA obtain third-party validation of the Risk Rating 
System.
    These commenters also objected to incorporation of the Risk Rating 
System into certain specific provisions of the proposed regulations. 
Multiple proposed provisions contained the requirement that a Lender 
have or maintain ``satisfactory SBA performance,'' which SBA proposed 
to determine by considering the Lender's Risk Rating, among other 
factors. Specifically, SBA proposed to incorporate ``satisfactory SBA 
performance,'' and thus the Risk Rating, in the following proposed 
provisions: Sec.  120.410(a), Requirements for all participating 
Lenders; Sec.  120.424(b), What are the basic conditions a Lender must 
meet to securitize?; Sec.  120.433(b), What are the SBA's other 
requirements for sales and sales of participating interests?; Sec.  
120.434(c), What are SBA's requirements for loan pledges?; Sec.  
120.451(b)(3), How does a Lender become a PLP Lender?; Sec.  
120.630(a)(5), Qualifications to be a Pool Assembler; Sec.  
120.710(e)(1), What must an Intermediary demonstrate to get a reduction 
in Loan Loss Reserve Fund?; Sec.  120.812(c), Probationary period for 
newly certified CDCs; Sec.  120.820(c), CDC non-profit status and good 
standing; Sec.  120.839, Case-by-case application to make a 504 loan 
outside of a CDC's Area of Operations; and Sec.  120.841(c), 
Qualifications for the ALP.
    SBA has considered these comments. We believe, however, that the 
Risk Rating System is a reasonable internal tool for assessing 
portfolio risk, because it incorporates past, present, and future 
predictive performance to rate Lenders' relative risk to SBA and 
provides SBA with a comprehensive risk management tool previously 
unavailable to the Agency. The Risk Rating System was developed with 
the assistance of Dun & Bradstreet and Fair Isaac, private industry 
leaders in predictive modeling and risk rating systems. These companies 
have performed annual validation testing at both the loan and Lender 
level since 2004. In addition to the validation testing, SBA has 
provided to Lenders and trade groups data demonstrating the correlation 
between the Risk Ratings and portfolio risk factors in various 
presentations given between May and September, 2008. We note that SBA 
may amend the Risk Rating System from time to time. Any such amendments 
will be published in the Federal Register. We also note that a Lender's 
Risk Rating will be used in combination with other factors when 
evaluating satisfactory SBA performance and that SBA does not expect 
that the Risk Rating would be the sole basis for taking enforcement 
action. The relevant provisions of this interim final rule have been 
revised to reflect this expectation. Conversely, a good Risk Rating 
does not preclude SBA from taking actions based on other factors or 
grounds. Therefore, SBA is adopting Sec.  120.1015 as proposed.
    Section 120.1050--On-Site Review/Exam Responses. SBA received seven 
comments on Sec.  120.1050, which describes SBA's on-site examinations 
of SBA Supervised Lenders and on-site reviews of the SBA operations of 
SBA Lenders. Two commenters stated that SBA on-site reviews are 
duplicative of the safety and soundness reviews already conducted by 
Federal regulators. One of these commenters stated that its Federal 
financial regulator examines the Lender's SBA portfolio for safety and 
soundness, although the regulator does not look at compliance with SBA 
program regulations and policies. SBA has considered these comments, 
but believes that its on-site reviews and examinations are a critical 
component of Lender oversight, and are necessary to ensure the 
continued integrity of SBA's lending programs. SBA notes that other 
Federal credit guaranty agencies perform similar reviews of their 
lenders and the management of the agencies' guaranteed loan portfolios. 
Furthermore, to SBA's knowledge, the Federal financial regulators do 
not perform an equivalent review of SBA loan portfolios during safety 
and soundness reviews. SBA will, however, continue to make efforts to 
coordinate its oversight with other bank regulators. If SBA is able to 
leverage the efforts of Federal bank regulators in the future, it could 
lead to a more streamlined review by SBA. Therefore Sec.  120.1050 
remains unchanged from the proposed regulation.
    Section 120.1060--Confidentiality of Reports, Risk Ratings and 
Related Confidential Information. SBA received approximately 50 
comments on Sec.  120.1060, SBAs confidentiality provision for Risk 
Ratings, review and examination reports, and other related confidential 
information. Although all of the commenters supported confidentiality 
requirements generally, some commenters thought that the requirements 
in proposed Sec.  120.1060 were too restrictive. These commenters 
recommended modifying Sec.  120.1060 to allow Lenders to share 
``general information'' on their review and examination results with 
other Lenders and trade organizations in order to develop industry best 
practices. SBA has considered these comments and recognizes the 
commenters' desire to develop best practices. SBA believes, however, 
that allowing Lenders to share ``general'' review and examination 
report information is too indefinite a standard, and would increase the 
risk that confidential information would be disclosed to the public. 
Alternatively, SBA will seek to share best practices with trade 
organizations and Lenders using aggregate information obtained from 
Lender review and examination reports. Therefore, Sec.  120.1060 is 
adopted as proposed.
    Section 120.1400--Grounds for Enforcement Actions--SBA Lenders. SBA 
received comments on several provisions of proposed Sec.  120.1400, 
which details the grounds for enforcement actions against SBA Lenders; 
these comments are detailed below.
    Section 120.1400(a)--Grounds for enforcement actions--Agreement. 
Some commenters objected to 120.1400(a) because it references Form 750, 
the SBA Loan Guaranty Agreement. These commenters argued that the 
Agreement is out of date and, therefore, should not be referenced. SBA 
disagrees with the comment that the form should not be referenced. The 
Form 750 contains the Lender's agreement to participate in SBA programs 
in accordance with program rules and regulations, and every 7(a) Lender 
has executed a Form 750.
    Section 120.1400(b)--Grounds for enforcement actions--Scope. 
Approximately 85 commenters requested that Sec.  120.1400(b), which 
defines the scope of the regulation, be clarified. In response to the 
comments, SBA has revised subsection (b) for clarity.
    Section 120.1400(c)--Grounds for enforcement actions--Grounds in

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General. Subsection (c) lists twelve enforcement grounds that generally 
apply to all SBA Lenders. Some commenters were concerned that the 
enforcement grounds did not provide a degree of certainty regarding 
which enforcement grounds would trigger particular enforcement actions. 
SBA believes that enforcement actions will depend upon the particular 
facts and circumstances of individual cases; therefore SBA cannot be 
constrained to a one size fits all approach to application of 
enforcement actions. However, SBA does plan on providing additional 
enforcement action guidance through SBA's SOPs.
    SBA also received approximately 90 comments on Sec.  
120.1400(c)(4), which describes failure to lend in a commercially 
reasonable and prudent manner, evidence of which may include, but is 
not limited to, the SBA Lender having a repeated Less Than Acceptable 
Risk Rating or an on-site review/examination assessment which is Less 
Than Acceptable. Commenters requested that SBA specify how many low 
Risk Ratings a Lender could be assigned before it would be subject to 
an enforcement action. Commenters also stated that an enforcement 
action should not be taken based solely on a single Less Than 
Acceptable on-site review/examination assessment. SBA has considered 
these comments. The Less Than Acceptable Risk Ratings or on-site 
review/examination assessments reflect the particular facts and 
circumstances of individual cases. Sometimes the risk can be addressed 
solely through Lender corrective actions; sometimes other action must 
be taken. SBA must have the flexibility to take actions appropriate to 
the particular risk evidenced by Less Than Acceptable Risk Ratings and/
or on-site review/assessments. Therefore, SBA is reluctant to set a 
specific number of low risk ratings or Less Than Acceptable on-site 
assessments to trigger enforcement action. However, as noted above, SBA 
does not anticipate using the Risk Rating System as the sole basis for 
taking enforcement actions against SBA Lenders, and has modified Sec.  
120.1400(c)(4) accordingly.
    These same commenters also opposed the use of ``repeated Less Than 
Acceptable Risk Ratings'' as a possible enforcement ground in Sec.  
120.1400(c)(9). SBA has considered these comments, and Sec.  
120.1400(c)(9) has also been modified to conform to the change in Sec.  
120.1400(c)(4).
    Finally, SBA received approximately 90 comments on proposed Sec.  
120.1400(c)(6), which gives SBA authority to take possible enforcement 
action if it determines that a Lender is ``engaging in a pattern of 
uncooperative behavior'' or taking an action that is ``detrimental to 
an SBA program, that undermines management or administration of a 
program, or that is not consistent with standards of good conduct.'' 
This language was based on current language in the CDC regulations. 
Commenters stated that this provision is overly broad, and requested 
that SBA give examples of the types of behavior that might trigger an 
enforcement action under this provision. One commenter also requested 
that, prior to taking enforcement action against a Lender, SBA provide 
notice to the Lender explaining why the Lender's actions were 
uncooperative, detrimental to the program, undermined SBA's management 
of the program, or were not consistent with standards of good conduct 
prior to enforcement. In response, SBA is providing examples of the 
types of behavior that may trigger this provision. Those behaviors 
include, but are not limited to, refusal to implement actions to 
correct material weaknesses found in on-site reviews/assessments, and 
failure to carry out an approved plan to correct material weaknesses 
identified in an on-site review/assessment before a new on-site review/
assessment is conducted. As for the additional notice, SBA has added 
language to the interim final rule providing such notice prior to 
enforcement.
    Section 120.1400(d)(5)--Grounds for enforcement actions--Grounds 
required for certain enforcement actions against SBA Supervised Lenders 
(except Other Regulated SBLCs) or, as applicable, Other Persons--For 
transfer of loan portfolio. SBA has made a clarification to Sec.  
120.1400(d)(5)(i) consistent with statutory authority. 15 U.S.C. 
650(i). Specifically, we revised the ``and'' in subparagraph ``i'' to 
read as an ``or''.
    Section 120.1425(c)(2)--Grounds for enforcement actions--
Intermediaries participating in the Microloan Program and NTAPs--
Grounds in general. Section 120.1425(c)(2)(viii) has been modified to 
conform with the changes in Sec.  120.1400(c)(4) and (9) and reflect 
that SBA does not anticipate using the Risk Rating System as the sole 
basis for taking enforcement actions against Intermediaries or NTAPs.
    Section 120.1500(a)(1)--Portfolio Guaranty Dollar Limit. SBA 
received several comments requesting clarification of Sec.  
120.1500(a)(1), SBA's proposed portfolio guaranty dollar limit 
enforcement action. The commenters requested that SBA clarify whether 
the guaranty limit applies to the total dollars of SBA loans or 
debentures guaranteed for an SBA Lender, or whether it restricts the 
maximum dollar amount on individual loans or debentures a Lender may 
make. SBA intended Sec.  120.1500(a)(1) to apply only to the total 
dollars of SBA loans or debentures guaranteed for an SBA Lender. SBA is 
adopting Sec.  120.1500(a)(1) as proposed.
    Section 120.1500(a)(3)--Continuing Guaranty. Approximately 80 
commenters supported Sec.  120.1500(a)(3), which provides that the 
suspension or revocation of a Lender from an SBA program will not 
invalidate a guaranty previously provided by SBA. These commenters 
further recommended that this provision be moved to the introductory 
paragraph to Sec.  120.1500, so as to apply to all enforcement actions, 
not just non-immediate suspensions or revocation. SBA has considered 
these comments, and agrees that the provisions should apply to all 
enforcement actions. We have therefore moved the provision to the 
beginning of the text, and clarified that an enforcement action, by 
itself, would not invalidate a guaranty previously provided by SBA.
    Section 120.1500(b)--Secondary Market Suspension. SBA received 
approximately 90 comments opposing secondary market suspension as an 
available enforcement action. As stated in the proposed rule preamble, 
SBA is including this enforcement provision as a means of limiting an 
SBA Lender's risk exposure to SBA and the Secondary Market. Commenters 
contended that many Lenders are reliant on access to the Secondary 
Market in order to continue their 7(a) lending activities, and that 
such a suspension or revocation ``is tantamount to a program suspension 
or termination.'' Many commenters also questioned the need for SBA to 
provide additional protection to the Secondary Market, because 
``purchasers in the Secondary Market conduct extensive due diligence.'' 
Finally, numerous commenters questioned SBA's need to protect itself 
from an SBA Lender's risk exposure, noting that the Agency has ``very 
little risk of loss'' because Lenders are ultimately responsible for 
their loans if SBA determines the need to repair or deny liability.
    SBA has considered these comments, and recognizes that suspension 
or revocation of authority to sell or purchase loans or certificates in 
the Secondary Market could have very serious implications for certain 
7(a) Lenders. Nonetheless, SBA has a responsibility to protect the 
integrity of the Secondary Market, whose operation is contingent upon 
SBA's full faith and

[[Page 75503]]

credit guaranty. SBA must also mitigate the risk to the Agency. SBA 
disagrees with the contention that the Agency has little risk of loss 
due to the Lender's responsibility to SBA in the case of a repair or 
denial of liability. If SBA has previously honored its guaranty to a 
holder in the Secondary Market, SBA is subject to risk that it will not 
be able to recoup funds from the SBA Lender, particularly if the SBA 
Lender is insolvent. Furthermore, for some SBA Lenders, Secondary 
Market Suspension may be preferable as an alternative to suspension or 
revocation of the SBA Lender's authority to participate in the SBA 
program. Therefore, Sec.  120.1500(b) is adopted in the interim final 
rule as proposed.
    Section 120.1600 (a)(3)--Enforcement Procedures--SBA Timeframes. 
Approximately 90 commenters requested that SBA give a definitive time 
period for rendering a decision in enforcement actions in order to 
allow the affected Lender to plan its SBA operations with some degree 
of certainty. The majority of these commenters recommended that SBA 
adopt a 60-day response time. Commenters also requested that SBA adopt 
an Agency response deadline of 30 days instead of the 90-day deadline 
proposed by SBA on immediate suspensions.
    SBA recognizes the need for SBA Lenders, Intermediaries, and NTAPs 
(non-lending technical assistance providers) to plan their future SBA 
operations with certainty. SBA also recognizes the need for the Agency 
to provide an expeditious response, particularly when an immediate 
suspension has been put into effect. But SBA must balance this against 
the time needed to make the appropriate decision. SBA will make every 
effort to issue final enforcement decisions as quickly as possible and 
has decided to adopt a 30-day deadline (unless SBA provides notice that 
it requires additional time) for the final decision in the case of an 
immediate suspension and a 90-day deadline (unless SBA provides notice 
that it requires additional time) for final decisions for all other 
enforcement actions. We note that consideration of additional 
information (e.g., information provided by the Lender subsequent to 
objection) may extend the deadline accordingly.
    Section 120.1600(a)(5)--Enforcement Procedures--Administrative 
Appeals Process for SBA Lenders, Intermediaries, and NTAPs. In general, 
proposed Sec.  120.1600(a)(5) provided SBA Lenders, Intermediaries, and 
NTAPs streamlined enforcement appeal rights direct to Federal district 
court rather than requiring that Lenders first go through SBA's 
administrative appeals process. Many commenters requested that SBA 
incorporate an administrative appeals process within SBA's enforcement 
procedures framework citing cost concerns.
    SBA has considered these comments and considered the possibility of 
incorporating an administrative appeals process for enforcement 
decisions, including to the Office of Hearings and Appeals (OHA). 
However, SBA has concluded that a direct appeal to Federal district 
court will, on balance, be a more efficient and cost-effective process 
for Lenders to utilize. For example, Lenders would be able to seek 
immediate injunctive relief from the Federal district courts, whereas 
OHA does not have the authority to issue injunctive relief. The Lender 
could lose valuable time and incur greater expense if it had to pursue 
its appeal through OHA before it could seek injunctive relief from the 
Federal courts. In reaching its conclusion, SBA has also considered the 
fact that SBA's enforcement decision will have been based on multiple 
levels of administrative review, including in most cases the 
independent Lender Oversight Committee. In addition, the extensive due 
process provisions of Section 1600 include notice and an opportunity to 
object.
    Section 120.1600(b)--Enforcement Procedures--Administrative Appeals 
Process for SBA Supervised Lenders, Management Officials and Other 
Persons. SBA has made technical changes to Sec.  120.1600(b)(1)(i) and 
(b)(3)(i) to clarify that administrative hearings under these 
subparagraphs, which are specifically required by the Small Business 
Act, will be conducted by SBA's Office of Hearings and Appeals in 
accordance with 15 U.S.C. 650 and applicable sections of Part 134 of 
SBA regulations.

III. Chart of Regulations Relocated

    Some of the regulations promulgated in this interim final rule were 
relocated from other sections within Part 120. 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. See below chart of regulations relocated.

                     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.

[[Page 75504]]

 
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,
                                                     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).
------------------------------------------------------------------------

IV. Justification for Interim Final Rule

    SBA finds that good cause exists to publish this rule as an interim 
final rule. As discussed above, SBA previously published a Notice of 
Proposed Rulemaking (NPRM) addressing all of the topics and issues 
covered by this interim final rule. SBA has already allowed for public 
comment, reviewed the comments and made changes accordingly. SBA has 
determined that the changes made in this rule are a logical outgrowth 
of the proposed rule and the comments received on the proposed rule. 
Procedurally, SBA could therefore issue a final rule; however, SBA is 
publishing this rule interim final rather than proceeding to a final 
rule in order to provide the public with an additional opportunity to 
comment.
    SBA has a statutory obligation to implement a Lender Oversight 
Program and it is critically important during the current financial 
crisis that a proper oversight program is in place. Any delay in 
promulgation could be prejudicial to the integrity of the program and 
could potentially result in additional losses to the American 
taxpayers. SBA is requesting additional public comments in order to 
further shape the program. Publishing this rule as interim final allows 
for any needed adjustments as the industry moves through the economic 
cycle.
    SBA invites comments from all interested members of the public. 
These comments must be received on or before the close of the comment 
period noted in the DATES section of this interim final rule. SBA may 
then consider these comments in making any necessary revisions to these 
regulations.
    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 a Regulatory Impact Analysis, as set forth below.

A. Regulatory Objective of the Proposal

    This rule incorporates SBA's risk-based lender oversight program 
into SBA regulations. Specifically, the rule codifies in 13 CFR 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 rule also 
consolidates and lists the types of, grounds for, and procedures 
governing SBA enforcement actions within Subpart I. This rule is a 
necessary first step to provide coordinated and effective oversight of 
financial institutions that originate and manage SBA guaranteed loans.
    These regulatory changes will improve SBA's oversight and 
management of the 7(a), 504, Microloan and NTAP programs. SBA believes 
that there are no viable alternatives to these changes that would 
produce similar positive results without imposing an additional burden 
on the SBA or the public.

B. Baseline Costs

1. Baseline Costs for 7(a) Lenders (Excluding SBA Supervised Lenders)
    All 7(a) Lenders, excluding SBA Supervised Lenders, are currently 
required to be supervised and examined by a state or Federal regulatory 
authority, satisfactory to SBA. This is a cost already borne by these 
7(a) Lenders. In addition, these 7(a) Lenders are subject to SBA's 
supervisory and enforcement provisions contained in the business 
programs portion of Part 120.
    The estimated annual baseline costs to the Federal government for 
7(a) Lenders' oversight is provided for in the existing OCRM 
infrastructure.
2. Baseline Costs for SBLCs
    Each SBLC is currently required to submit audited financial 
statements within three months after the close of each fiscal year and 
interim financial reporting when requested by SBA. SBA also currently 
requires that SBLCs submit a report on any legal or administrative 
proceeding, by or against the SBLC, or against an officer, director or 
employee of the SBLC for an alleged breach of official duty; copies of 
any report furnished to its stockholders; a summary of any changes in 
the SBLC's organization or financing; notice of capital impairment; and 
such other reports as SBA may require from time to time by written 
directive. The collection of the information and reports referenced 
here is largely already maintained by the SBLCs for operational and 
financing purposes. It is estimated that preparation and submission of 
this information takes about 80 hours annually for each SBLC. The hour

[[Page 75505]]

burden is an SBA estimate based on inquiries made to selected SBLCs. 
The estimate of the total annual cost burden is based on an average 
annual outside audit fee of $8,000 per respondent, plus an additional 
$2,000 per respondent for staff involvement in the independent audit 
engagement and SBA reporting (approximately 15 hours of CFO time at a 
$100 hourly rate plus 15 hours of administrative profession time at a 
$30 hourly rate, rounded). This total cost burden is estimated at 
$140,000 for 14 SBLCs. SBA has reduced this figure by $20,000 to 
$120,000 to adjust for reduced costs for smaller SBLCs. The estimated 
annual cost to the Federal government for this information collection 
is approximately 8 hours of Financial Analyst time at $55 per hour, or 
$6,160 annually for all 14 SBLCs. Any additional estimated indirect 
annual cost to the Federal government for oversight of these SBLCs is 
provided for in the existing OCRM infrastructure. During the comment 
period, one comment was received questioning whether the Baseline Costs 
for SBLCs were estimated too low. However, no information was provided 
regarding which specific component(s) of the estimate were of concern. 
SBA considers the information it received directly from selected SBLCs 
during development of the rule to be most applicable; therefore, the 
SBLC baseline costs estimate remains unchanged from the proposed rule.
3. Baseline Costs for NFRLs
    No direct costs are currently incurred by NFRLs for SBA oversight 
and related functions discussed in this rule. The estimated annual cost 
to the Federal government for oversight of these NFRLs is provided for 
in the existing OCRM infrastructure.
4. Baseline Costs for CDCs
    Each CDC is currently required to submit to SBA an annual report 
within 180 days of the fiscal year end, including financial statements 
of the CDC and any affiliates or subsidiaries and such interim reports 
as SBA may require. The collection of the information and reports 
referenced here is largely already maintained by the CDCs for 
operational purposes. SBA has estimated that preparation and submission 
of this information takes approximately 28 hours annually for each CDC, 
at an average cost of $30 per hour for staff compilation, which 
computes to a cost of $840 per CDC, and a total of 7,560 hours for all 
CDCs. This total cost burden is $226,800 (7,560 hours x $30) for the 
approximately 270 CDCs. The estimated annual cost to the Federal 
government for this information collection is approximately 1 hour of 
financial analyst time per CDC or 270 hours total for all CDCs, at a 
cost of $55 per hour. Estimated annual Federal cost burden therefore is 
estimated at $14,850 (270 hours x $55). The remaining estimated annual 
cost to the Federal government for oversight of CDCs is provided for in 
the existing OCRM infrastructure.
5. Baseline Costs for Microloan Intermediaries and NTAPs
    Microloan Intermediaries and NTAPs currently incur no direct costs 
for oversight and related functions as discussed in this rule. The 
estimated annual cost to the Federal government for oversight of these 
Microloan Intermediaries and NTAPs is currently provided for in the 
existing OFA infrastructure.

C. Benefits and Costs of the Rule

1. Benefits and Costs of the Proposed Rule to all SBA Lenders, 
Microloan Intermediaries and NTAPs
    The rule benefits SBA Lenders, Microloan Intermediaries, and NTAPs 
by generally consolidating oversight authority and responsibility 
within one SBA office, OCRM. These institutions also benefit from 
knowledge of established and further defined programmatic standards, 
enforcement grounds, ranges of enforcement actions and procedures for 
supervision and enforcement actions as set forth in the rule. They 
further benefit from performance feedback to the extent it assists them 
in improving their SBA operations and minimizing losses.
    While there are specific benefit and costs issues for specific 
categories of Lenders as detailed below, all SBA Lenders, Microloan 
Intermediaries and NTAPS will incur some relatively minimal costs 
related to the rule's incorporation of review/exam reporting (e.g., 
self-assessments and related reporting, corrective action plans). Self-
assessments and review/exam reporting are a timely and cost effective 
means of overseeing and monitoring the SBA performance and compliance 
of SBA Lenders, Microloan Intermediaries and NTAPs.
2. Benefits and Costs of the Rule to 7(a) Lenders (Other Than SBLCs and 
NFRLs)
    No additional direct costs will be incurred by 7(a) Lenders for 
oversight as contained in the rule. No additional reporting or direct 
costs will be incurred by 7(a) Lenders with the rule's implementation.
    SBA received approximately 90 comments requesting that SBA include 
cost estimates of appealing proposed enforcement actions to a Federal 
district court rather than SBA's Office of Hearings and Appeals (OHA). 
The Agency does not currently have data that would enable it to provide 
a reasonably accurate estimate of Lenders' costs for appealing such 
actions through the judicial process. SBA is also unable to extrapolate 
from data on the costs of appealing to OHA because although that 
process is currently available, the process has been used rather 
infrequently and any such extrapolation would be unreliable. SBA is 
willing to consider comments from Lenders that would enable the agency 
to obtain the relevant costs data.
    SBA also received one request for estimates of the costs that could 
be incurred in connection with possible enforcement actions included in 
Sec.  120.1500 of the interim final rule. SBA is unable to estimate the 
cost of appealing or responding to potential enforcement actions SBA 
might take, because the type of enforcement action and steps necessary 
to correct a deficiency will vary based on the specific deficiency and 
characteristics and situation of the particular Lender. SBA is willing 
to consider comments from Lenders that would enable the agency to 
obtain the relevant costs data.
3. Benefits and Costs of the Rule to SBLCs
    The rule provides for more developed internal control requirements 
and adoption of a formal capital plan. It requires filing of (i) 
quarterly condition reports (including financial statements); (ii) 
reports of changes in financial condition; (iii) notice of change of 
auditor; (iv) capital restoration plans; and (v) Other Regulated SBLC 
Reports, with certifications as to accuracy or compliance (including 
capital compliance) as applicable. Because internal controls, formal 
capital plans, and quarterly financial statements are likely already 
maintained by the SBLCs for operational purposes, there is little or no 
additional cost for these new requirements. Preparation and submission 
of all the additional reports and the new recordkeeping takes 
approximately 3 hours annually of additional CFO time at a $100 hourly 
cost, plus 3 hours annually of additional administrative professional 
time at a $30 hourly cost. Therefore, the total additional cost burden 
is $5,460 ($390 x 14) for 14 SBLCs.
4. Benefits and Costs of the Rule to NFRLs
    The rule requires each NFRL to submit an annual report, including

[[Page 75506]]

audited financial statements within three months after the close of 
each fiscal year. The rule further requires that all audited financial 
report filings are prepared in accordance with Generally Accepted 
Accounting Principles (GAAP), and include an opinion from the 
independent accounting firm engaged in the audit. It also requires 
NFRLs to submit: (i) A report on any legal or administrative 
proceeding, by or against the NFRL, or against an officer, director or 
employee of the NFRL for an alleged breach of official duty; (ii) 
copies of any report/publications furnished to its stockholders; (iii) 
summaries of changes in the NFRL's organization or financial structure, 
personnel and eligibility; (iv) notice of capital impairment; (v) 
quarterly condition reports; (vi) changes in financial condition 
reports; (vii) recapitalization plans; and (viii) notice of changes in 
auditors and such other reports as SBA may require from time to time by 
written directive--with certifications as to accuracy and compliance 
(including capital compliance), as applicable. The rule requires 
adoption of a developed internal control policy, records maintenance, 
and adoption of a formal capital plan. Much of the collection of the 
information and reports referenced here, as well as the requirements 
for internal control, records retention and adoption of a formal 
capital plan are information likely already maintained by the NFRLs for 
operational, and in some instances financing, purposes. Preparation and 
submission costs are consistent with that of the baseline for the 
SBLCs, at 80 hours of external auditor time at $100 hourly rate, plus 
an additional $2,000 per NFRL for staff involvement in the independent 
audit engagement (approximately 15 hours of CFO time at a $100 hourly 
rate plus 15 hours of administrative profession time at a $30 hourly 
rate, rounded) for a total of $10,000 per NFRL. Additional reporting 
and recordkeeping requirements to the NFRLs (that which would be new to 
SBLCs as well) are at 3 hours of additional CFO time at a $100 hourly 
rate plus 3 hours of additional administrative professional time at a 
$30 hourly rate ($390 per NFRL). Since there are no current baseline 
costs to NFRLs, the total additional cost burden for this rule for the 
58 NFRLs is $602,620 ($10,390 x 58 NFRLs).
5. Benefits and Costs of the Rule to CDCs
    Approximately 70 commenters requested that SBA include an estimate 
for the cost of CDCs' compliance with the Single Audit Act 
requirements. SBA and OMB have determined that the Single Audit Act 
does not apply to SBA's 504 program; therefore, cost estimates of 
Single Audit Act compliance are unnecessary.
    SBA also received several comments from CDCs requesting estimates 
of the costs of implementing the internal control requirements 
contained in Sec.  120.826(b). Because most CDCs likely already 
maintain internal controls for operational purposes, and because the 
interim final rule allows for flexibility in the internal control 
structure of CDCs with varying size and sophistication, SBA estimates 
little or no additional cost for the requirements.
    SBA did not adopt the proposed 90-day annual report filing deadline 
or the proposed requirement that all CDCs obtain audited financial 
statements in the interim final rule; ther