Small Business Size Standards; Temporary Alternative Size Standards for 7(a) Business Loan Program, 20577-20580 [E9-10359]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 74, Number 85 (Tuesday, May 5, 2009)]
[Rules and Regulations]
[Pages 20577-20580]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-10359]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AF96


Small Business Size Standards; Temporary Alternative Size 
Standards for 7(a) Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Interim final rule with request for comments.

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SUMMARY: The U.S. Small Business Administration (SBA) is temporarily 
amending the size eligibility criteria for loan assistance provided 
under its 7(a) Business Loan Program. This rule temporarily establishes 
the same alternative small business size standard that applies to SBA's 
Certified Development Company (CDC) Program. The U.S. Congress passed 
and the President signed the American Recovery and Reinvestment Act of 
2009 (Recovery Act). The purposes and goals of the Recovery Act are to 
promote economic recovery and to preserve and create jobs. SBA prepared 
this rule as an interim final rule, effective immediately, because it 
will help alleviate the pressing needs of many small businesses for 
financial assistance in the current economic environment.

DATES: Effective Dates: This rule is effective on May 5, 2009.
    Comment Date: Comments on the interim final rule must be received 
on or before August 3, 2009.
    Applicability Dates: This rule applies to all 7(a) loan 
applications approved from May 5, 2009 through September 30, 2010.

ADDRESSES: You may submit comments, identified by [RIN number 3245-
[INSERT] by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Carl J. Jordan, Acting Division Chief for Size 
Standards, U.S. Small Business Administration, 409 3rd Street, SW., 8th 
floor, Washington, DC 20416.
     Hand Delivery/Courier: Carl J. Jordan, Acting Division 
Chief for Size Standards, 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 Carl J. Jordan, Acting Division 
Chief for Size Standards. 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 the final 
determination, in its discretion, of whether the information is CBI 
and, therefore, will not be published.

FOR FURTHER INFORMATION CONTACT: For size standard questions please 
contact Carl J. Jordan, Acting Division Chief for Size Standards, (202) 
205-6093, carl.jordan@sba.gov. For finance questions please contact 
Grady Hedgespeth, Director, Office of Financial Assistance, (202) 205-
7562, grady.hedgespeth@sba.gov.

SUPPLEMENTARY INFORMATION:

I. Background Information

    The American Recovery and Reinvestment Act of 2009 (Recovery Act), 
Public Law 111-05 was enacted on February 17, 2009, to among other 
things, promote economic recovery by preserving and creating jobs, and 
to assist those most impacted by the severe economic conditions facing 
the nation. SBA is one of several agencies that are intended to play a 
role in achieving these goals. SBA received funding and authority 
through the Recovery Act to modify its existing loan programs or 
establish new loan programs to help re-invigorate small business 
lending. SBA's actions will increase access to affordable credit for 
small businesses through the agency's 7(a) and 504 loan programs, 
unfreeze the secondary market for SBA guaranteed loans, help small 
businesses struggling with existing debt, and allow greater investment 
in high-growth small businesses. The changes to SBA's programs by the 
Recovery Act include the following: (1) Temporary reduction or 
elimination of fees in the 7(a) and 504 loan guarantee programs; (2) 
temporary authorization of up to a 90 percent guarantee on most 7(a) 
loans; (3) creation of a temporary Secondary Market Guarantee Authority 
to provide a Federal guarantee for pools of first lien 504 loans that 
are to be sold to third-party investors; (4) new authority for 
refinancing community development loans under the 504 program; (5) 
revision of the job creation goals of the 504 program; (6) 
simplification of the maximum leverage limits and aggregate investment 
limits required of Small Business Investment Companies; (7) temporary 
authority to provide loans on a deferred basis to viable small business 
concerns that have a qualifying small business loan and are 
experiencing immediate financial hardship; (8) temporary increase in 
the surety bond maximum amount; and (9) establishment of a Secondary 
Market Lending Authority to make loans to systemically important broker 
dealers in SBA's 7(a) secondary market.
    To achieve its mandate under the Recovery Act and maximize credit 
available through its programs to

[[Page 20578]]

America's small businesses, SBA is issuing this rule. SBA believes that 
in the current economic environment, many businesses that are slightly 
outside of traditional size standards to qualify for SBA guaranteed 
7(a) loans are shut out of conventional lending markets and unable to 
obtain credit. As a result of the recent disruptions in credit markets, 
commercial borrowers are on average less creditworthy than in previous 
years. Lenders have also significantly tightened credit standards for 
borrowers. These trends are evidenced by Quarterly Senior Loan Officer 
Opinion Surveys released by the Federal Reserve Board (available at 
https://www.federalreserve.gov/BoardDocs/SnLoanSurvey/default.htm) in 
July 2008, October 2008 and January 2009 and are expected to continue 
given the unprecedented disruptions in the financial system.
    Under SBA's CDC program, a business concern must meet either the 
size eligibility criteria of the 7(a) Business Loan Program, or have 
tangible net worth not in excess of $8.5 million and average net income 
after Federal income taxes (excluding any carry-over losses) for the 
preceding two completed fiscal years not in excess of $3.0 million (13 
CFR 120.301(b)). This interim final rule temporarily extends 
eligibility for 7(a) loans to businesses that meet the alternate size 
criteria for the CDC Program. SBA estimates that this will qualify an 
additional 70,000 businesses for the 7(a) Business Loan program and 
immediately help make capital available to these small businesses which 
may be affected by diminished credit opportunities as a result of the 
economy. This temporary size standard will be available from the 
Effective Date of this rule though the end of Federal Fiscal Year 2010, 
September 30, 2010.
    SBA has at least twice before taken similar measures to provide 
assistance to additional small businesses in times of economic 
uncertainty. SBA temporarily applied the CDC size standards to the 7(a) 
Business Loan Program from December 31, 1992 to March 4, 1993. SBA also 
applied the CDC size standards to 7(a) loans made through its Gulf 
Opportunity Loan Pilot program because of the urgent need for Federal 
financial assistance as a result of Hurricanes Katrina and Rita in 
2005. 70 FR 69045, November 14, 2005.
    Small businesses are critical to the nation's economy and are 
responsible for most new private sector jobs created and roughly 50% of 
the non-farm employment base. Access to capital at affordable rates and 
attractive terms is the lifeblood of a healthy small business sector. 
Today, many small business concerns, including those which may not 
qualify for 7(a) loans under the existing framework, are experiencing 
financial hardship as a result of economy. SBA believes that 
temporarily applying the CDC size standards to the 7(a) program will 
provide an effective mechanism for the Federal Government to extend 
crucial financial assistance to small businesses that cannot obtain 
financial assistance in the current economic environment. This will 
also help achieve the purposes and goals of the Recovery Act to promote 
economic recovery, create and preserve jobs, and make small business 
credit more available.

II. Analysis of Changes to Section 121

    Section 121.301(a). This section is revised to clarify that the 
alternative 7(a) business loan size standard is temporary and applies 
only for a period that coincides with two Federal Fiscal Years (FY 2009 
and FY 2010). This date also coincides with SBA Recovery Act funding 
and several new Recovery Act SBA Programs, which are available through 
September 30, 2010.
    Section 121.301(b). This section is revised to extend temporarily 
the alternate size standards currently in use for SBA's CDC program to 
small businesses seeking financial assistance under the Agency's 7(a) 
program.
    Currently, as stated above, to be eligible for assistance under the 
CDC program, a business concern must meet either the size eligibility 
criteria of the 7(a) Business Loan Program, or have tangible net worth 
not in excess of $8.5 million and average net income after Federal 
income taxes (excluding any carry-over losses) for the preceding two 
completed fiscal years not in excess of $3.0 million. Size standards 
based on the CDC net worth and net income size standard make assistance 
available to some small businesses that may be larger in size than 
business concerns that qualify for the 7(a) Business Loan Program.
    SBA recognizes that small business concerns are experiencing 
difficulty accessing credit in the current economic environment. Many 
businesses that previously qualified for conventional credit programs, 
without government assistance, are now less able to access the 
financing they need. The broader CDC alternate size standards will make 
more small businesses eligible for 7(a) loans.
    Applying the alternate net worth and net income size standards to 
the 7(a) loan program on a temporary basis during the current downturn 
in the economy provides an effective mechanism for the Federal 
Government to extend crucial financial assistance that would otherwise 
be unavailable to this segment of the small business community.

III. Justification for Publication as Interim Final Rule

    In general, SBA publishes a rule for public comment before issuing 
a final rule in accordance with the Administrative Procedure Act (APA) 
and SBA regulations. 5 U.S.C. 553 and 13 CFR 101.108. Section 
553(b)(3)(B) of the APA provides an exception to this standard 
rulemaking process, however, where an agency finds good cause to adopt 
a rule without prior public participation. The good cause requirement 
is satisfied when prior public participation is impracticable, 
unnecessary, or contrary to the public interest. Under such 
circumstances, an agency may publish an interim final rule without 
soliciting public comment.
    In enacting the good cause exception to standard rulemaking 
procedures, Congress recognized that emergency situations arise where 
an agency must issue a rule without public participation.
    The Recovery Act was enacted in response to pronounced turmoil in 
the financial markets. It promotes economic recovery by preserving and 
creating jobs and assisting those most impacted by the severe economic 
conditions facing the nation. SBA received funding and authority 
through the Recovery Act to modify existing loan programs and establish 
new loan programs to significantly stimulate small business lending. 
SBA expects these actions will increase access to affordable credit for 
small businesses through the Agency's 7(a) loan programs, unfreeze the 
secondary market for SBA guaranteed loans, help small businesses 
struggling with existing debt, and allow greater investment in high-
growth small businesses.
    To achieve the purposes and spirit of the Recovery Act, SBA's 
temporary application of the broader alternate size standards of the 
CDC Program to businesses seeking 7(a) loans will provide them with 
additional choices for obtaining financial assistance. This temporary 
alternative 7(a) loan size standard will enable businesses currently 
sharing many characteristics of existing small businesses to have 
access to SBA's flagship credit program in this time of tight credit.
    Accordingly, SBA finds that good cause exists to publish this rule 
as an interim final rule in light of the urgent need. Advance 
solicitation of comments for this rulemaking would be impracticable and 
contrary to the public

[[Page 20579]]

interest, as it would harm those small businesses that need immediate 
access to capital. Any such delay would be extremely prejudicial to the 
affected businesses.

IV. Justification for Immediate Effective Date of Interim Final Rule

    The Administrative Procedure Act requires that ``publication or 
service of a substantive rule shall be made not less than 30 days 
before its effective date, except * * * as otherwise provided by the 
agency for good cause found and published with the rule.'' 5 U.S.C. 
553(d)(3). SBA finds that good cause exists to make this final rule 
effective the same day it is published in the Federal Register.
    The purpose of the APA provision is to provide interested and 
affected members of the public sufficient time to adjust their behavior 
before the rule takes effect. For the reasons set forth above in the 
section on Justification for Publication as Interim Final Rule, SBA 
finds that good cause exists for making this interim final rule 
effective immediately, instead of observing the 30-day period between 
publication and effective date. Small businesses can receive assistance 
without delay by the immediate adoption of this rule, and no 
postponement of effective date is necessary for the public to adjust 
its behavior. The changes adopted in this rule temporarily extend the 
7(a) program to an additional group of small businesses; however, 
current programs and practices remain in place.

V. Comments Request

    Although this rule is being published as an interim final rule, SBA 
is soliciting comments from interested members of the public on all 
aspects of this rule, including the underlying policies. In particular, 
SBA would appreciate comments addressing the duration of the regulatory 
change and whether SBA should consider making the change permanent.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C., Ch. 35) and the Regulatory Flexibility Act (5 
U.S.C. 601-612)

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a ``significant'' regulatory action for purposes of 
Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. This is not a major rule, however, under 
the Congressional Review Act, 5 U.S.C. 800.

Regulatory Impact Analysis

1. Is there a need for the regulatory action?
    As discussed in the supplementary information, the current economic 
conditions warrant applying the alternate size standards of the CDC 
Program to the 7(a) Business Loan Program as a mechanism for addressing 
diminished sources of credit for the small business community. SBA's 
mission is to aid and assist small businesses through a variety of 
financial, procurement, business development, and advocacy programs. To 
assist effectively the intended beneficiaries of these programs, SBA 
must establish distinct definitions of which businesses are deemed 
small businesses. The Small Business Act (15 U.S.C. 632(a)) delegates 
to SBA's Administrator the responsibility for establishing small 
business definitions.
    For two of SBA's financial assistance programs (i.e., the CDC 
Program and the Small Business Investment Company Program), a business 
may qualify for assistance if it does not exceed the industry size 
standard for its primary industry (13 CFR 121.201) or alternate size 
standards based on net worth and net income. For certain industries, 
the alternate size standards qualify businesses larger in size than 
under the industry size standard levels.
    This regulatory action promotes the Administration's objectives. 
One of SBA's goals in support of the Administration's objectives is to 
help individual small businesses succeed through fair and equitable 
access to capital and credit. Reviewing and modifying size standards, 
when appropriate, ensures that intended beneficiaries have access to 
small business programs designed to assist them.
2. What are the potential benefits and costs of this regulatory action?
    The benefit to businesses obtaining small business status as a 
result of this interim final rule is eligibility for SBA's 7(a) 
Business Loan Program. The alternate CDC net worth and net income size 
standards do not affect other SBA programs, Federal procurement 
preference programs for small businesses, or regulatory and other 
programs of other Federal agencies that use SBA size standards. Under 
this interim final rule, approximately 70,000 additional businesses 
(primarily engaged in construction, retail trade, and services) will 
become eligible for the 7(a) Business Loan Program. The assistance 
available under the 7(a) Business Loan Program will enable newly 
eligible businesses to access credit they need to maintain or expand 
their operations during the current economic conditions.
    SBA estimates that approximately 900 additional 7(a) loans per year 
totaling $450 million could be made to these newly defined small 
businesses. Extending the 7(a) Business Loan Program to additional 
businesses is not expected to crowd-out other small businesses since 
the estimated additional loans represent approximately 3.5 percent of 
the total loan volume in fiscal year 2008 of approximately $13 billion 
and is well within the SBA authorized loan ceiling for fiscal year 
2009.
    SBA does not anticipate any significant costs to the Program as a 
result of this interim final rule. The Program is self-financing and 
existing resources are in place to sufficiently process the additional 
loans.
    Executive Order 12988: For the purposes of Executive Order 12988, 
Civil Justice Reform, SBA has determined that this rule is crafted, to 
the extent practicable, in accordance with the standards set forth in 
Sec. Sec.  3(a) and 3(b)(2), to minimize litigation, eliminate 
ambiguity, and reduce burden.
    Executive Order 13132: For the purposes of Executive Order 13132, 
SBA determined that this rule has no federalism implications warranting 
preparation of a federalism assessment.
    Paperwork Reduction Act: This interim final rule does not impose 
any additional reporting or recordkeeping requirements under the 
Paperwork Reduction Act, 44 USC Chapter 35.
    Regulatory Flexibility Act: Because the rule is an interim final 
rule, there is no requirement for SBA to prepare an Initial Regulatory 
Flexibility Act (IRFA) analysis. The Regulatory Flexibility Act (RFA), 
5 U.S.C. 601, requires administrative agencies to consider the effect 
of their actions on small entities, small non-profit businesses, and 
small local governments. Pursuant to the RFA, when an agency issues a 
rule, the agency must prepare an IRFA which describes whether the 
impact of the rule will have a significant economic impact on a 
substantial number of small entities. However, the RFA requires 
analysis of a rule only where notice and comment rulemaking are 
required. Rules are exempt from Administrative Procedure Act (APA) 
notice and comment requirements and therefore from the RFA requirements 
when the agency for good cause finds that notice and public procedure 
thereon is impracticable, unnecessary, or contrary to the public 
interest.

[[Page 20580]]

List of Subjects in 13 CFR Part 121

    Loan programs--business, Disaster assistance loans, Reporting and 
recordkeeping requirements, Small business.

0
For reasons set forth in the preamble, amend part 121 of title 13 Code 
of Federal Regulations as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for part 121 continues to read as follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637, 644, and 
662(5); and Pub. L. 105-135, sec. 401 et seq., 111 Stat. 2592.


0
2. Amend Sec.  121.301 by revising paragraphs (a) introductory text and 
(b) to read as follows:


Sec.  121.301  What size standards are applicable to financial 
assistance programs?

    (a) For Business Loans (other than for 7(a) Business Loans for the 
period beginning May 5, 2009 and ending on September 30, 2010) and for 
Disaster Loans (other than physical disaster loans), an applicant 
business concern must satisfy two criteria:
* * * * *
    (b) For Development Company programs and, for the period beginning 
May 5, 2009 and ending on September 30, 2010, for 7(a) Business Loans, 
an applicant must meet one of the following standards:
    (1) The same standards applicable under paragraph (a) of this 
section; or
    (2) Including its affiliates, tangible net worth not in excess of 
$8.5 million, and average net income after Federal income taxes 
(excluding any carry-over losses) for the preceding two completed 
fiscal years not in excess of $3.0 million. If the applicant is not 
required by law to pay Federal income taxes at the enterprise level, 
but is required to pass income through to its shareholders, partners, 
beneficiaries, or other equitable owners, the applicant's ``net income 
after Federal income taxes'' will be its net income reduced by an 
amount computed as follows:
    (i) If the applicant is not required by law to pay State (and 
local, if any) income taxes at the enterprise level, multiply its net 
income by the marginal State income tax rate (or by the combined State 
and local income tax rates, as applicable) that would have applied if 
it were a taxable corporation.
    (ii) Multiply the applicant's net income, less any deduction for 
State and local income taxes calculated under paragraph (b)(2)(i) of 
this section, by the marginal Federal income tax rate that would have 
applied if the applicant were a taxable corporation.
    (iii) Sum the results obtained in paragraphs (b)(2)(i) and 
(b)(2)(ii) of this section.
* * * * *

    Dated: April 15, 2009.
Karen G. Mills,
Administrator.
[FR Doc. E9-10359 Filed 5-1-09; 11:15 am]
BILLING CODE 8025-01-P