Dealer Floor Plan Pilot Program, 7098-7101 [2011-2836]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 76, Number 27 (Wednesday, February 9, 2011)]
[Rules and Regulations]
[Pages 7098-7101]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2836]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 120 and 121

[Docket No. SBA-2010-0015]


Dealer Floor Plan Pilot Program

AGENCY: U.S. Small Business Administration (SBA).

ACTION: Program implementation with request for comments.

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SUMMARY: SBA is introducing a new Dealer Floor Plan Pilot Program to 
make available 7(a) loan guaranties for lines of credit that provide 
floor plan financing. This new Dealer Floor Plan Pilot Program was 
created in the Small Business Jobs Act of 2010. Under the new Dealer 
Floor Plan Pilot Program, which will be available through September 30, 
2013, SBA will guarantee 75 percent of a floor plan line of credit 
between $500,000 and $5,000,000 to eligible dealers of new and used 
titleable inventory, including but not limited to automobiles, 
motorcycles, boats (including boat trailers), recreational vehicles and 
manufactured housing (mobile homes).

DATES: Effective Date: The Dealer Floor Plan Pilot Program will be 
effective on February 9, 2011, and will remain in effect through 
September 30, 2013.
    Comment Date: Comments must be received on or before March 11, 
2011.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA-2010-0015 by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Dealer Floor Plan Pilot Program Comments--Office of 
Financial Assistance, U.S. Small Business Administration, 409 Third 
Street, SW., Suite 8300, Washington, DC 20416.
     Hand Delivery/Courier: Patrick Kelley, Senior Advisor to 
the Associate Administrator, Office of Capital Access, U.S. Small 
Business Administration, 409 Third Street, SW., Washington, DC 20416.
    SBA will post all comments on  https://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at https://www.regulations.gov, please submit the 
information to Patrick Kelley, Senior Advisor to the Associate 
Administrator, Office of Capital Access, U.S. Small Business 
Administration, 409 Third Street, SW., Washington, DC 20416, or send an 
e-mail to dealerfloorplancomments@sba.gov. Highlight the information 
that you consider to be CBI and explain why you believe SBA should hold 
this information as confidential. SBA will review the information and 
make the final determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: Patrick Kelley, Senior Advisor to the 
Associate Administrator, Office of Capital Access, U.S. Small Business 
Administration, 409 Third Street, SW., Washington, DC 20416; (202) 205-
0067; patrick.kelley@sba.gov.

SUPPLEMENTARY INFORMATION: On September 27, 2010, President Obama 
signed the Small Business Jobs Act of 2010 (``Small Business Jobs 
Act'') (Pub. L. 111-240). Section 1133(a) of the Small Business Jobs 
Act authorized a new, expanded Dealer Floor Plan (DFP) Pilot Program, 
which will remain available until September 30, 2013.

1. Comments

    Although the new DFP Pilot will be effective February 9, 2011, 
comments are solicited from interested members of the public on all 
aspects of the new DFP Pilot. These comments must be submitted on or 
before the deadline for comments listed in the DATES section. The SBA 
will consider these comments and the need for making any revisions as a 
result of these comments.

2. Dealer Floor Plan Pilot Program

Overview

    Under the DFP Pilot, SBA is implementing a 7(a) loan guaranty 
product targeted to retail dealers of new and used titleable inventory, 
including but not limited to automobiles, motorcycles, boats (including 
boat trailers), recreational vehicles and manufactured housing (mobile 
homes). Key features of the new DFP Pilot are set forth below. More 
detailed guidance on the new DFP Pilot will be provided in a procedural 
guide (``DFP Procedural Guide'') that will be available on SBA's Web 
site.

Eligibility

    In addition to standard 7(a) eligibility requirements set forth in 
13 CFR part 120 and SBA's Standard Operating Procedure (SOP) 50 10 
5(C), Subpart B, Chapter 2, the eligibility of applicants for a floor 
plan line of credit guaranteed under the DFP Pilot will be limited to 
retail dealers of titleable inventory (both new and used) that is 
required to be licensed and/or registered in at least one State after 
acquisition. The inventory does not need to be licensed and/or 
registered in the State where it is sold, but it does need to be a type 
of inventory that could be licensed and/or registered in at least one 
State of the United States, as ``State'' is defined in the Small 
Business Act.
    SBA sets size standards that establish which businesses are 
considered small for certain government programs. Size standards have 
been established for types of economic activity or industry and, 
depending on the type of industry, are based on number of employees or 
revenues. In addition, SBA has established an alternative size standard 
based on the applicant's tangible net worth and net income. The Small 
Business Jobs Act established a temporary alternative size standard of 
a maximum tangible net worth of the applicant of not more than 
$15,000,000 and an average net income after Federal income taxes 
(excluding any carry-over losses) of the applicant for the 2 full 
fiscal years before the date of the application that is not more than 
$5,000,000. SBA's size regulations, including those pertaining to 
affiliation, are set out in 13 CFR part 121 and apply to the DFP Pilot. 
The applicant can qualify for a DFP line of credit using either the 
industry-based size standards

[[Page 7099]]

(set forth in 13 CFR 121.201) or the alternative size standard set 
forth in the Small Business Jobs Act.

Maximum Advance Rates and Guaranty Percentage

    Lenders will be allowed a maximum advance rate of 100% on new or 
used inventory. The maximum SBA guaranty will be no more than 75% of 
100% of the cost (manufacturer's invoice) for new inventory and 75% of 
100% of the cost or industry based wholesale book value, whichever is 
less, for used inventory.

Loan Amount and Maturity

    Loans under the DFP Pilot will have a minimum loan amount of 
$500,000 and a maximum loan amount outstanding at any one time of 
$5,000,000.
    The minimum maturity on DFP lines of credit will be 1 year. The 
maximum maturity on lines of credit approved under the DFP Pilot will 
be limited to five (5) years. The DFP Pilot is scheduled to expire on 
September 30, 2013. The expiration of the Pilot will have no effect on 
any DFP line of credit approved by SBA on or before September 30, 2013.

Use of Proceeds and Repayment

    Floor plan lines of credit guaranteed by SBA will be revolving 
lines of credit. The proceeds may be used for the acquisition of 
titleable inventory for retail sales, to refinance existing floor plan 
lines of credit with another lender or to replace existing floor plan 
lines of credit with the participating lender. Proceeds also may be 
used to pay the guaranty fee. Proceeds may not be used for any other 
purpose. If proceeds are used to replace a same institution floor plan 
line of credit and the borrower defaults on the SBA-guaranteed DFP line 
of credit within 90 days of initial disbursement, SBA may deny 
liability on its guaranty of the DFP line.
    Repayment of these lines will occur as the acquired inventory is 
sold. The payment of interest will be due monthly.

Interest Rates

    DFP lines of credit may have either a fixed or variable interest 
rate. The maximum interest rates for loans under the DFP Pilot are the 
same as those allowed by 13 CFR 120.213-120.214 for the standard 7(a) 
loan program.

Collateral

    Collateral must be secured by a first lien on all titleable 
inventory acquired with proceeds of the DFP line of credit. This lien 
may be perfected by obtaining either (i) the title to the inventory 
reflecting no prior liens, or (ii) a first perfected security interest 
in all titleable inventory acquired with any portion of the proceeds 
from the SBA-guaranteed floor plan line of credit. The floor plan line 
of credit which SBA guarantees does not have to be the sole floor plan 
line. However, if more than one floor plan line exists to any one 
dealer, then the inventory supported by each line is to be separately 
accounted for and the sale proceeds of any inventory acquired with any 
portion of the floor plan line guaranteed by SBA must be used to 
directly reduce the balance on that line. In addition, dealers with 
multiple floor plan lines for multiple product lines (manufacturers or 
new/used) with multiple floor plan creditors will be required to have 
appropriate delineated inter-creditor agreements to enable proper 
security interest perfection. The lender may take additional collateral 
in accordance with its policies and procedures governing its similarly-
sized, non-SBA guaranteed floor plan lines of credit.

Allowable Fees

    The SBA guaranty fee and the lender's annual service fee set forth 
in 13 CFR 120.220 apply to loans approved under this pilot program. For 
loans approved under the DFP Pilot, lenders may charge the borrower the 
same fees allowed under SBA's 7(a) loan program with the exception of 
the extraordinary servicing fee.
    For loans approved under the DFP Pilot, SBA will allow lenders to 
charge an extraordinary servicing fee that is higher than the 2 percent 
allowed in 13 CFR 120.221(b), provided that the fee charged is 
reasonable and prudent based on the level of extraordinary effort 
required to adequately service the floor plan line. In addition, if the 
lender currently provides floor plan financing to its customers, the 
lender may not charge higher fees for its SBA-guaranteed floor plan 
lines of credit than it charges for its similarly-sized, non-SBA 
guaranteed floor plan lines of credit. SBA's guaranty does not extend 
to extraordinary servicing fees and, at time of guaranty purchase, SBA 
will not pay any portion of such fees.

Secondary Market and Participating Lender Financings or Other 
Conveyances

    SBA loan guaranties made under the DFP Pilot may not be sold under 
Agency regulations at 13 CFR part 120, Subpart F--Secondary Market.
    SBA loan guaranties approved under the DFP Pilot may be included in 
any participating lender financings or other conveyances, including 
securitizations, participations and pledges, provided the lender 
complies with 13 CFR 120.420 through 120.435.

Eligible Lenders

    All SBA lenders with an executed Loan Guaranty Agreement (SBA Form 
750) may participate in the DFP Pilot. Any delegated authority the 
lender has as a 7(a) lender, such as Preferred Lender Program (PLP) or 
SBA Express authority, will not apply to the DFP Pilot.
    If a lender has at least $1 billion in floor plan lines of credit 
in its current portfolio, the lender may qualify for delegated 
authority under the DFP Pilot. The process for requesting delegated 
authority will be set forth in the DFP Procedural Guide. Lenders that 
are approved for delegated authority under the DFP Pilot will be 
required to execute a separate Supplemental Guaranty Agreement. Lenders 
with delegated authority must have existing policies and procedures 
governing floor plan financing, including risk management policies and 
procedures, and must administer their SBA-guaranteed floor plan lines 
of credit in conformance with the existing policies and procedures used 
for their similarly-sized, non-SBA guaranteed floor plan lines.
    Lenders who have not participated in floor plan financing must 
develop policies and procedures specific to floor plan financing, 
including risk management policies and procedures. When developing 
policies and procedures specific to floor plan financing, lenders may 
follow guidance provided by their primary Federal regulator or, if none 
is available, lenders may follow the guidance on floor plan financing 
provided by the Office of the Comptroller of the Currency (OCC) in 
Section 210 of its Examiner's Handbook. (The OCC Examiner's Handbook 
can be found at https://www.occ.gov/static/publications/handbook/floorplan1.pdf.)
    Lenders participating in the pilot initiative must have trained 
and/or experienced personnel who are responsible for making, servicing 
and liquidating floor plan lines of credit.

Application Forms, Authorization and Reporting Requirements

    Each lender participating in the DFP Pilot must submit its first 
application under the pilot following Standard 7(a) procedures to the 
LGPC. SBA will begin accepting applications under the DFP Pilot on 
February 9, 2011.
    After the initial application under the DFP Pilot is approved by 
the LGPC, a lender with delegated authority may submit subsequent 
applications for DFP

[[Page 7100]]

lines of credit using its delegated authority. After OCRM has approved 
the lender's policies and procedures governing floor plan financing, 
non-delegated lenders may submit subsequent applications for DFP lines 
of credit to the LGPC. SBA will provide instructions for lenders on how 
to complete existing SBA application forms to include floor plan lines 
of credit in the DFP Procedural Guide.
    SBA will incorporate into the Standard 7(a) Authorization 
Boilerplate applicable provisions related to floor plan financing. 
Lenders with delegated authority may use the Standard 7(a) 
Authorization Boilerplate or the Authorization for SBA Express and 
Patriot Express loans. If the delegated lender uses the Authorization 
for SBA Express and Patriot Express loans, the lender is responsible 
for ensuring all applicable provisions related to floor plan financing 
are included in the Authorization.
    In addition to SBA's servicing and liquidation requirements set 
forth in 13 CFR 120.535 and 120.536 and SOPs 50 50 and 50 51, lenders 
will be required to service any floor plan line of credit guaranteed by 
SBA with the requirement that as any item of inventory acquired with 
the line is sold the proceeds from the sale must be submitted to the 
lender to reduce the balance on the line pursuant to the sold inventory 
item. (SOPs 50 50 and 50 51 can be found at https://www.sba.gov/about-sba-services/7481.)
    In addition to their 1502 reporting on all SBA-guaranteed loans, 
lenders will be required to report quarterly on disbursement and 
collection activity on DFP lines of credit using SBA Form 1502R. (SBA 
Form 1502R can be found at https://archive.sba.gov/idc/groups/public/documents/sba_homepage/lender_creditresol_form1502.pdf.) OCRM will 
review these reports as part of its regular oversight of lenders 
participating in the DFP Pilot.

Guaranty Purchase

    Under the DFP Pilot, SBA will allow the lender to make demand on 
SBA to honor its guaranty if the borrower is in default on any 
financial covenant for more than 30 calendar days and the default has 
not been cured. Also, under the DFP Pilot, if a lender discovers that 
the borrower is in a sold out of trust (SOT) situation, the lender may 
request that SBA honor its guaranty 30 calendar days after discovery of 
an SOT situation that has not been cured during the 30 day period. In 
addition, if a lender discovers an adverse change in the financial 
condition, organization, management, operation, or assets of the 
Borrower, the lender may request that SBA honor its guaranty 30 
calendar days after discovery of the adverse change if it has not been 
remedied during the 30 day period. While non-compliance with any non-
financial loan covenant other than SOT situations could trigger the 
lender discontinuing disbursements and placing the account into a 
payment only status, non-compliance with such non-financial covenants 
will not trigger SBA's obligation to purchase the guaranteed portion of 
the DFP line of credit.
    In order to be consistent with industry practice, liquidation of 
all business personal property, while preferred, will not be required 
prior to the lender making demand on SBA to honor its guaranty. Prior 
to making demand on SBA to honor its guaranty, the titleable inventory 
securing the DFP lines of credit must be fully accounted for and 
liquidated, with all net proceeds applied to net balance of the loan in 
accordance with SOP 50 51 3. If any additional collateral has been 
taken to secure the DFP line, the lender will not necessarily have to 
fully liquidate such collateral prior to making demand on SBA, but the 
lender will be required to obtain all necessary valuations and make a 
determination as to whether the additional collateral will be 
liquidated or, with proper justification, abandoned.
    In addition to the standard purchase documentation required by SBA, 
with any guaranty purchase request under the DFP Pilot lenders will be 
required to provide copies of the floor check reports, the monthly 
manufacturer's dealership financial statements (for dealers of new 
inventory) or monthly financial statements (for dealers of used 
inventory), and the monthly reconciliations of lender's floor plan 
inspection reports with the dealer's financials for the twelve (12) 
months prior to default. Delegated lenders also will need to provide a 
copy of the lender's credit memo with any purchase request. Also, as 
part of the guaranty purchase review, SBA will review the lender's 
compliance with its existing policies and procedures governing floor 
plan financing. In addition to the grounds set forth in 13 CFR 120.524, 
the lender's failure to comply with its policies and procedures or the 
terms and procedures set forth in this Federal Register notice or the 
DFP Procedural Guide may result in denial of SBA's guaranty on the 
loan, in full or in part. Also, if proceeds of a DFP line of credit are 
used to replace a same institution floor plan line and the borrower 
defaults on the DFP line within 90 days of initial disbursement, SBA 
may deny liability on its guaranty of the DFP line.

Lender Oversight

    As part of its ongoing lender oversight activities, OCRM will 
review, evaluate and approve the floor plan lending policies and 
procedures of each lender participating in the DFP Pilot. The timing of 
the review of the lender's policies and procedures will be set forth in 
the DFP Procedural Guide.
    Additionally, for lenders participating in the DFP Pilot, OCRM will 
follow its typical oversight practices utilizing a combination of off-
site monitoring and on-site reviews depending on the size and risk 
assessment of the lender's DFP portfolio. OCRM also will monitor the 
usage and performance of lender DFP loan portfolios which may include 
reviews of lender loan files and reports provided to SBA by the lender 
on its dealer floor plan activities to monitor and assess how lenders 
are managing their DFP portfolios.

Regulatory Waivers

    Pursuant to the authority provided to SBA under 13 CFR 120.3 to 
suspend, waive or modify certain regulations in establishing and 
testing pilot loan initiatives for a limited period of time, SBA will 
waive or modify, as appropriate, the following regulations, which 
otherwise apply to 7(a) loans, for the DFP Pilot only: (1) 13 CFR 
120.221(b), which limits extraordinary servicing fees to 2% of the 
outstanding balance on an annual basis, is being waived so lenders can 
charge more than 2% on loans approved under this pilot initiative as 
long as the fees are not higher than those charged on the lender's 
similarly-sized, non-SBA guaranteed floor plan lines of credit and as 
long as the fees are reasonable and prudent based on the level of 
extraordinary effort required to adequately service the floor plan 
line; (2) 13 CFR part 120, Subpart F--Secondary Market, is being waived 
because loans approved under the DFP Pilot cannot be sold on the 
secondary market; (3) 13 CFR 120.520(a) is being waived to allow 
lenders to make demand on SBA to honor its guaranty on a DFP line of 
credit if the borrower is in default on any financial covenant for more 
than 30 calendar days and the default has not been cured, if a borrower 
is in an SOT situation which has not been cured for more than 30 
calendar days after lender discovers it, and if a borrower experiences 
an adverse change in its financial condition, organization, management, 
operation, or assets which has not been remedied for more than 30 
calendar days after lender discovers it; and (4) 13 CFR 120.524, which 
describes when SBA is released from

[[Page 7101]]

liability on its guaranty, is being modified because, in addition to 
the grounds stated in this regulation, the lender's failure to comply 
with its policies and procedures governing floor plan financing or the 
terms and procedures set forth in this Federal Register notice or the 
DFP Procedural Guide may result in denial of SBA's guaranty on the 
loan, in full or in part. In addition, if the proceeds of the DFP line 
of credit are used to replace a same institution floor plan line and 
the borrower defaults on the DFP line of credit within 90 days of 
initial disbursement, SBA may deny liability on its guaranty of the DFP 
line. The regulation at 13 CFR 120.520(a) is also being waived to allow 
lenders to make demand on SBA to honor its guaranty in the above 
situations without being required to liquidate all business personal 
property securing the line of credit first.
    The statutory language creating this DFP Pilot overrides the 
regulatory prohibition against floor plan financing or other revolving 
line credit (except under 120.390) found in 13 CFR 120.130(c).
    All other provisions of the Small Business Act applicable to the 
7(a) loan program apply to loans made under the DFP Pilot. Unless 
waived or modified by this Notice, all the regulations applicable to 
the 7(a) loan program apply to loans made under the DFP Pilot. All 
standard operating procedures applicable to the 7(a) loan program that 
are not superseded by any provision of this Notice or the DFP 
Procedural Guide apply to loans made under this pilot.
    Lenders must use prudent lending practices in the making, servicing 
and liquidating of SBA-guaranteed floor plan lines of credit and must 
comply with all SBA Loan Program Requirements that are not superseded 
by any provisions of this Notice or the DFP Procedural Guide.
    SBA will provide more detailed guidance in the form of a procedural 
guide which will be available on SBA's Web site, https://www.sba.gov. 
SBA may also provide additional guidance, if needed, through SBA 
notices, which will also be published on SBA's Web site, https://www.sba.gov.
    Questions on the DFP Pilot may be directed to the Lender Relations 
Specialist in the local SBA district office. The local SBA district 
office may be found at https://www.sba.gov/localresources/.

    Authority: 15 U.S.C. 636(a)(34) and 13 CFR 120.3.

    Dated: February 3, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-2836 Filed 2-8-11; 8:45 am]
BILLING CODE 8025-01-P