Small Business Jobs Act: 504 Loan Program Debt Refinancing, 63151-63156 [2011-26311]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 76, Number 197 (Wednesday, October 12, 2011)]
[Rules and Regulations]
[Pages 63151-63156]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26311]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AG17


Small Business Jobs Act: 504 Loan Program Debt Refinancing

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: This rule finalizes the interim final rule that implemented 
section 1122 of the Small Business Jobs Act of 2010, which authorizes 
projects approved for financing under Title V of the Small Business 
Investment Act to include the refinancing of qualified debt. As a 
result of comments received, this final rule amends the interim final 
rule to authorize the financing of business expenses as part of a 
Refinancing Project, to allow the Third Party Loan to be at least as 
much as the 504 loan instead of requiring that the Third Party Loan 
provide at least 50% of the financing, and to revise the definition of 
qualified debt. Other aspects of the interim final rule are adopted as 
final without change.

DATES: Effective Date: This rule is effective October 12, 2011.

FOR FURTHER INFORMATION CONTACT: Andrew B. McConnell, Jr., Office of 
Financial Assistance, at jobsact_debtrefinancing@sba.gov or 202-205-
9949.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 17, 2011, SBA published an interim final rule with 
request for comments in the Federal Register to implement section 1122 
of the Small Business Jobs Act of 2010 (Jobs Act). See 76 FR 9213. This 
provision of the Jobs Act temporarily authorizes projects approved for 
financing under Title V of the Small Business Investment Act to include 
the refinancing of qualified debt. Prior to the Jobs Act, in a typical 
504 project with a refinancing component, the borrower was required to 
use a significant portion of the loan proceeds for expansion of the 
business. See 13 CFR 120.882(e). The temporary Jobs Act program 
authorizes the use of the 504 Loan Program for the refinancing of debt 
where there is no expansion of the small business, and is available for 
loan applications approved by SBA through September 27, 2012.
    The interim final rule was effective February 17, 2011 and the 
comment period was open until May 18, 2011. SBA received written 
comments from 34 commenters, including 6 banks, 2 small businesses, 17 
Certified Development Companies, 3 national trade associations, and 6 
individuals. The comments are summarized and addressed below with, 
where applicable, the citation to the rule provision that has been 
changed after consideration of the comments.

II. Summary of Comments Received

    1. Financing for Business Expenses--13 CFR 120.882(g)(6). In the 
interim final rule, SBA requested comments from the public on whether, 
and how, to implement the provision in the Jobs Act that authorizes the 
financing of business expenses in the temporary debt refinance program. 
Twenty-five of the 34 comments received requested that SBA implement 
the authority to finance business expenses; none of the comments 
opposed implementing this authority. Several commenters stated that 
there is an urgent need for this financing due to the national 
recession which, they assert, resulted in bank regulator restrictions 
on lending institutions, limitations on lines of credit, and decreased 
opportunity for equipment vendor financing. Businesses could enhance 
their viability and growth potential if they were able to access the 
accumulated equity in their real estate and other fixed assets for 
business purposes. No suggestions were received on how to implement the 
business expense provision.
    Based on the comments, SBA is amending the rule to allow a Borrower 
to request the financing of business expenses as part of its 
application for the Refinancing Project. Such financing will be 
available only if the amount of cash that will be provided as a result 
of the refinancing exceeds the amount to be paid to the lender of the 
Qualified Debt. The Borrower's application must include a specific 
description of the business expenses for which the financing is 
requested and an itemization of the amount of each expense. The funds 
provided for business expenses must be used solely for the business 
expenses of the Borrower, such as salaries, rent,

[[Page 63152]]

utilities, inventory, and other obligations of the business. The 
expenses may have been incurred, but not paid, prior to loan 
application or may be used to pay for expenses that will become due for 
payment within eighteen months after the date of loan application. Both 
the CDC and the Borrower will be required to certify in the application 
that the funds will be used to cover the business expenses of the 
Borrower. Borrower must be able, upon request, to substantiate the use 
of the funds provided for business expenses, through, for example, bank 
statements, invoices marked ``paid'', cleared checks, or any other 
documents that demonstrate that a business obligation was satisfied 
with the funds provided.
    2. Third Party Loan Less than 50%--13 CFR 120.882(g)(5). The 
interim final rule requires that the Third Party Loan contribute not 
less than 50% of the Refinancing Project amount, the 504 loan 
contribute not more than 40% of the Refinancing Project amount, and the 
Borrower contribute not less than 10% of the Refinancing Project 
amount. However, while the typical 504 Project includes a Third Party 
Loan equal to 50% of the Project costs, the regulations for a 504 
Project other than debt refinancing require only, with certain 
exceptions not applicable here, that the financing for the 504 Project 
include one or more Third Party Loans that total at least as much as 
the 504 loan. See 13 CFR 120.920(a). Sixteen comments were received 
requesting SBA to apply to a debt refinancing project the same loan 
structure requirement that applies to other 504 Projects, and not 
require the Third Party Loan to be 50% of the Refinancing Project. 
Commenters observed that the 50% contribution is not required by 
Section 1122 of the Jobs Act. SBA has considered these comments and 
concludes that it serves the interest of this temporary debt 
refinancing program to amend the interim final rule to make it 
consistent with 13 CFR 120.920(a), requiring that the Third Party Loan 
total at least as much as the 504 loan.
    3. Qualified Debt Criteria: Substantially all of loan proceeds used 
to acquire Eligible Fixed Asset--13 CFR 120.882(g) (15) (Definition of 
Qualified Debt, subparagraph (iii)), and 13 CFR 120.882(e)(1). To 
qualify for refinancing, the Jobs Act requires, among other criteria, 
that the debt to be refinanced be a commercial loan ``the proceeds of 
which were used to acquire an eligible fixed asset''. See Sec.  
502(7)(C)(i)(III)(aa)(DD) of the Small Business Investment Act. In 
promulgating the interim final rule, SBA was aware that the Borrower 
may have refinanced such a loan one or more times after the original 
financing and used available equity in the asset to finance working 
capital or other expenses. Consequently, SBA provided in the interim 
final rule that the commercial loan would meet this criteria if 
``substantially all (85% or more) of [the loan] was for the acquisition 
of Eligible Fixed Assets'', see 13 CFR 120.882(g)(15); the remaining 
15% of the proceeds must have been used for other purposes for the 
benefit of the Borrower. SBA stated in the preamble to the interim 
final rule that the Borrower would be required to certify that the 
existing debt satisfies these requirements, and that the Third Party 
Lender would be required to certify that it has no reason to believe 
that the existing debt does not satisfy these requirements. In 
addition, SBA stated in the preamble that SBA may require, on a random 
basis, for a borrower and/or lender to submit additional documentation 
supporting the ``substantially all'' assertion.
    SBA received 19 comments expressing concern as to the ability of a 
small business to provide adequate documentation to support the 
``substantially all'' standard. In particular, for loans involving more 
than one refinancing and lending institution, the commenters stated 
that it would be extremely difficult and burdensome to attempt to 
document the components of the existing debt. Consequently, SBA has 
reconsidered this criteria and is amending the interim final rule to 
recognize the economic reality that many loans for which borrowers will 
be seeking refinancing under the Jobs Act may have already been 
refinanced one or more times and that borrowers may have been able to 
borrow against the equity that was created in the Eligible Fixed Asset 
after its original financing. Accordingly, SBA is amending the rule to 
provide that, if the Eligible Fixed Asset was originally financed 
through a commercial loan that would have satisfied the ``substantially 
all'' standard (the ``original loan'') and that was subsequently 
refinanced one or more times, with the current commercial loan being 
the most recent refinancing, the current commercial loan will be deemed 
to satisfy the ``substantially all'' standard. With respect to 
situations where the Borrower leased the property acquired with the 
original loan to one or more tenants, SBA recognizes that the original 
loan may not have satisfied the leasing policies set forth in 13 CFR 
120.131 and 13 CFR 120.870(b), but that the Borrower would be able to 
demonstrate that it satisfies SBA's leasing policies with respect to 
existing buildings as of the date of application for assistance under 
the Jobs Act. SBA believes that such Borrowers should be eligible for 
this assistance and is amending the rule to provide that, if the 
original loan was for the construction of a new building, or the 
acquisition, renovation, or reconstruction of an existing building, and 
such loan would not have satisfied the leasing policies set forth in 13 
CFR 120.131 and 13 CFR 120.870(b), the current commercial loan will be 
eligible for assistance if the Borrower is able to demonstrate 
compliance with 13 CFR 120.131(b) for existing building as of the date 
of application for assistance under the Jobs Act.
    SBA will require the Borrower to certify that the existing debt 
satisfies the applicable requirements, and will require the Third Party 
Lender to certify that it has no reason to believe that the existing 
debt does not satisfy these requirements. As stated in the interim 
final rule, SBA may also still require, on a random basis, for a 
Borrower and/or lender to submit additional documentation to support 
the certifications prior to the closing on the 504 debenture, including 
the documents for the original loan with which the fixed asset was 
acquired and the subsequent refinancing documents to show that the 
current commercial loan is the most recent refinancing. SBA will cancel 
an approved loan if the documents do not support the certifications. If 
the Borrower and/or lender are unable to produce the additional 
documentation, each must certify that they have made a diligent search 
for the documents and that the documents are not in their possession. 
SBA will not cancel an approved loan based solely on the inability of 
the Borrower and/or lender to produce the documents, except that, if 
the lender is the original lending institution that made the loan for 
the Eligible Fixed Asset (not, for example, an institution that 
acquired or merged with the original lending institution), SBA would 
expect that this lender would be able to produce the necessary 
documents. To make the permanent debt refinancing program, which 
involves expansions, consistent with this temporary debt refinancing 
program, SBA is also amending 13 CFR 120.882(e)(1) to provide that if 
the acquisition of the 504-eligible asset was originally financed 
through a commercial loan that would have satisfied the ``substantially 
all'' standard and that was subsequently refinanced one or more times, 
with the

[[Page 63153]]

current commercial loan being the most recent refinancing, the current 
commercial loan will be deemed to satisfy the requirement of 
120.882(e)(1).
    4. Qualified Debt Criteria: Current on all payments due--13 CFR 
120.882(g)(15) (Definition of Qualified Debt, subparagraph (vii)). One 
of the eligibility criteria for this refinancing program is that the 
Borrower has been current on all payments for not less than 1 year 
before the date of application. The interim final rule defines 
``current on all payments due'' to mean that ``no payment scheduled to 
be made during the one year period was either deferred or more than 30 
days past due.'' 13 CFR 120.882(g)(15) (definition of ``qualified 
debt''). One trade association representing lenders that originate the 
vast majority of 504 transactions stated that SBA should allow 
considerable flexibility, and requested that SBA define ``current'' to 
mean that no payment was more than thirty days past due from the 
contractual requirement at the date of application, without regard to 
whether these requirements were original or modified payment terms. The 
commenter contended that this change would allow for cases where 
lenders worked with borrowers to temporarily modify loan terms to help 
them get through the recent economic slowdown, and reasoned that SBA 
will be able to use prudent underwriting to assess whether such 
modifications indicate whether or not borrowers are creditworthy. SBA 
agrees and is amending the definition of ``current on all payments 
due'' to allow a Borrower to be deemed current so long as, at any time 
within the 12 month period prior to the date of application, no payment 
was more than thirty days past due from either the original payment 
terms or modified payment terms (including deferments) if such 
modification was agreed to in writing by the Borrower and the lender of 
the existing debt prior to the publication date of these rules in the 
Federal Register. However, SBA reserves the right to determine, at its 
discretion on a loan-by-loan basis, whether modified repayment terms 
would preclude refinancing under this program.
    5. Total Project Cost Supported by Appraisal and Definition of 
Refinancing Project--13 CFR 120.882(g)(5) and 120.882(g)(6). Twenty-
eight comments were received expressing concern with respect to the 
basis upon which the amount of the refinancing is determined. Several 
commenters requested that SBA base the total project cost on the 
appraised value of the collateral even when it exceeds the amount of 
the existing debt, which will allow borrowers to access the benefits of 
the 504 program, including the financing of business expenses, without 
increasing the risk to the agency. Additional comments were received 
that the definition of ``Refinancing Project'' is too narrow and needs 
to be expanded in order to increase eligibility for small businesses. 
Other commenters requested that SBA remove the limitation on 
refinancing over-collateralized, high-equity value projects and allow 
such projects to be financed for borrowers who are otherwise locked out 
of credit markets. SBA believes that these comments are addressed by 
the changes made to the rule as indicated above in paragraphs 1 and 2, 
which, respectively, allow the Refinancing Project to include the 
financing of business expenses when supported by acceptable collateral, 
and remove the 50% Third Party Loan requirement.
    6. Decline in Real Estate Values--One comment was received stating 
that the Jobs Act debt refinance program does not address the decline 
in appraised values or the potential of a commercial real estate crisis 
because assistance is based upon current fair market appraised value. 
Others made similar comments and requested that the total project cost 
be supported, but not defined, by the appraised value. These comments 
suggest that the amount of the Refinancing Project should be based on 
the existing outstanding principal balance of the Qualified Debt 
instead of on the value of the available collateral. SBA is not 
adopting this recommendation as the Small Business Jobs Act expressly 
provides that ``the amount of the financing is not more than 90% of the 
value of the collateral for financing, * * *'' (Section 1122 
(a)(C)(ii)(I))(italics added)).
    7. 6-Month Closing Period Extensions--The interim final rule 
requires that the 504 loan be disbursed within 6 months after loan 
approval, unless the Director, Office of Financial Assistance, or his 
designee approves a request for extension of the disbursement period 
for good cause. See 13 CFR 120.882(g)(12). Nine comments were received 
requesting that the Agency permit more time than 6 months for 
disbursement after loan approval, with some commenters stating that 9 
months may be needed to prepare fully for closing. SBA believes that 
the commenters' concerns are adequately addressed by the current 
authority to grant extensions based on good cause. To facilitate the 
Agency's consideration of extension requests, the Director, Office of 
Financial Assistance, has delegated the authority to approve extensions 
of the disbursement period up to an additional three months for good 
cause to the Center Director of the Sacramento Loan Processing Center.
    8. Allow Existing 504 Third Party Loan Financing--Four comments 
were received in support of allowing existing 504 Third Party Loans to 
be eligible for this debt refinancing program. SBA is not adopting this 
recommendation as SBA continues to maintain the position, as stated in 
the preamble to the interim final rule, that these borrowers have 
already benefited from government assistance.
    9. Expand Eligibility to Notes Maturing After 12/31/2012--The 
interim final rule requires that the existing debt mature on or before 
December 31, 2012 to be eligible for refinancing, unless such date is 
extended by SBA, based on its assessment of available resources and 
market conditions, in a Notice published in the Federal Register. Two 
comments were received requesting that SBA extend program eligibility 
to borrowers whose notes mature in more than 24 months after 12/31/
2012. On April 4, 2011, SBA published an announcement in the Federal 
Register that loans with any maturity date would be eligible for 
refinancing if they also meet the other statutory and regulatory 
requirements. See 76 FR 18375.
    10. Allow Liquid Assets as Collateral--Three comments requested 
that SBA allow the Borrower to contribute additional collateral in the 
form of liquid assets. SBA has considered this comment and is not 
adopting it due to the relative volatility of the value of many other 
asset classes when compared with real estate or equipment.
    11. Allow Expansion Projects--Two comments were received requesting 
that projects involving expansion be allowed as part of this temporary 
refinancing program, with one commenter specifically requesting that an 
expansion be allowed where it meets a public policy goal. However, the 
refinancing authority granted by the Jobs Act expressly provides that 
it applies to a project that does not involve the expansion of a small 
business concern. In addition, SBA already allows refinancing with 
lower fees than this program for projects involving expansion where the 
existing indebtedness is up to 50% of the project cost of the 
expansion. See 13 CFR 120.882(e). Moreover, with the publication of 
this rule, SBA is allowing for business expenses and obligations to be 
financed when supported by acceptable collateral so there is greater 
flexibility in what can now be financed.

[[Page 63154]]

    12. SBA Coordination With Bank Regulators--Two comments were 
received that described the difficulties involved in making this debt 
refinancing program available for loans that the bank regulators may 
consider Troubled Assets. One of the commenters requested that SBA seek 
the cooperation of the bank regulators to grant an exception from the 
requirements involved for Troubled Assets. SBA is always willing to 
provide bank regulators with information about SBA's programs that may 
assist them in assessing the refinancing transaction and any effect on 
the lender and borrower.
    13. Thirty-Year Debenture--One comment was received requesting that 
SBA consider a thirty year debenture to ease the debt service 
constraint in this type of environment. This would assist borrowers by 
lowering monthly payments which in turn helps cash flow and may allow 
more borrowers to qualify. This recommendation was not adopted due to 
the short-term nature of this program and would likely require a change 
in the subsidy cost modeling. It would also create a limited amount of 
30 year securities which would make marketing the securities more 
difficult.
    14. Loan Loss Reserve for All CDCs--One commenter provided a 
general comment about the 504 Loan Program and stated that all CDCs, 
not only PCLP CDCs, should be required to maintain a loan loss reserve 
to reimburse SBA for losses on 504 loans in order to discourage CDCs 
from making ``bad loans.'' The commenter recognized that this change 
would require new statutory authority. SBA is reviewing this 
recommendation.
    15. Pool Eligible Real Estate Mortgages Loans--One comment was 
received that SBA should allow for the pooling of all eligible real 
estate mortgages loans even if it is the same institution debt. 
Currently, Third Party lenders may sell up to 80% of their first 
mortgages to pool originators in SBA's First Mortgage Loan Pool 
Program. 13 CFR 120.1700-120.1726. SBA provides a 100% guarantee to 
investors that purchase the rights to this portion of the loan that 
have been pooled together as part of this program. Same institution 
refinanced first mortgages are not currently eligible under this 
temporary program. SBA is not adopting this recommendation due to 
concern that it would pose an unacceptable risk by allowing an 
institution an opportunity to avoid 80% of the risk in a transaction 
that was not entirely at arm's length. In addition, this option was not 
in SBA's original subsidy model and could require additional fees.
    16. Extending Legislation--Twelve comments were received requesting 
that SBA request an extension of the temporary legislation for the Jobs 
Act due to the time needed for SBA to develop and implement this new 
program. SBA is not in a position at this time to determine whether to 
support an extension of this program.
    Finally, SBA has concluded that posting the fees on the agency's 
Web site in lieu of establishing the specific fee in the regulations 
would be more advantageous and transparent to the public. As a result, 
SBA is amending 13 CFR Section 120.882(g)(4) to provide that the amount 
of the fee will be established by SBA each fiscal year and will be 
available on SBA's Web site at https://www.sba.gov/content/504-loan-refinancing-program.

III. Justification for Immediate Effective Date

    The APA 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). The purpose of this 
provision is to provide interested and affected members of the public 
sufficient time to adjust their behavior before the rule takes effect. 
The changes made by this rule benefit the public by expanding, rather 
than restricting, the opportunities for refinancing under this 
temporary debt refinancing program. Any delay in the effective date 
would deny small businesses immediate access to the full benefits of 
the credit made available through this rule, such as the financing of 
business expenses, and an immediate effective date will maximize the 
rule's value to small businesses and its effect on the economy. SBA 
therefore finds that there is good cause for making this rule effective 
immediately instead of observing the 30-day period between publication 
and effective date.

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
    OMB has determined that this rule is a ``significant'' regulatory 
action under Executive Order 12866. In the interim final rule, SBA set 
forth its initial regulatory impact analysis, which addressed the 
following: The regulatory objective of the interim final rule; the 
baseline costs; the potential benefits and costs of the interim final 
rule to lenders, to CDCs and Borrowers, and to SBA and the Federal 
Government; and alternatives to the interim final rule.
    SBA did not receive any comments which specifically addressed its 
regulatory impact analysis. However, as discussed above, SBA received 
several comments requesting that SBA implement the authority to finance 
business expenses as part of a Refinancing Project. As indicated above, 
SBA is implementing this authority, which will provide additional 
benefit to small businesses. The cost differential for an application 
for assistance with this change is negligible.
    In addition, SBA is modifying the cost estimates that were provided 
in the interim final rule based on a revised estimate of the number of 
refinance loans that SBA anticipates will be processed during the time 
remaining for this temporary program. This revised estimate is based on 
the actual volume of the program to date and the estimated volume of 
loan applications that will be processed based on the changes made by 
this Final Rule. SBA now anticipates that 8,520 refinance loans will be 
processed, of which an estimated 5,795, or 68% will be submitted by ASM 
(Abridged Submission Method) CDCs and an estimated 2,725, or 32%, will 
be submitted by non-ASM CDCs. For ASM CDCs, SBA estimates that the 
average time for completion of each application would consist of 8.4 
hours at an average cost of $45 per hour. Therefore, the annual costs 
of submitting 504 debt refinance applications under the final rule 
would be 5,795 loan applications x 8.4 hours for an estimated cost of 
$2,190,510. For Non-ASM CDCs, SBA estimates that the average time for 
completion of each application would consist of 8.7 hours at an average 
cost of $45 per hour. Therefore, the annual costs of submitting 504 
debt refinance applications under the final rule would be 2,725 loan 
applications x 8.7 hours for an estimated cost for non-ASM debt 
refinance applications of $1,066,838. The total estimated costs for ASM 
and non-ASM applications combined would be $3,257,348 for the two-year 
period of the Jobs Act.
    In addition, based on the length of time SBA takes to review and 
process 504 applications, SBA is estimated to take an average of 8.4 
hours to review and respond to ASM applications and 8.7 hours to review 
and respond to non-ASM applications. For ASM applications, this equates 
to 8.4 hours at $45 hour x 5,795 applications for an estimated cost of 
$2,190,510 for ASM refinance loan application for the two-year program 
period. For non-ASM applications, this equates to 8.7 hours at

[[Page 63155]]

$45 hour for an estimated cost x 2,725 for a total annual estimated 
cost of $1,066,838 for non-ASM refinance loan application. SBA 
estimates that its combined cost of reviewing ASM and non-ASM 
applications to be $3,257,348 for the two year period of the Jobs Act.
    In order to carry out this new program, SBA will hire up to 50 
additional staff for the Sacramento Loan Processing Center. The Agency 
must also hire one full-time staff for lender oversight at an average 
cost of $135,000 per year or a total of $270,000 for the two-year 
period of the Jobs Act. In addition, contract dollars of $105,000 per 
year, or $210,000 for the two-year period of the Jobs Act, will be 
utilized to assist with analysis and oversight. The total estimate cost 
of oversight of the 504 debt refinance program for the two-year period 
of the Jobs Act is estimated at $480,000.
    For the reasons described above, SBA adopts as final the initial 
regulatory impact analysis set forth in the interim final rule as 
revised above.

Executive Order 12988

    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have preemptive effect or retroactive effect.

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive Order. As 
such it does not warrant the preparation of a Federalism Assessment.

Executive Order 13563

    To the extent practicable given the need to make this temporary, 2-
year refinance program operational expeditiously in order to assist as 
many small businesses as possible, the interim final rule and the final 
rule were developed in keeping with the intent of this Executive Order. 
SBA solicited suggestions and comments on how best to implement the 
Jobs Act from the affected stakeholders and the public as a whole. SBA 
provided notice of a public forum in the Federal Register, which was 
held in Boston, Massachusetts on November 17, 2010. More than 100 
persons attended in person or by phone and 23 individuals provided 
testimony. In addition, SBA announced a comment e-mail address and 
solicited comments for a 30 day period. The interim final rule was 
significantly shaped by those comments, especially the decision to keep 
the same basic 504 financing structure for same institution debt 
refinancing as for a new institution refinancing another lender's debt. 
In addition, as indicated above, SBA received written comments on the 
interim final rule from 34 entities, including 6 banks, 2 small 
businesses, 17 Certified Development Companies, 3 national trade 
associations, and 6 private citizens, and the changes made by this 
final rule reflect the concerns expressed by these commenters.
    By adhering as closely as possible to the procedures and conditions 
of SBA's existing permanent 504 refinancing program, any burden that 
this rule may have imposed on the affected stakeholders is lessened. In 
addition, SBA is adopting a new procedure with this rule that 
specifically addresses concerns that were raised in public comments 
regarding the burden that was imposed on lenders and borrowers by 
requiring them to document, on a random basis, that substantially all 
of the proceeds of the current debt being refinanced was used for 
eligible collateral. As indicated by the stakeholders, this requirement 
is especially difficult if a property has been refinanced more than 
once or if the initial lender had been acquired by another lender. In 
response to these comments, the final rule provides that, if the 
Eligible Fixed Asset was originally financed through a commercial loan 
that would have satisfied the ``substantially all'' standard and that 
was subsequently refinanced one or more times, with the current 
commercial loan being the most recent refinancing, the current loan 
will be deemed to satisfy the ``substantially all'' standard. (This 
final rule also applies this change to the permanent refinance program 
authorized by 13 CFR 120.882(e)). Borrowers and lenders will still be 
required to certify that the debt to be refinanced meets the applicable 
requirements and, SBA may still require, on a random basis, that 
Borrowers and/or lenders submit additional documentation to support the 
certifications. However, in response to the comments, SBA has 
determined that, if the Borrower and/or lender are unable to produce 
the additional documentation, SBA will allow them each to certify that 
they have made a diligent search for the documents and that the 
documents are not in their possession. SBA will not, as indicated 
above, deny an application based on the inability of the Borrower and/
or lender to produce the documents, except that, if the lender is the 
original lending institution that made the loan to acquire the Eligible 
Fixed Asset (not, for example, an institution that acquired or merged 
with the original lending institution), SBA would expect that this 
lender would be able to produce the necessary documents.

Paperwork Reduction Act

    The SBA has determined that this rule imposes no additional 
reporting and recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. chapter 35.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires administrative 
agencies to consider the economic impact of their actions on small 
entities, including small non-profit businesses and small local 
governments. Pursuant to the RFA, in finalizing a rule, whenever an 
agency is required by 5 U.S.C. 553, or any other law, to publish 
general notice of proposed rulemaking for any proposed rule, or 
promulgates a final interpretative rule involving the internal revenue 
laws of the United States as described in 5 U.S.C. 603(a), the agency 
shall prepare a final regulatory flexibility analysis. (See, 5 U.S.C. 
604(a)). As discussed in the interim final rule, SBA has determined 
that there was good cause to publish this rule without notice and 
comment rulemaking under section 553. In addition, this rule is not an 
interpretive rule involving the internal revenue code. This rule is, 
therefore, exempt from the requirements of the RFA.

List of Subjects in 13 CFR Part 120

    Community development, Loan programs--business, Loan programs--
veterans, Reporting and recordkeeping requirements, Small businesses, 
Veterans.

    Accordingly, the interim final rule amending 13 CFR Part 120 which 
was published at 76 FR 9218 on February 17, 2011, is adopted as a final 
rule with the following changes:

PART 120--BUSINESS LOANS

0
1. The authority citation for 13 CFR part 120 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h) and (m), 650, 687(f), 696(3), and 697(a) and (e); Public 
Law 111-5, 123 Stat. 115, Public Law 111-240, 124 Stat. 2504.


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2. Amend Sec.  120.882 by revising paragraphs (e)(1), (g)(4), (g)(5), 
(g)(6), and paragraphs (iii) and (vii) in the

[[Page 63156]]

definition of ``Qualified debt'' in paragraph (g)(15), to read as 
follows:


Sec.  120.882  Eligible Project costs for 504 loans.

* * * * *
    (e) * * *
    (1) Substantially all (85% or more) of the proceeds of the 
indebtedness were used to acquire land, including a building situated 
thereon, to construct a building thereon, or to purchase equipment. The 
assets acquired must be eligible for financing under the 504 loan 
program. If the acquisition, construction or purchase of the asset was 
originally financed through a commercial loan that would have satisfied 
the ``substantially all'' requirement and that was subsequently 
refinanced one or more times, with the current commercial loan being 
the most recent refinancing, the current commercial loan will be deemed 
to satisfy this paragraph (e)(1).
* * * * *
    (g) * * *
    (4) In addition to the annual guarantee fee assessed under Sec.  
120.971(d)(2), Borrower must pay SBA a supplemental annual guarantee 
fee to cover the additional cost attributable to the refinancing in an 
amount established by SBA each fiscal year.
    (5) The funding for the Refinancing Project must come from three 
sources based on the current fair market value of the fixed assets 
serving as collateral for the Refinancing Project, including a Third 
Party Loan that is at least as much as the 504 loan, not less than 10% 
from the Borrower (excluding administrative costs), and not more than 
40% from the 504 loan. In addition to a cash contribution, the 
Borrower's 10% contribution may be satisfied as set forth in Sec.  
120.910 or by the equity in any other fixed assets that are acceptable 
to SBA as collateral for the Refinancing Project, provided that there 
is an independent appraisal of the fair market value of the asset;
    (6)(i) The portion of the Refinancing Project provided by the 504 
loan and the Third Party Loan may be no more than 90% of the fair 
market value of the fixed assets that will serve as collateral;
    (ii) The Borrower's application may include a request to finance 
eligible business expenses as part of the Refinancing Project if the 
amount of cash funds that will be provided for the Refinancing Project 
exceeds the amount to be paid to the lender of the Qualified Debt. The 
Borrower's application must include a specific description of the 
business expenses for which the financing is requested and an 
itemization of the amount of each expense. For the purposes of this 
paragraph (b), ``eligible business expenses'' means the business 
expenses of the Borrower, such as salaries, rent, utilities, inventory, 
or other obligations of the business, that were incurred but not paid 
prior to the date of application or that will become due for payment 
within eighteen months after the date of application. Both the CDC and 
the Borrower must certify in the application that the funds will be 
used to cover eligible business expenses. Borrower must, upon request, 
substantiate the use of the funds provided for business expenses 
through, for example, bank statements, invoices marked ``paid,'' 
cleared checks, or any other documents that demonstrate that a business 
obligation was satisfied with the funds provided.
* * * * *
    (15) * * *
    Qualified debt * * *
    (iii) Substantially all (85% or more) of which was for an Eligible 
Fixed Asset. If the Eligible Fixed Asset was originally financed 
through a commercial loan that would have satisfied the ``substantially 
all'' standard (the ``original loan'') and that was subsequently 
refinanced one or more times, with the current commercial loan being 
the most recent refinancing, the current commercial loan will be deemed 
to satisfy this paragraph (iii). If the original loan was for the 
construction of a new building, or the acquisition, renovation, or 
reconstruction of an existing building, and such loan would not have 
satisfied the leasing policies set forth in 13 CFR 120.131 and 13 CFR 
120.870(b), the current commercial loan will be deemed to satisfy these 
policies, provided that Borrower demonstrates compliance with 13 CFR 
120.131(b) for existing buildings as of the date of application.
* * * * *
    (vii) For which the applicant for the refinancing available under 
this paragraph (g) has been current on all payments due for not less 
than one year preceding the date of application. For the purposes of 
this paragraph (vii), ``current on all payments due'' means that no 
payment was more than 30 days past due from either the original payment 
terms or modified payment terms (including deferments) if such 
modification was agreed to in writing by the Borrower and the lender of 
the existing debt prior to the October 12, 2011. Any delinquency in 
payment on the loan to be refinanced after approval and before 
debenture funding must be reported to SBA as an adverse change.
* * * * *

Karen G. Mills,
Administrator.
[FR Doc. 2011-26311 Filed 10-7-11; 8:45 am]
BILLING CODE 8025-01-P