Microloan Program Expanded Eligibility and Other Program Changes, 14617-14621 [2014-05549]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 79, Number 51 (Monday, March 17, 2014)]
[Proposed Rules]
[Pages 14617-14621]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05549]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 79, No. 51 / Monday, March 17, 2014 / 
Proposed Rules

[[Page 14617]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

[Docket No. SBA-2013-0002]
RIN 3245-AG53


Microloan Program Expanded Eligibility and Other Program Changes

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would amend certain existing regulations 
for the Microloan Program. The Microloan Program assists women, low 
income, veteran, and minority entrepreneurs, and others capable of 
operating a small business that are in need of small amounts of 
financial assistance. Specifically, this proposed rule would allow any 
Microloan Program Intermediary to make microloans (loans of $50,000 or 
less) to businesses with an Associate who is on probation or parole, 
except in limited circumstances; it would increase the minimum number 
of loans that microloan Intermediaries must make annually; and it would 
remove the requirement that the Microloan Revolving Fund (MRF) and the 
Loan Loss Reserve Fund (LLRF) be held in interest-bearing Deposit 
Accounts. In addition, the proposed rule includes technical amendments 
that would conform the regulations to current statutory authority.

DATES: Comments must be received on or before May 16, 2014.

ADDRESSES: You may submit comments, identified by RIN: 3245-AG53, 
docket number [SBA-2013-0002] by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Jody Raskind, Chief, Microenterprise Development 
Branch, U.S. Small Business Administration, 409 3rd Street SW., 8th 
floor, Washington, DC 20416.
     Hand Delivery/Courier: Jody Raskind, Chief, 
Microenterprise Development Branch, U.S. Small Business Administration, 
409 3rd Street SW., 8th floor, Washington, DC 20416.
    All comments will be posted on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, please submit the information to Jody 
Raskind, Chief, Microenterprise Development Branch, U.S. Small Business 
Administration, 409 3rd Street SW., 8th Floor, Washington, DC 20416, or 
send an email to jody.raskind@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: Jody Raskind, Chief, Microenterprise 
Development Branch, at (202) 205-7076 or Jody.Raskind@sba.gov.

SUPPLEMENTARY INFORMATION: 

 I. Background Information

    Section 7(m) of the Small Business Act (15 U.S.C. 636(m)) (``Act'') 
authorizes SBA's Microloan Program, which assists small businesses that 
need small amounts of financial assistance. Under the program, SBA 
makes direct loans to Intermediaries, as defined in Sec.  120.701(e), 
that use the loan proceeds to make microloans to eligible borrowers. 
SBA is also authorized to make grants to Intermediaries to be used for 
marketing, management, and technical assistance.
    This proposed rule includes several regulatory changes, as well as 
technical amendments that conform the regulations to current statutory 
authority. SBA is proposing these changes in order to clarify certain 
program requirements that have caused confusion and in response to 
feedback from existing Intermediaries.

II. Section by Section Analysis

    Intermediaries must keep their Microloan Revolving Funds (MRFs) and 
Loan Loss Reserve Funds (LLRFs) at insured depository institutions. See 
13 CFR 120.701(a), 120.709, and 120.710. SBA proposes to revise the 
definition of insured depository institution in Sec.  120.701(d) to 
specifically include Federally-insured credit unions. The current 
definition specifies only insured banks and savings associations. SBA 
is proposing this change to clarify inconsistent interpretations of 
this definition through a clear statement that such credit unions are 
included.
    Section 120.707(a), What conditions apply to loans by 
Intermediaries to Microloan borrowers?, sets forth the eligibility 
conditions placed on loans between Intermediaries and microloan 
borrowers. However, the current language of Sec.  120.707(a) has caused 
some confusion among Intermediaries as to which businesses are eligible 
for microloans. Currently, Sec.  120.707(a) states that ``An 
intermediary may make Microloans to any small business eligible to 
receive financial assistance under this part.'' SBA interprets this 
language to mean that microloan borrowers must meet the same 
eligibility criteria as borrowers under the Agency's 7(a) and 504 
business loan programs (except that nonprofit child care businesses are 
eligible for microloans). See 13 CFR 120.110. The proposed rule would 
revise this language to clarify that microloan borrowers must meet the 
same eligibility requirements as borrowers in the 7(a) and 504 
programs, except as specifically set forth in Sec.  120.707(a).
    This rule would also amend Sec.  120.707(a) to allow Intermediaries 
to make loans to businesses with an Associate, as defined in Sec.  
120.10, who is currently on probation or parole, except in limited 
circumstances. Businesses with an Associate who is incarcerated, on 
probation, on parole, or currently under indictment for a felony or a 
crime of moral turpitude are ineligible for assistance under the 7(a) 
or 504 programs under Sec.  120.110(n); therefore, such businesses are 
currently ineligible for assistance under the Microloan Program as 
well. SBA is proposing this change as a result of a regulatory review 
conducted in connection with SBA's participation on the Federal 
Interagency Reentry Council (Reentry Council), https://www.nationalreentryresourcecenter.org/reentry-council. The Reentry 
Council is an interagency task force led by the Department of Justice 
which seeks to explore ways in which agencies can reduce the Federal 
barriers to successful reentry of formerly incarcerated individuals in 
order to assist them in becoming productive citizens. Formerly 
incarcerated individuals who maintain

[[Page 14618]]

steady employment are less likely to return to jail; however, many 
formerly incarcerated individuals have difficulty finding steady 
employment. The Microloan Program offers an opportunity for such 
individuals who meet the Intermediaries' lending criteria to receive 
financing and technical assistance to start their own businesses. Under 
the amended rule, businesses with an Associate on probation or parole 
for an offense involving fraud or dishonesty would be ineligible, as 
would child care businesses with an Associate on probation or parole 
for an offense against children. Also, under the proposed rule, 
individuals who are currently incarcerated or under indictment would 
remain ineligible for microloans.
    In Sec.  120.709, What is the Microloan Revolving Fund?, and Sec.  
120.710(a), What is the Loan Loss Reserve Fund?, SBA proposes to remove 
the requirement that Deposit Accounts, as defined in Sec.  120.701(a), 
be interest-bearing. SBA is proposing this change after receiving 
information from several Intermediaries that interest-bearing accounts 
are not readily available or require Intermediaries to pay a fee. This 
proposed rule eliminates the requirement that the Deposit Accounts be 
interest-bearing and, as a result, would reduce the burden and costs 
faced by microloan Intermediaries.
    In Sec.  120.712, How does an Intermediary get a grant to assist 
Microloan borrowers?, SBA proposes to remove paragraph (c) to conform 
to current statutory authority. Section 120.712(c) states that 
Intermediaries that make at least 50 percent of their loans to small 
businesses located in or owned by residents of Economically Distressed 
Areas are not subject to the 25 percent grant contribution requirement. 
This Intermediary contribution waiver authority was removed from the 
statute in 2010. See 15 U.S.C. 636(m)(4), as amended by Public Law 111-
240. Paragraphs (d) and (e) would be redesignated as paragraphs (c) and 
(d).
    SBA proposes to add a new Sec.  120.716, What is the minimum number 
of loans an Intermediary must make each Federal fiscal year?, which 
would contain the minimum loan requirement for Intermediaries. The 
minimum loan requirement is currently contained in Sec.  
120.1425(d)(2), Grounds for enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs, which is located in 
Subpart I, ``Risk-Based Lender Oversight'' (including oversight of 
Intermediaries). SBA is proposing to move the minimum loan requirement 
to Subpart G, which contains the other regulations specific to the 
Microloan Program. The new Sec.  120.716 would also specifically state 
that Intermediaries that do not meet the minimum loan requirement are 
not eligible to receive new grant funding. This is consistent with 
SBA's current policy and practice. SBA determines whether an 
Intermediary is eligible for grant funding based on the number of 
microloans made in the previous Federal fiscal year. An Intermediary 
that is ineligible for a grant due to failure to make the minimum 
number of microloans in the previous Federal fiscal year may become 
eligible for grant funding the following year by meeting the minimum 
number of loans for the current year. Section 120.1425(d)(2) would be 
revised to include a cross reference to the new Sec.  120.716.
    Proposed Sec.  120.716 would also increase the minimum number of 
microloans that Intermediaries must close and fund each year. 
Currently, Intermediaries must close and fund (i.e., make an initial 
disbursement on) at least four loans each Federal fiscal year. Under 
the proposed rule, the minimum number of microloans will gradually 
increase to twelve per year. In FY2015, the minimum loan requirement 
will be six microloans. In FY2016, the requirement will increase to 
eight microloans. In FY2017 and thereafter, the requirement will 
increase to a minimum of twelve microloans each year.
    SBA proposes to increase the minimum loan requirement for several 
reasons. First, many existing Intermediaries have repeatedly requested 
an increase in the requirement so that more grant funding is available 
for those Intermediaries that generate higher numbers of loans. Second, 
increasing the minimum number of loans will expand access to capital by 
increasing the total number of microloans made each year by 
Intermediaries. Finally, SBA believes that a minimum requirement of 
twelve loans, which represents approximately one microloan per month, 
is a reasonable standard that active lenders should be able to meet. 
Increasing the minimum loan requirement will require Intermediaries 
that currently make less than the minimum number of microloans per year 
to increase their lending. SBA proposes a graduated increase in the 
minimum loan requirement to allow Intermediaries sufficient time to 
build scale to meet the higher requirements.
    SBA invites comments on all aspects of the proposed rule and, in 
particular, whether the proposed minimum loan requirements are 
achievable without sacrificing prudent lending standards. SBA would 
also like comments regarding the limitation on making of microloans to 
businesses with an Associate who is on probation or parole for certain 
offenses, and on how Intermediaries would comply with this requirement.

Compliance With Executive Orders 12866, 12988, 13132, and 13563, 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 has determined that this 
proposed rule is a ``significant'' regulatory action for the purposes 
of Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. However, this is not a major rule under the 
Congressional Review Act, 5 U.S.C. 800.
A. Regulatory Objective of the Proposal
    The proposed rule would allow any Microloan Program Intermediary to 
make microloans (loans of $50,000 or less) to businesses with an 
Associate who is on probation or parole; it increases the minimum 
number of loans that microloan Intermediaries must make annually; and 
it removes the requirement that the Microloan Revolving Fund (MRF) and 
the Loan Loss Reserve Fund (LLRF) be held in interest-bearing Deposit 
Accounts. In addition, the proposed rule includes technical amendments 
that conform the regulations to current statutory authority.
 B. Benefits of the Rule
    The small business borrowers that receive loans from Microloan 
Program Intermediaries directly benefit from the Microloan Program. The 
most significant benefit to small business borrowers as a result of 
this proposed rule is increased access to capital. This proposed rule 
would allow Microloan Program Intermediaries to make loans to 
businesses with an Associate who is on probation or parole, except in 
limited circumstances. This change would meet the unmet financing and 
employment opportunity needs of this segment of the population.
    Additionally, this proposed rule would require Intermediaries to 
meet a higher standard in terms of minimum loan production. Once fully 
implemented, this new standard will represent an increase of 
approximately 400 microloans per year. During FY 2012, 77 
Intermediaries (approximately half of Intermediaries) made fewer than 
12 microloans. As proposed,

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Intermediaries would be required to increase the number of microloans 
made each year in order to receive grant funding, which is used to 
provide technical assistance to borrowers and prospective borrowers. As 
a result, this proposed rule change would also increase the number of 
microborrowers receiving training with limited technical assistance 
resources. Finally, the rule change would encourage the expansion of 
Intermediaries into new lending territories to broaden the base of 
customers from which borrowers can be drawn. This expansion represents 
geographic growth in availability of capital for small business 
borrowers.
    The final element of the proposed rule change, the removal of the 
interest-bearing requirement on deposit accounts, will ultimately mean 
more financing capital and technical assistance training for small 
business borrowers. Banks often charge monthly fees for use of 
interest-bearing deposit accounts. By allowing microloan Intermediaries 
to use non-interest bearing accounts, the Intermediaries will have 
additional resources to use toward providing loans or technical 
assistance.
C. Costs of the Rule
    The proposed rule changes would impact the approximately 77 
Intermediaries making fewer than twelve microloans per year. However, 
the graduated introduction of the higher minimum loan requirement will 
lessen the cost faced by the Intermediaries by allowing additional time 
to ramp up loan production. Because the financing capital is provided 
by SBA, the only cost to the Intermediaries will be the operating 
expenses associated with the increased number of loans that are not 
covered by the interest rate spread allowed by the program.
    SBA does not anticipate that the proposed rule changes will impact 
the program's subsidy model. For loans to businesses with an associate 
on parole or probation, SBA believes that Intermediaries will continue 
to make prudent lending decisions regardless of whether a micro-
borrower is a member of the newly eligible population. Because SBA does 
not expect the new population of borrowers to have a different 
repayment rate than the rest of the borrowers, inclusion of this 
population in the model will not impact subsidy.
    Since the subsidy models do not use as an input the number of 
microloans made by Intermediaries to micro-borrowers, increasing the 
minimum number of loans made per year will not impact subsidy. Finally, 
SBA believes that a change in the interest-bearing nature of the MRF 
and LLRF accounts will not impact subsidy. The MRF and LLRF are 
established for each loan made to an intermediary. MRF consists of loan 
proceeds from SBA to the Intermediary. Microloans to micro-borrowers 
and microloan repayments are processed through this account. A Loan 
Loss Reserve Fund (LLRF) is established and maintained at 15% of the 
outstanding balance of microloans owed to the Intermediary under the 
corresponding loan from SBA. In the event that an Intermediary defaults 
on its payments or goes out of business or ceases to participate in the 
Microloan program, SBA will have right to the proceeds in the MRF and 
LLRF up to the amount due to SBA under the program.
D. Alternatives
    SBA received a number of recommendations and support for the 
proposed changes on numerous occasions from Intermediaries. Such 
comments came during conference calls, training conferences, and in 
some cases, letters from Intermediaries. The Intermediaries that have 
provided input to SBA seek more efficient ways to use limited 
resources, ensure that resources are going where most needed, and to 
reduce administrative costs. The proposed regulatory changes will move 
the Microloan Program to the next level of market expansion, cost 
reduction, and better utilization of taxpayer dollars. SBA believes 
that this rule is SBA's best available means for increasing access to 
capital for women, low income individuals, minority entrepreneurs, and 
other small businesses which need small amounts of financial 
assistance. SBA also believes that it will encourage self-employment as 
an option for those not easily employable due to mistakes in their 
past.

Executive Order 12988

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

Executive Order 13132

    SBA has determined that the proposed rule 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. Therefore, 
for the purposes of Executive Order 13132, SBA has determined that this 
proposed rule has no federalism implications warranting preparation of 
a federalism assessment.

Executive Order 13563

    Executive Order 13563 reaffirms the principles of E.O. 12866 while 
calling for improvements in the nation's regulatory system to promote 
predictability, to reduce uncertainty, and to use the best, most 
innovative, and least burdensome tools for achieving regulatory ends. 
The executive order directs agencies to consider regulatory approaches 
that reduce burdens and maintain flexibility and freedom of choice for 
the public where these approaches are relevant, feasible, and 
consistent with regulatory objectives. E.O. 13563 emphasizes further 
that regulations must be based on the best available science and that 
the rulemaking process must allow for public participation and an open 
exchange of ideas. We have developed this rule in a manner consistent 
with these requirements. This rule is also part of the Agency's 
commitment under the Executive Order to reduce the number and burden of 
regulations.
    A description of the need for this regulatory action and benefits 
and costs associated with this action is included above in the 
Regulatory Impact Analysis under Executive Order 12866. SBA discussed 
implementing these proposed rule changes with Microloan Program 
Intermediary associations and representatives from Intermediaries 
during conference calls. In addition, these issues were discussed 
during the Microloan Training Conference with Intermediaries in 2012. 
Most of these proposed changes were specifically requested by 
Intermediaries.

Paperwork Reduction Act, 44 U.S.C., Ch. 35

    SBA has determined that this proposed rule would not impose any new 
reporting and recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. Chapter 35. The Microloan Program Electronic Reporting 
System (MPERS) is approved under OMB Control Number 3245-0352, ICR 
Reference Number 201011-3245-004 and the SBA Lender Microloan 
Intermediary and NTAP Reporting Requirements are approved under OMB 
Control Number 3245-0365, ICR Reference Number 201203-3245-001.

Regulatory Flexibility Act 5 U.S.C. 601-612

    The Regulatory Flexibility Act (5 U.S.C. 601-612) (RFA) requires 
administrative agencies to consider the

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economic impact of their actions on small entities, which includes 
small businesses, small nonprofit businesses, and small local 
governments. The RFA requires agencies to prepare a regulatory 
flexibility analysis, which describes the economic impact that the rule 
will have on small entities, or certify that the rule will not have a 
significant economic impact on a substantial number of small entities.
    SBA has determined that this rule affects a substantial number of 
small entities, but that it will not have significant impact on those 
entities. All of the Intermediaries that participate in the Microloan 
program are small nonprofit or quasi-governmental entities. 
Approximately half of the 148 existing Intermediaries will be required 
to increase loan production in order to meet the new minimum loan 
requirements. SBA anticipates that approximately 15 of these 
Intermediaries may choose not to participate in the Microloan Program 
as result of the increased lending requirement. These 15 Intermediaries 
made fewer than 4 loans in FY 2012 and may choose not to increase loan 
production to meet the higher requirements. These entities are making 
so few loans, and generating so little revenue from those loans, that 
exiting the program will not cause a significant economic impact.
    SBA estimates that entities leaving the program will lose 
approximately $15,000 in annual revenue associated with microloans that 
would have been made under the SBA Microloan Program. The $15,000 
represents approximate annual interest and fee income for 3 microloans 
of $50,000. An organization making just three microloans a year is not 
sustainable and must rely on other sources of income to operate. 
Additionally, these entities are already out of compliance with program 
requirements and as a result, do not receive grants through the 
Microloan Program.
    The graduated introduction of the minimum loan requirement will 
allow Intermediaries additional time to ramp up loan production. The 
proposed rule would require six microloans in 2015, eight microloans in 
2016, and twelve loans per year in 2017 and thereafter. This graduated 
approach allows Intermediaries to adapt business practices to meet 
higher loan requirements. For example, rural Intermediaries may seek 
out new ways to utilize technology to more efficiently serve rural 
areas and therefore, make more microloans. Additionally, the graduated 
approach allows Intermediaries to anticipate and seek out future 
funding needs to meet increased microloan requirements. Finally, SBA 
will offer a series of training events for Intermediaries to share best 
practices related to building up an organization's capacity to make 
more microloans.
    Accordingly, the Administrator of SBA hereby certifies that this 
rule will not have a significant economic impact on a substantial 
number of small entities. SBA invites comment from members of the 
public who believe there will be a significant impact either on 
Microloan Intermediaries, or on microborrowers that receive funding 
from Microloan Intermediaries.

List of Subjects in 13 CFR Part 120

    Community development, Equal employment opportunity, Loan programs-
business, Reporting and recordkeeping requirements, Small business.

    For the reasons stated in the preamble, SBA proposes to amend 13 
CFR Part 120 as follows:

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); Pub. 
Law 111-5, 123 Stat. 115, Pub. Law 111-240, 124 Stat. 2504.

0
2. Amend Sec.  120.701 by revising paragraph (d) to read as follows:


Sec.  120.701  Definitions.

* * * * *
    (d) Insured depository institution means any Federally insured 
bank, savings association, or credit union.
* * * * *
0
3. Amend Sec.  120.707 by revising paragraph (a) to read as follows:


Sec.  120.707  What conditions apply to loans by Intermediaries to 
Microloan borrowers?

    (a) Except as otherwise provided in this paragraph, an Intermediary 
may only make Microloans to small businesses eligible to receive 
financial assistance under this part. A borrower may also use Microloan 
proceeds to establish a nonprofit child care business. An Intermediary 
may also make Microloans to businesses with an Associate who is 
currently on probation or parole, provided, however, that the Associate 
is not on probation or parole for an offense involving fraud or 
dishonesty or, in the case of a child care business, is not on 
probation or parole for an offense against children. Proceeds from 
Microloans may be used only for working capital and acquisition of 
materials, supplies, furniture, fixtures, and equipment. SBA does not 
review Microloans for creditworthiness.
* * * * *
0
4. Amend Sec.  120.709 by revising the first sentence to read as 
follows:


Sec.  120.709  What is the Microloan Revolving Fund?

    The Microloan Revolving Fund (``MRF'') is a Deposit Account into 
which an Intermediary must deposit the proceeds from SBA loans, its 
contributions from non-Federal sources, and payments from its Microloan 
borrowers. * * *
* * * * *
0
5. Amend Sec.  120.710 by revising paragraph (a) to read as follows:


Sec.  120.710  What is the Loan Loss Reserve Fund?

    (a) General. The Loan Loss Reserve Fund (``LLRF'') is a Deposit 
Account which an Intermediary must establish to pay any shortage in the 
MRF caused by delinquencies or losses on Microloans.
* * * * *


Sec.  120.712  [Amended]

0
6. In Sec.  120.712, remove paragraph (c) and redesignate paragraphs 
(d) and (e) as paragraphs (c) and (d), respectively.
0
7. Add new Sec.  120.716 to read as follows:


Sec.  120.716  What is the minimum number of loans an Intermediary must 
make each Federal fiscal year?

    (a) Minimum loan requirement. Intermediaries must close and fund 
the required number of microloans per year (October 1-September 30) as 
follows:
    (1) For fiscal year 2015, six microloans,
    (2) For fiscal year 2016, eight microloans, and
    (3) For fiscal years 2017 and following, twelve microloans per 
year.
    (b) Failure to meet minimum loan requirement. Intermediaries that 
do not meet the minimum loan requirement are not eligible to receive 
new grant funding.
0
8. Amend Sec.  120.1425 by revising paragraph (d)(2) to read as 
follows:


Sec.  120.1425  Grounds for enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs.

* * * * *
    (d) * * *
    (2) Failure to close and fund the required number of microloans per 
year under Sec.  120.716.
* * * * *


[[Page 14621]]


    Dated: March 6, 2014.
Marianne O. Markowitz,
Acting Administrator.
[FR Doc. 2014-05549 Filed 3-14-14; 8:45 am]
BILLING CODE 8025-01-P