Debt Refinancing in 504 Loan Program, 19915-19921 [2018-09638]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 83, Number 88 (Monday, May 7, 2018)]
[Rules and Regulations]
[Pages 19915-19921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09638]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AG79


Debt Refinancing in 504 Loan Program

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: This rule finalizes the interim final rule (IFR) that was 
published on May 25, 2016, to implement the debt refinancing program 
reauthorized by Section 521 of Division E of the Consolidated 
Appropriations Act, 2016. In response to comments received on the IFR, 
this final rule makes some additional revisions to the program's 
regulations with respect to the definition of Qualified debt, the 
requirements related to Eligible Business Expenses, the refinancing of 
Projects involving single or limited use properties, and the 
disbursement period.

DATES: This rule is effective June 6, 2018.

FOR FURTHER INFORMATION CONTACT: Linda Reilly, 504 Program Chief at 
[email protected] or 202-205-9949.

SUPPLEMENTARY INFORMATION:

I. Background Information

    The 504 Loan Program is an SBA financing program authorized under 
Title V of the Small Business Investment Act of 1958 (the ``SBIAct''), 
15 U.S.C. 695 et seq. The core mission of the 504 Loan Program is to 
provide long-term financing to small businesses for the purchase or 
improvement of land, buildings, and major equipment, in an effort to 
facilitate the creation or retention of jobs and local economic 
development. Under the 504 Loan Program, loans are made to small 
business applicants by Certified Development Companies (``CDCs''), 
which are certified and regulated by SBA to promote economic 
development within their community. In general, a project in the 504 
Loan Program (a ``504 Project'') includes: A loan obtained from a 
private sector lender with a senior lien covering at least 50 percent 
of the project cost; a loan obtained from a CDC (a ``504 Loan'') with a 
junior lien covering up to 40 percent of the total cost (backed by a 
100 percent SBA-guaranteed debenture); and a contribution from the 
Borrower of at least 10 percent equity.
    The Small Business Jobs Act of 2010 (the ``Jobs Act''), Public Law 
111-240, 124 Stat. 2504, enacted on September 27, 2010, temporarily 
expanded the ability of a small business to use the 504 Loan Program to 
refinance certain qualifying debt. Prior to the Jobs Act, a 504 Project 
could include a refinancing component only if the project involved an 
expansion of the small business and the existing indebtedness did not 
exceed 50% of the project cost of the expansion. See 13 CFR 120.882(e). 
The temporary Jobs Act program authorized the use of the 504 Loan 
Program for the refinancing of debt where there is no expansion of the 
small business concern (the ``Debt Refinancing Program''). That program 
expired on September 27, 2012.
    Section 521 of Division E of the Consolidated Appropriations Act, 
2016 (the ``2016 Act''), Public Law 114-113, enacted on December 22, 
2015, reauthorized the Debt Refinancing Program with three 
modifications:
    (1) The Debt Refinancing Program shall be in effect only in those 
fiscal years during which the cost to the Federal Government of making 
guarantees under the Debt Refinancing Program and under the 504 Loan 
Program is zero;
    (2) A CDC is required to limit its financings under the 504 Loan 
Program so that, during any fiscal year, new financings under the Debt 
Refinancing Program do not exceed 50% of the dollars the CDC loaned 
under the 504 Loan Program during the previous fiscal year. The 2016 
Act provides that this limitation may be waived by SBA upon application 
by a CDC and after determining that the refinance loan is needed for 
good cause; and
    (3) The alternate job retention goal authorized by the Jobs Act for 
the Debt Refinancing Program is eliminated.
    On May 25, 2016, SBA published an interim final rule to implement 
the 2016 Act (81 FR 33123) and, with the ``zero cost'' requirement 
satisfied for fiscal year 2016, SBA began accepting applications for 
assistance under the Debt Refinancing Program on June 25, 2016, the 
effective date of the interim final rule. With the ``zero cost'' 
requirement satisfied for fiscal years 2017 and 2018, the Debt 
Refinancing Program has continued to be in effect without interruption. 
The regulations governing this program are found at 13 CFR 120.882(g).

II. Summary of Comments Received

    SBA received 49 comments during the comment period for the interim 
final rule, which closed on July 25, 2016. Of the comments received, 
44, or 90%, were from Certified Development Companies, one was from a 
trade association, one was from a law firm, one was from a commercial 
real estate broker, one was from a financial institution, and one was 
from a private citizen. Below is a summary of the comments received.

A. Definition of Qualified Debt--Section 120.882(g)(15)

    The Jobs Act authorizes the refinancing of ``Qualified Debt'' which 
is defined to mean, among other factors, ``indebtedness'' that ``was 
incurred not less than 2 years before the date of the application for 
assistance'', that ``is a commercial loan'', and the proceeds of which 
were used to acquire an Eligible Fixed Asset. See section 
502(7)(C)(III)(aa)(AA), (BB), and (DD) of the SBIAct. In imposing the 
two-year requirement, Congress clearly did not want the Debt 
Refinancing Program to apply to new loans (i.e., loans less than two 
years old). In implementing this statutory requirement, the current 
regulations define ``Qualified debt'', in part, as a ``commercial loan 
. . . [t]hat was incurred not less than 2 years before the date of the 
application for the refinancing available under [the 504 Debt 
Refinancing Program]''. See 13 CFR 120.882(g)(15) (definition of 
``Qualified debt''). Debt that was refinanced through the execution of 
a new Note within the two year period would not be considered Qualified 
debt under the current regulations.

[[Page 19916]]

    Twenty-nine commenters requested that the definition of Qualified 
debt be revised to include debt that has been refinanced within the 2 
years prior to the date of the 504 Debt Refinancing application. The 
commenters argue that, as long as the debt being refinanced was 
originally incurred more than 2 years before application, it falls 
under the statutory definition. Some of the commenters also contend 
that the term ``indebtedness'' is broader than the term ``commercial 
loan'', and that SBA should look to the date of the ``original'' 
indebtedness and not the date that the loan was refinanced. One 
commenter suggested that a refinancing within two years of the 
application date that extends the date of the balloon payment should be 
allowed if the borrower did not receive any additional funds with the 
new loan.
    SBA has reconsidered this issue and agrees that it is appropriate 
to consider the substance of the refinancing, rather than the form 
(i.e., whether the most recent debt is evidenced by a new Note), to 
determine whether it is the same ``indebtedness'' as the prior loan. 
SBA has concluded that certain loans that are refinanced within two 
years of the date of application (the resulting loan herein referred to 
as the ``most recent loan'') may qualify as the same indebtedness, but 
only if the most recent loan is, in effect, a replacement for the prior 
loan. Specifically, in order to be considered the same indebtedness, 
the most recent loan cannot have advanced any additional funds to the 
Borrower (other than to pay the closing costs of the refinancing). SBA 
is revising the definition of ``Qualified debt'' to reflect that SBA 
will consider the most recent loan to be the same indebtedness as the 
prior loan if the effect of the most recent loan was to extend the 
prior loan's maturity date without advancing any additional proceeds to 
the Borrower. The collateral for the most recent loan must also 
include, at a minimum, the same Eligible Fixed Asset(s) that served as 
collateral for the prior loan that was refinanced. (Other terms of the 
most recent loan, however, such as interest rate or amortization 
schedule, may be different and may also include the addition of other 
eligible collateral.) In order to ensure that the Debt Refinancing 
Program complies with the statutory prohibition against refinancing new 
indebtedness, CDCs must submit to SBA as part of the application copies 
of the most recent loan and lien instruments, as well as copies of the 
loan and lien instruments for the loan that was replaced by the most 
recent loan, to show that the effect of the most recent loan was to 
extend the prior loan's maturity date without advancing any additional 
funds to the Borrower (other than to pay the closing costs of the 
refinancing).
    In addition, SBA received comments relating to the statutory 
requirement that the applicant be current on all payments due for not 
less than one year preceding the date of application. See section 
502(7)(C)(III)(bb) of the SBIAct. The current regulations define 
``current on all payments due'' to mean 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 no less 
than one year preceding the date of application.'' See 13 CFR 
120.882(g)(15) (definition of ``Qualified debt'', ] (vii)). In the 
Interim Final Rule published on May 25, 2016, SBA explained that it 
established the requirement that the modification be executed no less 
than one year preceding the 504 application because a debt should not 
be considered ``current on all payments due for not less than one year 
preceding the date of application'' if the payment terms were modified 
during the one year period. This requirement was imposed, in part, to 
ensure that the Debt Refinancing Program would not be used to refinance 
loans that had been modified for the sole purpose of avoiding a 
delinquency or default within the prior year.
    Some commenters requested that SBA allow a modification (including 
through a renewal or extension) within the one year period when the 
purpose of the modification is to extend a balloon payment. SBA has 
reconsidered this issue and agrees that modifications that extend the 
maturity date of the loan may be allowed, provided that, during the one 
year period prior to the date of application (i.e., in the months prior 
to and after the modification), the applicant is current on all 
payments due, there have been no deferments of any payments, and no 
additional proceeds were advanced through the modification. To conform 
the current regulation to this revision, SBA is removing the reference 
to deferments from the regulatory text.
    In addition, as SBA is now allowing certain refinanced loans to 
satisfy the 2-year indebtedness requirement described in ] II.A. above, 
these refinanced loans should not be excluded from the definition of 
``current on all payments due for not less than one year preceding the 
date of application'' merely because the refinance occurred within the 
year prior to application. Thus, SBA will allow a refinanced loan to 
satisfy the ``current on all payments due'' requirement provided that 
it satisfies the same requirements as a modified loan, including that, 
during the one year period prior to the date of application (i.e., in 
the months prior to and after the refinancing), the applicant was 
current on all payments due, there were no deferments of any payments, 
and no additional proceeds were advanced through the refinancing (other 
than to pay the closing costs of the refinancing). (To be consistent 
with the change to the ``Qualified debt'' definition regarding when the 
indebtedness is incurred, the modified or refinanced loan may also 
change the interest rate and other terms.)
    SBA emphasizes that it expressly reserves the right to determine, 
at its discretion on a loan-by-loan basis, whether the modified or 
refinanced repayment terms fail to satisfy prudent lending standards.

B. Refinancing Projects Involving Limited or Single Purpose 
Properties--13 CFR 120.882(g)(5)

    Concerns were expressed by 24 commenters about requiring Borrowers 
to contribute 15%, instead of 10%, for the refinancing of projects 
involving limited/single purpose properties. The commenters noted that, 
under the temporary Debt Refinancing Program, SBA required such 
Borrowers to make only a 10% contribution but, when SBA began to 
process applications under the reauthorized Debt Refinancing Program, 
SBA required Borrowers to contribute 15%. SBA notes that the temporary 
Debt Refinancing Program was implemented during very different economic 
conditions, when the projects to be refinanced under this program were 
sometimes significantly under-collateralized. By requiring Borrowers to 
contribute only 10% and not 15% for refinancing projects involving 
limited or single purpose properties, SBA made the program more 
available to Borrowers at a time when it was difficult for small 
businesses to access capital. Because the project was for the 
refinancing of an existing debt, and was not for the acquisition, 
construction, conversion, or expansion of a limited or single purpose 
property, SBA concluded that the 15% contribution was not required 
under statutory or regulatory requirements. See section 502(3)(C)(ii) 
and 13 CFR 120.910(a)(2). Due to the critical need to provide small 
businesses with access to capital during that time, SBA was willing to 
absorb the additional risk posed by debt refinancing projects where the

[[Page 19917]]

underlying collateral was limited or single purpose properties.
    However, when SBA implemented the 2016 Act, SBA reconsidered this 
policy in light of the fact that, with the economic recovery, project 
properties are now typically over-collateralized and can readily 
provide the additional 5% equity and often more, thereby mitigating the 
risk presented to SBA by projects involving single or limited purpose 
properties in the event of liquidation. The 2016 Act states that the 
Debt Refinancing Program may provide ``not more than 90% of the value 
of the collateral'' for the refinancing of the Qualified Debt, and SBA 
has determined that, where the underlying collateral is limited or 
single purpose properties, the financing provided through the Debt 
Refinancing Program will be limited to 85% of the collateral value, 
with 15% being contributed by the Borrower.
    In the event that general market conditions result again in 504 
Projects that are significantly under-collateralized, however, SBA 
wants the Debt Refinancing Program to have the flexibility to allow 
Borrowers to contribute only 10% toward the cost of a project involving 
single or limited use properties. Accordingly, the rule will provide 
that, if the Refinancing Project involves a limited or single purpose 
building or structure, the Borrower must contribute not less than 15%; 
provided, however, that SBA may determine, in its discretion, that in 
the event of an economic recession, as determined by the National 
Bureau of Economic Research or its equivalent, the required Borrower 
contribution may be not less than 10% for such projects. In such 
circumstance, SBA will publish a notice in the Federal Register of its 
determination and setting forth the justification for the lower 
required Borrower contribution. This lower Borrower contribution 
requirement would be in effect until the first day of the calendar 
quarter after the economic recession has ended as determined by the 
National Bureau of Economic Research or its equivalent. SBA will 
publish a notice in the Federal Register to announce that the lower 
required Borrower contribution ceased being in effect as of that date.
    With respect to the loan provided by the Third Party Lender, the 
statute requires the Third Party Lender to contribute 50% to the 
project cost when the project is financing the construction (or 
acquisition, conversion or expansion) of a single or limited purpose 
property. See section 502(3)(B)(ii) of the SBIAct. While this statutory 
requirement does not strictly apply to the refinancing of existing debt 
involving single/limited purpose property, SBA has considered whether 
Third Party Lenders should nevertheless be required to contribute 50% 
in the case of refinancing a debt involving such properties. As 
Borrowers are now often able in the current market to contribute 20% or 
more equity to the Refinancing Project's costs, the 504 loan would 
amount to 30% or less of the project cost if the Third Party Lender 
were required to contribute 50%, which does not maximize the economic 
benefit of the 504 Loan Program to the small business. Thus, SBA has 
determined that Third Party Lenders will not be required to contribute 
50% but, as required for all projects financed under the Debt 
Refinancing Program, their participation must be at least equal to the 
SBA 504 loan.

C. Extension of Disbursement Deadline--13 CFR 120.882(g)(12)

    The current rule requires that the 504 loan proceeds be disbursed 
within 6 months after loan approval, and authorizes the Director, 
Office of Financial Assistance, or his or her designee, to approve any 
request for extension of the disbursement period for good cause. 13 CFR 
120.882(g)(12). A commenter stated that, now that the program is 
permanent, the rule should be revised to allow up to one year for 
disbursement. The commenter observed that six months may not be 
sufficient time to, for example, satisfy certain environmental 
requirements. SBA has considered this comment and agrees to change the 
disbursement period to nine months, and to provide the Director, Office 
of Financial Assistance (D/FA), or his or her designee, with the 
authority to approve any request for extension of the disbursement 
period for not more than an additional six months for good cause. SBA 
finds that this increase, along with the limited authority to approve 
any request for extension for good cause, is sufficient to address the 
commenter's concerns. SBA is revising 13 CFR 120.882(g)(12) 
accordingly.

D. Financing of Eligible Business Expenses--13 CFR 120.882(g)(6)(i) and 
(ii)

1. Loan-to-Value Limitations With Financing of Eligible Business 
Expenses
    Under the Debt Refinancing Program, Borrowers may 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. See 13 CFR 
120.882(g)(6)(ii).
    When SBA first implemented the reauthorized Debt Refinancing 
Program in 2016, SBA applied a maximum 75% loan-to-value (LTV) for any 
project that financed business expenses and limited such financing of 
business expenses to no more than 25% of the value of the Eligible 
Fixed Asset(s) securing the Qualified Debt. See Policy Notice 5000-
1382, effective May 26, 2016. Thirty-six commenters expressed concerns 
that the 75% LTV was severely restrictive and would impair utilization 
of the program, and many urged SBA to allow for a 90% LTV for all 
Refinancing Projects. SBA considered these comments and decided to 
revise 13 CFR 120.882(g)(6)(i) to allow a maximum LTV of 85% for any 
project that includes the financing of Eligible Business Expenses. SBA 
concludes that this higher LTV will provide increased access to credit 
without adding undue risk to SBA.
    In addition, most of the commenters expressed support for the 25% 
limitation on the amount that may be financed for business expenses, 
though SBA did receive at least one comment suggesting that the small 
business should determine the percentage of these expenses that may be 
financed. SBA notes that the financing of business expenses during 
Fiscal Year 2017 averaged less than 15% of the value of the Eligible 
Fixed Asset(s) securing the Qualified Debt. In addition, with the 
statutory requirement that SBA maintain the Debt Refinancing Program at 
zero subsidy in order for the program to be in effect during any fiscal 
year, SBA must be diligent in placing prudent controls on the program 
to mitigate SBA's risk and exposure. Accordingly, SBA has decided to 
limit the portion of the financing that may be for business expenses to 
20% of the value of the Eligible Fixed Asset(s). In addition, if the 
Refinancing Project includes the financing of Eligible Business 
Expenses, SBA will not accept as collateral any fixed assets other than 
the Eligible Fixed Asset(s) securing the Qualified Debt. Accordingly, 
SBA is revising 13 CFR 120.882(g)(6)(i) and (ii) and the definition of 
``Refinancing Project'' in 13 CFR 120.882(g)(15).
2. Eligible Business Expenses May Include Non-Capital Expenditures
    Twenty-eight commenters requested that SBA allow Borrowers to 
finance minor renovations or ``non-substantial modifications or 
improvements to the Eligible Fixed Assets'' as an Eligible Business 
Expense under the Debt Refinancing Program. Enacted by Congress in 
2010, the Jobs Act created the temporary Debt Refinancing Program for 
projects that do not involve

[[Page 19918]]

the expansion of a small business. See section 502(7)(C)(ii) of the 
SBIAct. SBA has concluded that the regulations would benefit from 
greater clarity regarding the type of minor renovations or ``non-
substantial modifications or improvements'' that SBA regards as not 
involving the expansion of the small business.
    SBA believes that a reasonable approach to this issue is to permit 
the financing of business expenses in the program as long as the 
expenses may be deducted as ordinary and necessary expenses on the 
small business's federal tax returns during the taxable year in which 
they were paid or incurred. See Internal Revenue Code, section 162. 
Examples of such expenses may include repairs, maintenance and minor 
improvements or renovations. Capital expenditures, on the other hand, 
would not be eligible for financing in the program because they have a 
useful life substantially beyond the taxable year. See Internal Revenue 
Code, section 263(a). Examples of such capital expenses may include the 
acquisition of land or improvements or betterments made to increase the 
value of any property. SBA believes that using this distinction between 
operating and capital expenditures is consistent with the statutory 
requirement that the Debt Refinancing Program be used for Refinancing 
Projects that do not involve the expansion of a small business.
    Accordingly, SBA is revising the definition of Eligible Business 
Expenses to allow the financing of ``any other expenses of the business 
that are not capital expenditures.'' With the addition of this 
category, SBA is clarifying that the Borrower may finance any operating 
expense that it records and deducts as an expense in the taxable year 
in which it was paid or incurred, but may not finance any capital 
expense that is used to acquire or improve assets and which the 
Borrower may not claim as a deduction in the taxable year in which the 
expense was paid or incurred. SBA will rely upon the CDC and the small 
business to represent the nature of the expense and that the expense 
may be deducted as an ordinary and necessary expense during the taxable 
year in which it was paid or incurred. CDCs must document their 
determination regarding the nature of the expense in the credit 
memorandum.
    SBA is also removing the phrase ``or other obligations of the 
business'' from the definition to clarify that, except as described 
below, other debt of the business is not included as an Eligible 
Business Expense. As SBA recently clarified, credit card debt may be 
included as an Eligible Business Expense if the credit card is issued 
in the name of the Applicant small business and the Applicant certifies 
that the credit card debt being refinanced was incurred exclusively for 
business related purposes. See SOP 50 10 5(J), Subpart C, Chapter 2, ] 
IV.E.3.g). SBA has also determined that business lines of credit may be 
included as an Eligible Business Expense if the business line of credit 
satisfies the same requirements as credit card debt. For debt that was 
incurred with a credit card or a business line of credit, the proceeds 
of the debt being refinanced, like all other business expenses financed 
under the Debt Refinancing Program, must have been used for expenses of 
the business that are not capital expenditures.

E. Waiver of the 50% Limitation--13 CFR 120.882(g)(10)

    The 2016 Act requires that a CDC limit its financings under the 504 
Loan Program so that, during any fiscal year, new financings under the 
Debt Refinancing Program do not exceed 50% of the dollars the CDC 
loaned under the 504 Loan Program during the previous fiscal year. The 
2016 Act also provides that this limitation may be waived upon 
application by a CDC and upon SBA's determination that the refinance 
loan is needed for good cause. In the interim final rule, SBA stated 
that it would provide guidance regarding the good cause determination 
in its Standard Operating Procedures or other guidance documents. SBA 
received many comments suggesting various factors for SBA to consider 
in making the good cause determination, including projects that (i) 
assist manufacturing firms, (ii) will employ 1 full time equivalent job 
for every $100,000 in requested assistance, (iii) include the 
participation of another economic development entity, (iv) involve a 
borrower who has a pre-existing relationship with the CDC, or (v) 
involve a CDC with less than $5 million in 504 loans during the prior 
fiscal year. Some commenters also expressed concerns that the 50% 
limitation is disadvantageous to smaller or rural CDCs that may not 
have the same capacity as larger CDCs to finance these projects.
    SBA considered these comments and concludes that the focus of the 
good cause determination should be only on the Borrower's financing 
needs, and not on the circumstances of the CDCs or other factors. 
Accordingly, as reflected in the recently issued SOP 50 10 5(J), 
Subpart C, Chapter 2, Sec.  IV.E.2, SBA will consider the following 
factors in determining whether there is good cause for the Borrower to 
obtain the refinancing through a CDC that exceeds the 50% requirement: 
(1) Whether the Borrower has access to other sources of financing, 
including other CDCs that have not exceeded their 50% cap; and (2) 
whether the CDC has an existing 504 loan with the Borrower that is in 
current status. No change to the regulation is necessary.

F. Statutory Requirements

    Several commenters requested changes to other program requirements 
in the Debt Refinancing Program, including that SBA: (i) Allow 504 or 
7(a) loans to be refinanced in the Debt Refinancing Program, (ii) allow 
CDCs participating in the Premier Certified Lenders Program (PCLP) to 
use their delegated authority to approve loans made in the Debt 
Refinancing Program, and (iii) reinstate the alternative job retention 
goal provided in the Jobs Act for Borrowers that do not meet the job 
creation and retention goals under sections 501(d) and (e) of the Small 
Business Investment SBIAct.
    However, each of these program requirements is mandated by statute: 
the prohibition against refinancing a loan subject to a guarantee by a 
Federal agency is mandated by section 502(7)(C)(i)(III)(aa)(CC) of the 
SBIAct; the prohibition against PCLP CDCs using their delegated 
authority to approve loans made in the Debt Refinancing Program is 
mandated by section 502(7)(C)(v) of the SBIAct; and the elimination of 
the alternative job retention goal was made by section 521(a)(1) of the 
2016 Act. SBA notes that, with the elimination of the alternate job 
retention goal, all applicants for a loan under the Debt Refinancing 
Program are required to meet the job creation and retention goals under 
section 501(d) and (e) of the SBIAct. Based on these goals, a 504 
Project, including a project financed under the Debt Refinancing 
Program, must achieve one of the economic development objectives set 
forth in 13 CFR 120.861 or 120.862.
    Accordingly, SBA cannot adopt the requested changes.

III. Section-by-Section Analysis

    Except as set forth below, 13 CFR 120.882(g) remains unchanged.
    Section 120.882(g) Introductory Text. In the Interim Final Rule, 
SBA revised the introductory text in this section to remove the 
following phrase that is no longer applicable: ``For applications 
received on or after February 17, 2011 and approved by SBA no later 
than September 27, 2012''. Also, with the permanent reauthorization of 
the Debt Refinancing Program by the 2016 Act, a specific application 
period is

[[Page 19919]]

unnecessary. No comments were received on this provision and no further 
changes are being made.
    Section 120.882(g)(3). In the Interim Final Rule, SBA revised this 
section by removing the maturity date requirement. In its place, SBA 
inserted the 2016 Act's requirement that, for the Debt Refinancing 
Program to be in effect during any fiscal year, the cost to the Federal 
government of making guarantees under the Debt Refinancing Program and 
under the 504 Loan Program must be zero. No comments were received on 
this provision and no further changes are being made.
    Section 120.882(g)(5). This paragraph is being revised to provide 
that, if the Refinancing Project involves a limited or single purpose 
building or structure, the Borrower must contribute not less than 15%. 
However, SBA may determine, in its discretion, that in the event of an 
economic recession as determined by the National Bureau of Economic 
Research or its equivalent, the required Borrower contribution may be 
not less than 10% for such projects. This lower Borrower contribution 
requirement may be in effect until the recession ends as determined by 
the National Bureau of Economic Research or its equivalent. As 
explained above, SBA will publish a notice in the Federal Register to 
announce the lower Borrower contribution requirement and explaining its 
justification, and a notice to announce that, due to the end of the 
recession, the lower Borrower contribution requirement is no longer in 
effect.
    Section 120.882(g)(6). As discussed above, SBA is revising Sec.  
120.882(g)(6)(i) to allow a maximum LTV of 85% for any project that 
includes the financing of Eligible Business Expenses, and to limit the 
portion of the financing that may be used for Eligible Business 
Expenses to 20% of the value of the Eligible Fixed Asset(s). SBA is 
also revising Sec.  120.882(g)(6)(ii) to amend the definition of 
Eligible Business Expenses to include ``any other expenses of the 
business that are not capital expenditures'', and to remove the phrase 
``other obligations of the business'' from the definition to clarify 
that Eligible Business Expense may include credit card debt and 
business lines of credit in the name of the small business that were 
incurred exclusively for business related purposes, but no other debt 
of the business may be included.
    Section 120.882(g)(10). As discussed above, the 2016 Act eliminated 
the alternate job retention goal and, accordingly, SBA removed the 
alternate job retention goal provision from the regulations in the 
Interim Final Rule.
    Instead, the Interim Final Rule revised Sec.  120.882(g)(10) to 
reflect the 2016 Act's requirement that a CDC limit its financings 
under the Debt Refinancing Program so that, during any fiscal year 
(October 1 to September 30), new financings under the Debt Refinancing 
Program do not exceed 50% of the dollars loaned by the CDC under the 
504 Loan Program during the previous fiscal year. Because the 2016 Act 
provides that the 50% limitation applies to the dollars loaned under 
the 504 Loan Program during the previous fiscal year, all financings 
made by the CDC during the previous fiscal year will be included in 
determining this number, including those financings made under the Debt 
Refinancing Program.
    The Interim Final Rule provided that, as authorized by the 2016 
Act, the 50% limitation may be waived upon application by a CDC and a 
determination by SBA that the refinance loan is needed for good cause. 
As discussed above, SBA received comments on this provision and SBA has 
issued waiver guidance in the recently issued Standard Operating 
Procedure 50 10 5(J). SBA will monitor the implementation of this 
guidance and update it as needed in its policy guidance. For clarity, 
SBA is changing the term ``refinance loan'' to ``504 loan'' in the last 
sentence of section 120.882(g)((10). No further changes are being made 
to the regulation.
    Section 120.882(g)(12). As discussed above, this paragraph is being 
revised to change the period by which a loan must be disbursed from six 
months to nine months. The Director, Office of Financial Assistance (D/
FA), or his or her designee, will have the authority to approve any 
request for extension of the disbursement period for not more than an 
additional six months for good cause.
    Section 120.882(g)(13). This section prohibits the Third Party Loan 
from being sold on the secondary market as a part of a pool guaranteed 
under subpart J of part 120 when the debt being refinanced is same 
institution debt. Subpart J of part 120, the Secondary Market Guarantee 
Program for First Lien Position 504 Loan Pools, expired on September 
23, 2012; however, should this program be reauthorized, SBA wants to 
ensure that this prohibition remains in effect. Accordingly, in the 
Interim Final Rule, SBA revised this provision to make it clear that 
the prohibition would apply to any successor to the program described 
in subpart J of part 120. No comments were received on this provision 
and no further changes are being made.
    Section 120.882(g)(15) (Definition of ``Qualified debt''). As 
discussed above, SBA is revising the criterion in paragraph (i) to 
allow certain loans that are refinanced within the two years prior to 
the date of application to be eligible as the same ``indebtedness'' if 
the effect of the refinancing was to extend the maturity date without 
advancing any additional proceeds, and the collateral for the most 
recent loan includes, at a minimum, the same Eligible Fixed Asset(s) 
that served as collateral for the former loan that was refinanced. 
Other terms of the most recent loan, such as interest rate and the 
addition of other collateral, may be different. To be considered for 
eligibility by SBA, the loan documents and lien instruments for the 
most recent loan, as well as the loan documents and lien instruments 
for the loan that was replaced by the most recent loan, must be 
submitted to SBA as part of the application.
    SBA is also revising the definition of ``current on all payments 
due'' in paragraph (vii) to allow the payment terms of a loan to be 
modified less than one year prior to the date of application (whether 
through a modification to an existing Note or a refinancing that 
results in a new Note) if the purpose of the modification or 
refinancing is to extend the maturity date of the loan, including 
balloon payments, no additional proceeds were advanced to the Borrower, 
and the Borrower was current on all payments due for the one year 
period prior to the date of application (i.e., in the months prior to 
and after the effective date of the modification or refinancing), 
including that there were no deferments of any payment.
    SBA emphasizes that it reserves the right to determine, at its 
discretion on a loan-by-loan basis, whether the terms of any 
modification or refinancing are consistent with prudent lending 
standards.
    Section 120.882(g)(15) (Definition of ``Refinancing Project''). SBA 
is revising this definition to provide that, if the Refinancing Project 
includes the financing of Eligible Business Expenses, SBA will not 
accept as collateral any fixed assets other than the Eligible Fixed 
Asset(s) securing the Qualified debt.

[[Page 19920]]

Compliance With Executive Orders 12866, 12988, 13132, and 13563, 13771, 
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 rule 
does not constitute a ``significant regulatory action'' under Executive 
Order 12866. This rule is also not a major rule under the Congressional 
Review Act.
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
    The Consolidated Appropriations Act, 2016, reauthorized the Debt 
Refinancing Program, which was first authorized by the Jobs Act. The 
Agency received significant public comments on the Jobs Act interim 
final rule that was issued to implement the temporary Debt Refinancing 
Program (see 76 FR 9213, February 17, 2011). To assist in developing 
that interim final rule, the Agency held a public forum on November 17, 
2010 in Boston, Massachusetts. As discussed above, SBA received a 
significant number of public comments on the interim final rule that 
was published to implement the reauthorized Debt Refinancing Program, 
and the revisions made by this final rule are the result of the public 
participation in the rulemaking process.
Executive Order 13771
    This rule is not an Executive Order 13771 regulatory action because 
it is not significant under E.O. 12866.
Paperwork Reduction Act, 44 U.S.C., Ch. 35
    SBA has determined that this final rule does not impose any 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act.
Regulatory Flexibility Act, 5 U.S.C. 601-612
    The RFA requires administrative agencies to consider the effect of 
their actions on small entities, including small non-profit businesses, 
and small local governments. Pursuant to the RFA, when an agency issues 
a rule, the agency must prepare an analysis that describes whether the 
impact of the rule will have a significant economic impact on a 
substantial number of these small entities. However, the RFA requires 
such analysis only where notice and comment rulemaking is required. 
This rule finalizes the interim final rule that was published in 2016 
to implement the reauthorized Debt Refinancing Program. In issuing that 
rule, SBA provided just cause why it could be published without notice 
and comment, and therefore, exempted from the RFA requirement to 
prepare an initial regulatory flexibility analysis. Since this final 
rule merely finalizes that exempted interim rule, SBA believes a final 
regulatory analysis is also not required.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses, Reporting and 
recordkeeping requirements.

    Accordingly, the interim final rule amending 13 CFR part 120 which 
was published at 81 FR 33123 on May 25, 2016, is adopted as a final 
rule with the following changes:

PART 120--BUSINESS LOANS

0
1. The authority citation for 13 CFR part 120 is revised 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 (7), and 697(a) 
and (e); Pub. L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 
2504.


0
 2. Amend Sec.  120.882 by:
0
a. Adding three sentences after the first sentence of paragraph (g)(5), 
and removing ``10%'' in the last sentence;
0
b. Revising paragraph (g)(6)(i);
0
c. Removing the third and fourth sentences of paragraph (g)(6)(ii) and 
adding in their place five sentences;
0
d. Removing the words ``refinance loan'' in the last sentence of 
paragraph (g)(10) and adding the words ``504 loan'' in their place;
0
e. Revising paragraph (g)(12);
0
 f. Removing the semicolon at the end of paragraph (i) in the 
definition of ``Qualified debt'' in paragraph (g)(15), adding a period 
in its place, and adding two sentences to the end of the paragraph;
0
g. Removing the second sentence of paragraph (vii) in the definition of 
``Qualified debt'' in paragraph (g)(15) and adding in its place two 
sentences; and
0
h. Revising the definition of ``Refinancing Project'' in paragraph 
(g)(15).
    The additions and revisions read as follows:


Sec.  120.882  Eligible Project costs for 504 loans.

* * * * *
     * * *
    (g) * * *
    (5) * * * If the Refinancing Project involves a limited or single 
purpose building or structure, the Borrower must contribute not less 
than 15% (excluding administrative costs), unless SBA determines, in 
its discretion, and publishes a notice in the Federal Register, that 
due to an economic recession, as determined by the National Bureau of 
Economic Research or its equivalent, Borrowers may contribute not less 
than 10% for Refinancing Projects involving a limited or single purpose 
property during the recession. The lower required contribution by the 
Borrower will be in effect until the first day of the calendar quarter 
following the end of the economic recession as determined by the 
National Bureau of Economic Research or its equivalent. SBA will 
publish a notice in the Federal Register announcing the date on which 
the requirement of the lower Borrower contribution ended. * * *
    (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, except 
that if the Borrower's application includes a request to finance the 
Eligible Business Expenses described in paragraph (g)(6)(ii) of this 
section, the portion of the Refinancing Project provided by the 504 
loan and the Third Party Loan may be no more than 85% of the fair 
market value of the fixed assets that will serve as collateral and the 
Borrower may receive no more than 20% of the fair market value of the 
Eligible Fixed Asset(s) securing the Qualified Debt for Eligible 
Business Expenses;
    (ii) * * * For the purposes of this paragraph (g), ``Eligible 
Business Expenses'' are limited to the operating expenses of the 
business that were incurred but not paid prior to the date of 
application or that will become due for payment within 18 months after 
the date of application. These expenses may include salaries, rent, 
utilities, inventory, and other expenses of the business that are not 
capital expenditures. Debt is not included as an

[[Page 19921]]

Eligible Business Expense, except debt that was incurred with a credit 
card or a business line of credit may be included if the credit card or 
business line of credit is issued in the name of the small business and 
the Applicant certifies that the debt being refinanced was incurred 
exclusively for business related purposes. Loan proceeds must not be 
used to refinance any personal expenses. Both the CDC and the Borrower 
must certify in the application that the funds will be used to cover 
Eligible Business Expenses. * * *
* * * * *
    (12) The 504 loans approved under this paragraph (g) must be 
disbursed within 9 months after loan approval. The Director, Office of 
Financial Assistance, or his or her designee, may approve a request for 
extension of the disbursement period for an additional 6 months for 
good cause.
* * * * *
    (15) * * *
    Qualified debt is a commercial loan:
    * * *
    (i) * * * A commercial loan that was refinanced within the two 
years prior to the date of application (the most recent loan) may be 
deemed incurred not less than 2 years before the date of the 
application provided that the effect of the most recent loan was to 
extend the maturity date without advancing any additional proceeds 
(except to cover closing costs) and the collateral for the most recent 
loan includes, at a minimum, the same Eligible Fixed Asset(s) that 
served as collateral for the former loan that was refinanced. The loan 
documents and lien instruments for the most recent loan, as well as the 
loan documents and lien instruments for the loan that was replaced by 
the most recent loan, must be submitted to SBA as part of the 
application.
* * * * *
    (vii) * * * 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 
(whether through a modification to an existing Note or through a 
refinancing that results in a new Note). The modification (or 
refinancing) must have been agreed to in writing by the Borrower and 
the lender of the existing debt no less than one year preceding the 
date of application, except that a modified (or refinanced) loan may be 
allowed if the purpose of the modification (or refinancing) was to 
extend the maturity date of the loan, including any balloon payment, 
and if, during the one year period prior to the date of application 
(i.e., in the months prior to and after the modification or 
refinancing), the Borrower was current on all payments due, there have 
been no deferments of any payments, and no additional proceeds were 
advanced through the modification or refinancing (except to cover 
closing costs). * * *
* * * * *
    Refinancing Project means the fair market value of the Eligible 
Fixed Asset(s) securing the qualified debt and any other fixed assets 
acceptable to SBA, except that if the Refinancing Project includes the 
financing of Eligible Business Expenses, SBA will not accept as 
collateral any fixed assets other than the Eligible Fixed Asset(s) 
securing the Qualified Debt.
* * * * *

    Dated: April 26, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-09638 Filed 5-4-18; 8:45 am]
 BILLING CODE 8025-01-P