SBA Supervised Lenders Application Process, 1783-1793 [2019-28500]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 85, Number 8 (Monday, January 13, 2020)]
[Proposed Rules]
[Pages 1783-1793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28500]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AH04


SBA Supervised Lenders Application Process

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA) is proposing to 
update the regulations applicable to Small Business Lending Companies 
(SBLCs) and state-regulated lenders (Non-Federally Regulated Lenders 
(NFRLs)) in order to improve efficiencies and potentially reduce costs 
related to the application and review process. The rule proposes to 
establish a comprehensive application and review process for SBLC and 
NFRL applicants (collectively referred to as SBA Supervised Lenders), 
including for transactions involving a change of ownership or control, 
and to clarify and incorporate into the regulations the factors SBA 
considers in its evaluation of an application. The rule also proposes 
to address SBA's requirements for the minimum amount of capital needed 
to be maintained by SBA Supervised Lenders, some of which have not been 
updated since 1996.

DATES: SBA must receive comments on this proposed rule on or before 
March 13, 2020.

ADDRESSES: You may submit comments, identified by RIN 3245-AH04, by any 
of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Bethany J. Shana, Office of Credit Risk Management, 
Office of Capital Access, Small Business Administration, 409 Third 
Street SW, Washington, DC 20416.
     Hand Delivery/Courier: Bethany J. Shana, Office of Credit 
Risk Management, Office of Capital Access, Small Business 
Administration, 409 Third Street SW, Washington, DC 20416.
    SBA will post all comments on https://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at https://www.regulations.gov, please submit the 
information to Bethany J. Shana, Office of Credit Risk Management, 
Office of Capital Access, 409 Third Street SW, Washington, DC 20416. 
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: Susan E. Streich, Director, Office of 
Credit Risk Management, Office of Capital Access, Small Business 
Administration, 409 3rd Street SW, Washington, DC 20416; email address: 
[email protected].

SUPPLEMENTARY INFORMATION: 

I. Background Information

    The 7(a) Loan Program is a business loan program authorized by 
section 7(a) of the Small Business Act (15 U.S.C. 636(a)) and is 
governed primarily by the regulations in part 120 of Title 13 of the 
Code of Federal Regulations (CFR). The core mission of the 7(a) Loan 
Program is to provide SBA-guaranteed financial assistance to small 
businesses that lack access to capital on reasonable terms and 
conditions in order to support our nation's economy.
    Under the 7(a) Loan Program, a lender (Lender) participates with 
SBA by making loans directly to eligible small businesses and SBA 
guarantees a portion of each loan made by Lenders in the program. The 
Lender is responsible for funding and servicing the loan and must 
comply with SBA's Loan Program Requirements (as defined in 13 CFR 
120.10) throughout the life of the loan. SBA may delegate to a Lender 
the authority to approve small business loans made under the 7(a) Loan 
Program. The Lender may also sell the guaranteed portion of a 7(a) loan 
in SBA's secondary market and, in certain circumstances, may securitize 
or sell a participating interest in the unguaranteed portion of a 7(a) 
loan. In the event that a borrower defaults on a 7(a) loan, the Lender 
must conduct the liquidation efforts and, if applicable, litigation 
efforts in accordance with SBA Loan Program Requirements. The Lender 
and SBA share in the loss, if any, in accordance with their respective 
interests in the loan.
    Most Lenders participating in the 7(a) Loan Program are depository 
institutions that have a primary Federal regulator (e.g., the Federal 
Deposit Insurance Corporation (FDIC), the Office of the Comptroller of 
the Currency (OCC), the National Credit Union Administration (NCUA)) 
that oversees the Lender's lending activities. SBA also has the 
statutory authority under section 7(a)(17) of the Small Business Act to 
authorize non-federally regulated entities to make 7(a) loans, 
including entities that have state-regulators. Under this authority, 
SBA has authorized SBA Supervised Lenders to make loans in the 7(a) 
Loan Program. SBA Supervised Lenders are defined in 13 CFR 120.10 to 
include SBLCs and NFRLs, and are subject to SBA regulation, oversight 
and enforcement, including the imposition of civil monetary penalties.
    SBLCs, as defined in 13 CFR 120.10, are non-depository lending 
institutions that are authorized only to make loans pursuant to section 
7(a) of the Small Business Act and loans to Intermediaries in SBA's 
Microloan

[[Page 1784]]

program. SBLCs are regulated, supervised and examined solely by SBA, 
except for the subset of SBLCs defined as Other Regulated SBLCs in 13 
CFR 120.10. In January of 1982, SBA imposed a moratorium on issuing 
additional SBA lending authorities (referred to as SBLC Licenses) to 
SBLCs. Today, there are fourteen (14) SBLCs with full authority to make 
7(a) loans up to the maximum loan amount (currently $5 million).\1\ An 
entity may purchase one of the fourteen SBLC Licenses from an existing 
SBLC with SBA's prior written approval.
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    \1\ SBA waived certain regulations for the purpose of permitting 
mission-oriented lenders to participate in SBA's Community Advantage 
Pilot Program (referred to as CA Lenders), a pilot program within 
the 7(a) Loan Program. Each CA Lender is identified as either an 
SBLC or NFRL, depending on whether the lender is subject to 
regulation by a state. CA Lenders are limited to making loans in the 
CA Pilot Program, which generally requires a CA Lender to make loans 
to underserved markets (e.g., low-to-moderate income communities, 
rural areas, opportunity zones, veteran-owned businesses) and in an 
amount not to exceed $250,000. The CA Pilot Program is governed by 
all regulations applicable to the 7(a) Loan Program generally and to 
SBA Supervised Lenders specifically unless waived or modified in the 
Federal Register Notices published in connection with the CA Pilot 
Program. SBA is not proposing to apply the changes in this proposed 
rule to the CA Pilot Program. For more information about the CA 
Pilot Program please refer to the CA Participant Guide, Version 5.0 
(October 1, 2018), available at https://www.sba.gov/document/support-community-advantage-participant-guide.
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    NFRLs, as defined in 13 CFR 120.10, are business concerns that are 
subject to regulation, supervision and oversight by a state regulator 
that must be satisfactory to SBA. By definition, an NFRL's lending 
activities are not regulated by a Federal Financial Institution 
Regulator (as defined in 13 CFR 120.10). Typically, NFRLs are organized 
as state licensed Business and Industrial Development Companies 
(BIDCOs), but may also include other types of state-regulated lending 
institutions, such as non-profit corporations or financial institutions 
without Federal deposit insurance or share insurance protection.
    To become an SBA Supervised Lender, a prospective applicant must be 
qualified as determined by SBA in its sole discretion. Applicants must 
meet, inter alia, the participation criteria and ethical requirements 
for all Lenders set forth in the regulations at 13 CFR 120.140 and 
120.410, the regulations specific to SBA Supervised Lenders (13 CFR 
120.460 through 120.465) and, if applicable, the regulations specific 
to SBLCs (13 CFR 120.470 through 120.490). An entity interested in 
becoming an SBA Supervised Lender must submit an application to SBA 
containing the information specified in SBA's Standard Operating 
Procedures 50 10, Lender and Development Company Loan Programs, as 
amended from time to time (SOP 50 10).\2\
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    \2\ The current version of the SOP is the 50 10 5(K), effective 
April 1, 2019. The application requirements can be found in this SOP 
in Subpart A, Chapter 1, Paragraph II.C.2 with respect to NFRLs and 
Subpart A, Chapter 2, Paragraph II with respect to SBLCs. The SOP is 
available at https://www.sba.gov/document/sop-50-10-5-lender-development-company-loan-programs.
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II. Summary of Proposed Changes

    In this proposed rule, SBA aims to enhance the application and 
review process for organizations seeking to participate as an SBA 
Supervised Lender in the 7(a) Loan Program and to mitigate the risk 
inherent in their participation in the program. The proposed changes 
would improve efficiencies associated with applications submitted to 
SBA by prospective SBLCs and NFRLs, including transactions involving a 
change of ownership or control, without compromising performance or 
increasing risk to the 7(a) Loan Program.
    This rule also proposes to incorporate into the regulations the 
factors SBA considers in its evaluation of an SBA Supervised Lender 
application, including an assessment of the applicant's capitalization, 
organizational structure, the risk associated with its business plan, 
the professional qualifications and the historical loan performance 
record of the applicant and its management team (including key 
employees), the prior history or involvement of the Applicant or its 
management team (including key employees) with any SBA program, and 
other relevant information obtained by SBA through due diligence.
    Typically, SBA Supervised Lenders are non-depository institutions, 
and, as such, rely on secondary market loan sales, warehouse lines of 
credit, participations or securitizations to support their lending 
operations. These activities, by their nature, create additional risk 
to SBA. Many of the changes in this proposed rule, including changes 
related to the safety and soundness and the lending activities of SBA 
Supervised Lenders (e.g., capital maintenance requirements), seek to 
mitigate the increased risk associated with the operations of SBA 
Supervised Lenders.

III. Section-by-Section Analysis of Proposed Changes

    SBA proposes to amend the following sections in 13 CFR part 120:

A. Substantive Changes

    1. Section 120.460 What are SBA's additional requirements for SBA 
Supervised Lenders?
    SBA proposes to add new paragraphs (c) and (d) to Sec.  120.460. 
Paragraph (c) would incorporate into the regulations a requirement that 
NFRLs must employ qualified full-time professional management, as is 
currently required of SBLCs. This new paragraph would clarify the 
meaning of qualified full-time professional management for SBA 
Supervised Lenders to include, at a minimum, the employment of a chief 
executive officer or equivalent to manage daily operations, a chief 
credit/risk officer, and at least one other full-time employee 
qualified by training and experience to carry out the SBA Supervised 
Lender's business plan. Existing SBA Supervised Lenders would not be 
required to comply with the new regulatory definition of qualified 
full-time professional management unless, after the effective date of a 
final rulemaking, they make or acquire any 7(a) loans or engage in a 
transaction that constitutes a change of ownership or control of the 
SBA Supervised Lender. Based on the quarterly condition reports and the 
annual reports that are required to be submitted to the Agency by SBA 
Supervised Lenders (including audited financial statements), most SBA 
Supervised Lenders already comply with the proposed new definition of 
qualified full-time professional management. SBA believes this proposed 
rule represents the minimum level of oversight and responsibility 
necessary for a lender receiving the benefit of SBA loan guarantees.
    SBA is proposing to add a new paragraph (d) to limit an NFRL's 
lending area for 7(a) loan originations to the state in which the 
NFRL's primary state regulator is located. A number of NFRLs 
participating in the 7(a) Loan Program currently have limitations 
imposed by state law or by their state regulator that restrict their 
lending activities to the state in which their primary state regulator 
is located. In recent years, however, certain state regulators have 
permitted NFRLs to expand their business plan and lending area to make 
loans outside of the state or even nationwide. SBA is concerned that 
state regulators may not have sufficient resources or capacity to 
adequately supervise, regulate and examine NFRLs with a business plan 
to make or acquire 7(a) loans outside of their state, and SBA does not 
have the resources necessary to fill in the gaps in oversight and 
enforcement.

[[Page 1785]]

    SBA has also found that many NFRLs lack the experience and 
expertise necessary to manage the risks associated with multistate 
lending, such as the financial risks inherent in the servicing and 
liquidation of 7(a) loans in other state jurisdictions. With the 
exception of two NFRLs, approximately 90% of the lending by NFRLs 
within the 7(a) Loan Program is done within the state where the NFRL's 
primary state regulator is located. In an effort to manage the risks 
associated with NFRLs participating in the 7(a) Loan Program, SBA 
proposes to incorporate a new paragraph (d) to limit the lending area 
of NFRLs (with respect to 7(a) loans only) to the state in which their 
primary state regulator is located, except that an NFRL's lending area 
may include a local trade area that is contiguous to such state (e.g., 
a city or metropolitan statistical area that is bisected by a state 
line) if the NFRL receives SBA's prior written approval. This is 
consistent with the general understanding that state-regulated lenders 
focus on economic development in their state and local communities. 
Existing NFRLs would not be subject to this requirement unless, after 
the effective date of a final rulemaking, they make or acquire any 7(a) 
loans or engage in a transaction that constitutes a change of ownership 
or control of the NFRL. For further discussion on the impact of this 
proposed rule see the initial regulatory flexibility analysis (IRFA) 
below.
    2. Section 120.462 What are SBA's additional requirements on 
capital maintenance for SBA Supervised Lenders?
    SBA is authorized to supervise the safety and soundness of NFRLs 
and regulate their lending activities pursuant to section 23(a) of the 
Small Business Act. See 15 U.S.C. 650(a). Currently, NFRLs must 
maintain the minimum amount of capital established by their state 
regulator to meet SBA's regulatory requirements for capital 
maintenance. See 13 CFR 120.462(d). SBA has determined, however, that 
the minimum level of capital established by an NFRL's state regulator 
may not be sufficient to manage the credit risk associated with an 
NFRL's lending operation or the potential loss to SBA due to an NFRL's 
financial failure.\3\ This rule proposes to amend the regulations to 
require NFRLs to maintain a baseline minimum amount of capital 
necessary for participation in the 7(a) Loan Program. The proposed 
minimum amount of capital that an NFRL would need to maintain would be 
equal to the higher of (1) the minimum amount of capital required by 
the NFRL's state regulator, or (2) $2,500,000. Existing NFRLs that have 
capital amounts less than the proposed minimum would have three years 
after the effective date of a final rulemaking to reach the new minimum 
capital amount. An NFRL that does not meet the new minimum capital 
requirement by the end of the three-year period could remain in the 
program but would not be permitted to make or acquire 7(a) loans after 
such date, until it satisfies the requirement. In addition, the new 
minimum capital requirement would apply immediately in the event of a 
change of ownership or control of an NFRL during the three-year time 
frame.
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    \3\ In 2017, a state licensed lender participating as an NFRL in 
the 7(a) Loan Program was put into liquidation by order of its state 
regulator and under the supervision of a state court. After 
approximately two years, the appointed liquidator sold the lender's 
assets. The events leading up to the lender's liquidation indicate 
that although the lender was in compliance with the minimum capital 
required by its state regulator, the NFRL did not have a sufficient 
amount of capital to manage the credit risk associated with its 7(a) 
lending activities. Because the NFRL did not maintain a sufficient 
amount of capital SBA was put in a position to sustain a loss at the 
time of the lender's financial failure.
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    SBA believes that most NFRLs already comply with this requirement 
\4\ and that it represents the baseline minimum level of capital 
necessary for an NFRL to maintain while making loans with the benefit 
of SBA loan guarantees. The proposed new minimum level of capital is 
equal to one-half the amount of minimum capital proposed for SBLCs in 
this rulemaking (see Section III.A.6 below), consistent with SBA's 
intent in this proposed rule to limit 7(a) loan making by NFRLs to the 
state in which their primary state regulator is located (as opposed to 
nationwide for SBLCs).
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    \4\ Of the twenty-one NFRLs that are participating in the 7(a) 
Loan Program, three do not currently meet the proposed new minimum 
capital requirement of $2.5 million based on information submitted 
to SBA periodically in quarterly condition reports or annual 
reports. See 13 CFR 120.464.
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    3. Section 120.466 SBA Supervised Lender application.
    SBA proposes to add a new Sec.  120.466 to incorporate into the 
regulations a new application and review process for prospective SBA 
Supervised Lenders. SBA proposes to evaluate applications through an 
initial review and, if warranted, a final review.
    The initial review, as proposed under Sec.  120.466(a), would 
require an SBA Supervised Lender applicant to submit a written plan 
(known as a Lender Assessment Plan (LAP)). The LAP would allow SBA to 
more effectively review key elements of an application and reach a 
preliminary assessment about the qualifications of an applicant more 
quickly and efficiently. SBA recognizes that the current SBA Supervised 
Lender application process can be costly for the applicant and 
represents an inefficient use of SBA's time and limited resources.
    An initial review phase would assist SBA in identifying incomplete 
applications and unqualified applicants much earlier in the review 
process. The initial review will include an initial assessment of the 
applicant's business plan, capitalization and professional management 
team (including key employees). As part of this initial review, SBA may 
also require an in-person interview between the applicant and 
appropriate employees of the Office of Capital Access. The interview 
will serve as an opportunity for the applicant to explain the 
information provided in its LAP and answer any preliminary questions 
posed by SBA. During the initial review phase, SBA may also contact 
listed and unlisted references and verify the accuracy of the 
information provided in the LAP.
    If SBA determines, based on the information provided in the LAP and 
in the in-person interview (if required), that the applicant may 
proceed to the final review phase, it will notify the applicant in 
writing. Notification by SBA that the applicant may proceed to final 
review does not mean that the applicant will be favorably assessed or 
approved by SBA to participate as an SBA Supervised Lender in the 7(a) 
Loan Program. If SBA notifies an applicant in writing that it may not 
proceed to the final review, the applicant may not submit a new LAP 
until nine months from the date of such notification. This nine month 
time period should allow sufficient time for the applicant to address 
any issues identified by SBA during the initial review phase without 
overburdening SBA with premature resubmissions. SBA will determine 
whether a LAP submitted during this nine month time period is being 
submitted by the same applicant.
    The final review, as proposed under Sec.  120.466(b), would require 
each SBA Supervised Lender applicant to submit a complete application 
as further described in official SBA policies and procedures.\5\ A 
complete application would update the information disclosed in the LAP 
and would provide additional information for SBA's review, such as the 
applicant's organizational documents, operational plan, credit 
policies, internal control

[[Page 1786]]

policies, loan risk rating system, capital adequacy plan, proposed 
credit facilities, organizational chart, audited financial statements, 
bank statements, legal opinions and other necessary documentation. 
After completion of the final review, SBA (the Director, Office of 
Financial Assistance, in consultation with the Director, Office of 
Credit Risk Management) will issue a final decision to approve or deny 
the application. SBA believes the proposed new application and review 
process will provide greater clarity and transparency, will expedite 
SBA's review of applications, and may be less burdensome for applicants 
and on SBA's limited administrative resources.
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    \5\ The information required to be submitted in a complete 
application would not be set forth in SBA's regulation but would 
continue to be in SBA's official policies and procedures. See SOP 50 
10.
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    SBA recognizes that in some instances an SBA Supervised Lender 
applicant may be able to cure certain deficiencies in its application 
over a period of time, such as raising additional capital to support 
its business plan, adding more experienced members to its management 
team, or demonstrating to SBA a longer track record of successful loan 
making performance. This proposed rule provides that if an SBA 
Supervised Lender's application is denied, the applicant may submit a 
new LAP and restart the application process anytime after 18 months 
from the date of denial. SBA believes this 18 month time period is 
necessary to avoid resubmissions from declined applicants before 
sufficient time has elapsed for meaningful changes to occur and to be 
reflected in an SBA Supervised Lender application.
    Lastly, under Sec.  120.466(c), SBA is proposing to require an 
entity seeking to become an NFRL to have at least one year of current 
operating and relevant commercial lending experience before the entity 
may submit an application to become an SBA Supervised Lender. The 
requirement of having at least one year of experience is consistent 
with the standards that have been established for other SBA business 
loan programs, such as the Microloan Program, where entities are 
required to have at least one year of prior experience in order to be 
eligible to participate in the program as an Intermediary.
    4. Section 120.467 Evaluation of SBA Supervised Lender applicants.
    SBA proposes to add a new Sec.  120.467 to incorporate into the 
regulations the factors that SBA currently considers in evaluating an 
SBA Supervised Lender applicant. SBA's evaluation includes a review of, 
among other things, the applicant's business plan, organizational 
structure, operational plan, management qualifications, the historical 
performance of the loans originated by the applicant or attributable to 
its management team, the applicant's capitalization, financial 
projections and liquidity, and prior history or involvement of the 
applicant or its management team (including key employees) with any SBA 
guaranteed lending program or any other Federal or state lending 
program. In addition, SBA reviews the results of background 
investigations (e.g., through SBA Form 1081) and other information 
obtained through due diligence, such as reference checks.
    In addition, this proposed rule makes it clear that SBA may 
prohibit individuals or entities from participating as an officer, 
director, manager, owner or key employee of an applicant if such 
individual or entity: (1) Has a previous record of failing to comply 
with SBA Loan Program Requirements; (2) previously participated in a 
material way with any past or present SBA Lender or Intermediary that 
failed to maintain satisfactory SBA performance; (3) previously 
defaulted on any Federal loan or Federally assisted financing that 
resulted in the Federal Government or any of its agencies or 
departments sustaining a loss in any of its programs; or (4) ever 
failed to pay when due any debt or obligation, including any amounts in 
dispute, to the Federal Government or guaranteed by the Federal 
Government (including but not limited to taxes or business or student 
loans). These provisions are consistent with SBA's current policies in 
evaluating an SBA Supervised Lender applicant.
    5. Section 120.468 Change of ownership or control requirements for 
SBA Supervised Lenders.
    SBA proposes to move the regulation applicable to a change of 
ownership or control of an SBLC (Sec.  120.475) to a new Sec.  120.468 
with certain modifications. The purpose of this change is to 
incorporate into the regulations the current policy requirement that 
all SBA Supervised Lenders, including NFRLs, must obtain SBA approval 
prior to any change of ownership or control. This proposed rule 
provides clarification as to what would be considered a change of 
ownership or control, including any series of transfers that, in the 
aggregate over an 18 month period, transfers 10 percent or more of an 
SBA Supervised Lender's stock or ownership interests. This rule also 
seeks to add a new paragraph (a)(5) to clarify that the definition of a 
change of ownership or control includes any transaction or event that 
results in any change in the possession (direct or indirect) of the 
right to control, or the power to direct or cause the direction of, the 
management or policies of an SBA Supervised Lender. The rule also 
clarifies that SBA Supervised Lenders must receive SBA prior written 
approval before entering into any definitive agreement regarding a 
change of ownership or control.
    This rule also proposes to incorporate into the regulations as 
Sec.  120.468(c) the current policy that a new application (as 
described above in new Sec.  120.466) must be submitted to SBA in 
connection with a change of ownership or control of an SBA Supervised 
Lender.
    In addition, this proposed rule would add a new paragraph (d) to 
provide an SBA Supervised Lender with the opportunity to voluntarily 
surrender its SBA lending authority (i.e., its SBLC License or its NFRL 
lending authority) and withdraw from the 7(a) Loan Program with SBA's 
prior written approval. This would provide SBA Supervised Lenders with 
a path to exit the 7(a) Loan Program in an efficient and organized 
manner. As proposed, a voluntary surrender would require an SBA 
Supervised Lender to (i) transfer its entire loan portfolio to one or 
more Lenders acceptable to SBA, and (ii) enter into a withdrawal 
agreement. The purpose of the withdrawal agreement is to resolve any 
outstanding issues between the SBA Supervised Lender and SBA, including 
any outstanding monetary liabilities.
    6. Section 120.471 What are the minimum capital requirements for 
SBLCs?
    SBA proposes to amend Sec.  120.471(a) to increase the minimum 
capital requirement for SBLCs, which has not been updated since 1996. 
SBA has determined that the current minimum capital requirement that an 
SBLC must maintain (i.e., the greater of $1 million or 10 percent of 
the aggregate of its share of all outstanding loans) is insufficient to 
assure an SBLC's continued financial viability or provide for any 
necessary growth. In 1996, the maximum 7(a) loan amount was $1,000,000. 
The maximum 7(a) loan amount has increased several times since then, 
the last time occurring in September of 2010. Section 1111 of the Small 
Business Jobs Act of 2010 (SBJA), Pub. L. 111-240, 124 Stat. 2504, 
which was enacted on September 27, 2010, permanently increased the 
maximum guaranteed portion and the maximum loan amount for 7(a) loans. 
Under the SBJA, the maximum 7(a) loan amount was increased from $2 
million to $5 million and the maximum 7(a) loan guaranteed portion was 
increased to the

[[Page 1787]]

current amount of $3,750,000.\6\ No corresponding changes were made by 
SBA to increase the minimum capital requirements for SBA Supervised 
Lenders either at that time or in connection with any of the prior 
increases in the maximum 7(a) loan amount that have occurred since 
1996.
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    \6\ For International Trade and Export Working Capital loans the 
maximum 7(a) loan amount is $5 million, and the maximum 7(a) loan 
guaranteed portion is $4.5 million. See 15 U.S.C. 636(a)(2)(D) and 
(E); 15 U.S.C. 636(a)(3)(B); and 15 U.S.C. 636(a)(14)(B)(i).
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    This proposed rule would adopt a new minimum capital requirement 
for SBLCs equal to unencumbered paid-in capital and paid-in surplus of 
at least $5 million, or ten percent of the aggregate of its share of 
all outstanding loans, whichever is greater. Most of the existing SBLCs 
have capital in amounts well in excess of the minimum amount required 
by current Sec.  120.471(a). The proposed change would again ensure 
that no SBLC has minimum capital in an amount less than the size of a 
single 7(a) loan permitted in the program. See 15 U.S.C. 636(a)(3)(A). 
An existing SBLC that has capital in an amount less than the proposed 
minimum would have three years after the effective date of a final 
rulemaking to reach the new minimum capital amount, after which it 
would be permitted to remain in the program but would not be permitted 
to make or acquire 7(a) loans until such time as the minimum capital 
requirement was satisfied. The new minimum capital requirement would 
apply immediately, however, in the event of a change of ownership or 
control of an SBLC.
    SBA is proposing to amend Sec.  120.471(b) to expand the definition 
of capital to include ``unrestricted net assets'' for non-profit 
corporations. In recent years, SBA has seen an increase in the interest 
of non-profit corporations seeking to become an SBLC; however, the 
definition of capital has not been updated to reflect that an SBLC may 
be organized as either a for-profit or non-profit corporation. This 
proposed change would address that issue.
    Finally, SBA is considering whether it should make any additional 
changes to the definition of capital under Sec.  120.471(b). Capital 
currently consists only of the following: Common stock, preferred stock 
(non-cumulative and with no maturity date), additional paid-in capital 
(representing amounts paid for stock in excess of par value), retained 
earnings, and capital contributions to limited liability companies and 
limited partnerships that are not subject to repayment or withdrawal 
and have no cumulative priority return. In recent years, SBA has become 
concerned that retained earnings can include amounts, such as the 
estimated value of loan servicing rights, that may not be as reliable 
as paid-in capital. Specifically, SBA is concerned that the valuation 
of servicing rights assets is based on assumptions such as prepayment 
speeds and loan default rates that are subject to change. SBA is 
seeking to determine whether, and in what amount, servicing rights 
should contribute to an SBA Supervised Lender's required minimum 
capital, and to ensure that there is a consistent understanding of the 
appropriate treatment of servicing rights by SBA Supervised Lenders. 
SBA is soliciting comments from the public on the current definition of 
capital (as defined in Sec.  120.471(b)) and whether it should be 
modified to limit any contribution that servicing rights may have 
towards an SBA Supervised Lender's minimum capital requirement. 
Alternative options could include, for purposes of the minimum capital 
calculation: (1) Limiting the percentage of retained earnings that are 
permitted to be comprised of the value of servicing rights, or (2) 
limiting the percentage of servicing rights that are permitted to be 
included in retained earnings.

B. Technical Changes

    1. Section 120.410 Requirements for all participating Lenders.
    SBA proposes a conforming technical change to Sec.  120.410(a)(1) 
to reflect the new minimum capital requirements for SBA Supervised 
Lenders.
    2. Section 120.470 What are SBA's additional requirements for 
SBLCs?
    SBA proposes a conforming technical change to remove Sec.  
120.470(g) ``Management'' and redesignate paragraph (h) as paragraph 
(g). A new regulatory definition of qualified full-time professional 
management for SBA Supervised Lenders will be incorporated into 
proposed new Sec.  120.460(c) as described above in Section III.A.1.
    3. Section 120.475 Change of ownership or control.
    SBA proposes a conforming technical change to remove and reserve 
Sec.  120.475. The current text of Sec.  120.475 will be incorporated 
with modifications into proposed new Sec.  120.468 as described above 
in Section III.A.5.

Compliance With Executive Orders 12866, 13563, 13771, 12988, and 13132, 
the Paperwork Reduction Act (44 U.S.C., Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612).

Executive Order 12866
    The Office of Management and Budget (OMB) has determined that this 
proposed rule is not a ``significant'' regulatory action for the 
purposes of Executive Order 12866, and therefore, SBA has not prepared 
a Regulatory Impact Analysis. This is not a major rule under the 
Congressional Review Act, 5 U.S.C. 801 et seq.
Executive Order 13563
    This executive order supplements and reaffirms the principles and 
requirements in Executive Order 12866, including the requirement to 
provide the public with an opportunity to participate in the regulatory 
process. SBA Supervised Lenders have been involved in the 7(a) Loan 
Program for over 35 years. Over the years, the Agency has received 
feedback from many SBA Supervised Lender applicants and program 
participants including valuable insight and suggestions for 
improvements to the application and review process.
Executive Order 13771
    This proposed rule is not expected to be an Executive Order 13771 
regulatory action because this proposed rule is not significant under 
Executive Order 12866.
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 retroactive or preemptive effect.
Executive Order 13132
    SBA has determined that this proposed rule would 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.
Paperwork Reduction Act, 44 U.S.C., Ch. 35
    SBA has determined that this proposed rule would impose a new

[[Page 1788]]

reporting and/or recordkeeping requirement under the Paperwork 
Reduction Act (PRA). Specifically, the proposed rule would require SBA 
Supervised Lenders to submit a written Lender Assessment Plan (LAP) in 
order for SBA to conduct an initial review of the applicant. In 
addition, this rule also proposes to codify a requirement for 
applicants to submit a complete application in order for SBA to 
determine whether the applicant has the qualifications necessary to 
participate in the 7(a) Loan Program as an SBA Supervised Lender. As 
discussed above, this requirement is currently described in SBA's 
official policies and procedures.
    The applicant will also use some of the same forms as other Lenders 
that apply to participate in the 7(a) Loan Program, including the SBA 
Form 1081, Statement of Personal History. SBA Form 1081 is an OMB-
approved form under OMB Control number 3245-0080.
    The title, summary of the new information collection, description 
of respondents, and an estimate of the reporting burden related to this 
collection are discussed below.
    Title of Collection: SBA Supervised Lender Application and Review.
    OMB Control Number: New Collection.
    (a) Description: Lender Assessment Plan.
    The proposed rule would require organizations seeking to become an 
SBA Supervised Lender (or seeking SBA approval of a change of ownership 
or control) to submit a LAP to SBA. The LAP includes the legal name and 
contact information of the applicant, a written business plan, current 
and projected financial statements and other important information 
about the applicant and its management team (including key employees).
    Need and Purpose: A LAP is necessary for SBA to conduct an initial 
review of an applicant seeking to become an SBA Supervised Lender (or 
seeking SBA approval of a change of ownership or control). The LAP 
provides SBA with key elements of an application so that SBA can reach 
a preliminary assessment about the qualifications of an applicant more 
efficiently. This initial review phase will assist SBA in identifying 
incomplete applications and unqualified applicants much earlier in the 
application review process.
    Description and Estimated Number of Respondents: Pursuant to 
proposed Sec.  120.466(a), the information in the LAP will be collected 
from each organization seeking to become an SBA Supervised Lender (or 
seeking SBA approval of a change of ownership or control). SBA 
estimates that it will likely receive no more than four LAPs each year.
    Total Estimated Response Time: It is estimated that each applicant 
would need approximately 35 hours to prepare and submit the proposed 
LAP for an estimated total of 140 hours annually.
    (b) Description: SBA Supervised Lender Application.
    If an applicant seeking to become an SBA Supervised Lender (or 
seeking SBA approval of a change of ownership or control) is authorized 
by SBA to proceed to the final review phase, the applicant will be 
required to submit a complete application in order for SBA to determine 
whether the applicant has the qualifications necessary to participate 
in the 7(a) Loan Program.
    Need and Purpose: The information submitted with the collection is 
necessary for SBA to reach a final decision regarding an applicant 
seeking to become an SBA Supervised Lender (or seeking SBA approval of 
a change of ownership or control). The complete application requires an 
SBA Supervised Lender applicant to provide more detail about the 
information previously disclosed to SBA in the LAP and will include 
additional information about the applicant's proposed operation and 
lending activities as a participant in the 7(a) Loan Program. As stated 
above, the application requirements are not new since they are 
currently set out in SBA's official policies and procedures. Under 
those policies and procedures, an organization applying to become an 
SBA Supervised Lender (or seeking SBA approval of a change of ownership 
or control) is required to, among other things, submit documentation in 
support of its organizational structure, internal control policies, 
operational plan, proposed credit policies, loan risk rating system, 
proposed secondary market activities, capital adequacy plan, audited 
financial statements and other information (e.g., certifications and 
legal opinions) necessary for SBA to evaluate the qualifications of the 
applicant. See SOP 50 10. Although the requirements currently apply to 
about four organizations each year, now that SBA is proposing to codify 
the application requirements in its regulations, under the PRA it is 
deemed to impact ten or more respondents; therefore, SBA must now 
obtain OMB approval in compliance with the PRA procedures.
    Description and Estimated Number of Respondents: The information in 
the complete application will be collected from organizations that are 
seeking to become an SBA Supervised Lender and have successfully 
reached the final review phase. Based on current experience, SBA 
estimates that it will likely receive no more than four complete 
applications each year.
    Total Estimated Response Time: It is estimated that each applicant 
would need approximately 50 hours to prepare and submit a complete 
application, for an estimated total of 200 hours annually.
    SBA invites comments on: (1) Whether this collection of information 
is necessary for the proper performance of SBA's functions, including 
whether the information will have a practical utility; (2) the accuracy 
of SBA's estimate of the time for preparing and completing the 
collection of information, including the validity of the methodology 
and assumptions used; (3) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (4) ways to minimize 
the burden of the collection of information on respondents, including 
through the use of automated collection techniques, when appropriate, 
and other forms of information technology.
Regulatory Flexibility Act, 5 U.S.C. 601-612
    Under the Regulatory Flexibility Act (RFA), this proposed rule, if 
adopted, may have an impact on a substantial number of small entities 
that participate as SBA Supervised Lenders in the 7(a) Loan Program. 
Immediately below, SBA sets forth an initial regulatory flexibility 
analysis (IRFA) examining the impact of the proposed rule in accordance 
with section 603, Title 5, of the United States Code. The IRFA 
addresses (1) the reasons, objectives and legal basis for this proposed 
rule; (2) a description of the kind and number of small entities that 
may be affected; (3) the projected reporting, recordkeeping and other 
compliance requirements; (4) whether there are any Federal rules that 
may duplicate, overlap, or conflict with this proposed rule; and (5) 
whether there are any significant alternatives to this proposed rule.
    1. What are the reasons, objectives and legal basis for the rule?
    The proposed rule is designed to improve efficiencies and enhance 
the application and review process for organizations seeking to 
participate in the 7(a) Loan Program as SBA Supervised Lenders by 
conducting an initial review (LAP) and, if warranted, a final review 
(complete application). The objective is to provide a process for a 
more efficient and effective evaluation of the qualifications of 
applicants seeking to become SBA Supervised Lenders. The new 
application and review process would provide greater clarity and 
transparency to applicants

[[Page 1789]]

and would expedite SBA's review, which will potentially reduce costs on 
applicants and on SBA's limited administrative resources.
    The proposed rule also seeks to raise the minimum capital 
requirement that SBA Supervised Lenders must maintain in order to 
assure their continued financial viability and to provide for any 
necessary growth. The minimum capital requirement for SBA Supervised 
Lenders has not been updated by SBA for more than twenty-three years. 
The Agency has determined that the regulations addressing minimum 
capital must be amended to correspond with the 500% increase in the 
maximum 7(a) loan amount ($1 million to $5 million) that Congress has 
authorized by statute over the last twenty-three years.
    The proposed rule also limits the 7(a) lending area for NFRLs to 
the state in which their primary regulator is located, except that an 
NFRL may request SBA's prior written approval to make 7(a) loans in a 
local trade area that is contiguous to such state (e.g., a city or 
metropolitan statistical area that is bisected by a state line). Most 
NFRLs participating in the 7(a) Loan Program already limit their 
lending activities to the state in which their primary state regulator 
is located. In recent years, some state regulators have permitted NFRLs 
to make loans outside of their state or even nationwide. The expansion 
of an NFRL's 7(a) lending area increases risk to SBA and the Agency is 
concerned that some state regulators do not have the resources and the 
capacity to adequately supervise, regulate and examine non-depository 
lenders that operate outside of their state. In addition, state laws 
that apply to state-regulated lenders do not address the different 
conditions associated with lending in other states or nationwide. This 
part of the proposed rule is also consistent with the general 
understanding that state-regulated lenders (such as BIDCOs) are 
licensed under specific state laws to focus primarily on economic 
development in their respective state and local communities.
    SBA is authorized to supervise the safety and soundness of SBA 
Supervised Lenders and may regulate their 7(a) lending activities 
pursuant to section 23(a) of the Small Business Act. 15 U.S.C. 650(a), 
see also 15 U.S.C. 634(b)(7). SBA has the authority to promulgate 
rules, regulations and requirements for the 7(a) Loan Program. 15 
U.S.C. 634(b)(6).
    2. What are SBA's description and estimate of the number of small 
entities to which the rule will apply?
    SBA Supervised Lenders comprise a unique class of 35 non-depository 
lenders that may only participate in the 7(a) Loan Program and make 
7(a) loans if authorized by SBA. If the proposed rule is adopted in its 
current form, the rule would be applicable to all SBA Supervised 
Lenders (other than lenders participating as CA Lenders in the CA Pilot 
Program). SBA estimates that approximately 88 percent of SBA Supervised 
Lenders are considered small entities based on NAICS sector code 52 
(finance and insurance) and industry code 52298 (All Other Non-
depository Credit Intermediation) and have annual receipts of less than 
$38.5 million. This estimate of 31 small SBA Supervised Lenders is 
based on information contained in the quarterly condition reports and 
the annual reports that are required to be submitted to SBA by such 
lenders.
    3. What are the projected reporting, recordkeeping, and other 
compliance requirements of the rule and an estimate of the classes of 
small entities which will be subject to the requirements?
    The proposed rule would impose a new reporting and/or recordkeeping 
requirement for organizations seeking to become an SBA Supervised 
Lender (or seeking SBA approval of a change of ownership or control). 
The proposed rule seeks to codify an existing requirement that 
applicants submit a complete application in order for SBA to determine 
whether an organization has the qualifications necessary to participate 
in the 7(a) Loan Program as an SBA Supervised Lender.
    The LAP includes key information about an organization that would 
allow SBA to reach a preliminary assessment about the qualifications of 
an applicant more efficiently. SBA estimates it would receive 
approximately four LAPs each year. SBA estimates that it would take 
approximately 35 hours for an organization to prepare a LAP at a cost 
of $2,870 per LAP. Based on SBA's experience with similar data 
collections, we expect an organization that submits a LAP would need to 
employ the services of a financial manager and an administrative 
assistant when preparing a LAP for submission to SBA.\7\ SBA 
specifically requests comments on whether the number of hours estimated 
to prepare a LAP is appropriate.
---------------------------------------------------------------------------

    \7\ The cost estimate for the LAP is based on hourly job 
position wages published by the U.S. Department of Labor's Bureau of 
Labor Statistics for 2018 and increased by 30% to account for 
benefits. The cost breakdown is as follows: Financial Manager (30 
hours times an hourly rate of $91.77) plus Administrative Assistant 
(5 hours times an hourly rate of $23.43) equals $2,870.
---------------------------------------------------------------------------

    If an organization is authorized by SBA to proceed to the final 
review phase, a complete application must be submitted to SBA. As 
mentioned above, the application requirements for SBA Supervised 
Lenders are not new and are currently set forth in SBA's official 
policies and procedures. See SOP 50 10 5(K), Subpart A, Chapter 1, 
Paragraph II.C.2 for NFRLs and Subpart A, Chapter 2, Paragraph II for 
SBLCs. SBA estimates that it will receive approximately four complete 
applications each year. SBA estimates that it would take approximately 
50 hours for an organization to prepare a complete application at a 
cost of $3,813 per application. Based on SBA's experience with similar 
data collections, an organization applying to become an SBA Supervised 
Lender would typically employ the services of a financial manager, an 
accountant, an attorney and an administrative assistant when preparing 
a complete application for submission to SBA.\8\ SBA specifically 
requests comments on whether the number of hours estimated to prepare a 
complete application is appropriate.
---------------------------------------------------------------------------

    \8\ The cost estimate for a complete application is based on 
hourly job position wages published by the U.S. Department of 
Labor's Bureau of Labor Statistics for 2018 and increased by 30% to 
account for benefits. The cost breakdown is as follows: Financial 
Manager (30 hours times an hourly rate of $91.77) plus Accountant 
(10 hours times an hourly rate of $49.26) plus Attorney (5 hours 
times an hourly rate of $90.14) plus Administrative Assistant (5 
hours times an hourly rate of $23.43) equals $3,813.
---------------------------------------------------------------------------

    SBA anticipates that there would be some costs related to the new 
minimum capital requirement under the proposed rule for SBA Supervised 
Lenders. This proposed rule establishes a new minimum capital 
requirement for SBLCs and NFRLs of at least $5 million and $2.5 
million, respectively. Based on information provided to SBA by SBA 
Supervised Lenders in quarterly condition reports, 11 of the 14 SBLCs 
(i.e., 79%) have at least $4.75 million in capital (and of those 11 
SBLCs, nine have more than $5 million in capital). In addition, 18 of 
the 21 NFRLs (i.e., 86%) have more than $2.5 million in capital.
    SBA has determined that there are eight small entities that would 
be impacted by the new capital requirements in the proposed rule. In 
other words, eight of the 35 SBA Supervised Lenders that are considered 
small entities would need to increase their capital to reach the new 
minimum capital requirement of either $2.5 million or $5 million (as 
applicable). The estimated amount of capital that would need to be 
raised by these small entities ranges between $240,000 and

[[Page 1790]]

$3,580,000. SBA estimates that this proposed rule may have a 
significant economic impact on six of the 35 SBA Supervised Lenders 
(i.e., 17%), each of which is considered a small entity. As noted 
above, all existing SBA Supervised Lenders would have three years from 
the effective date of a final rulemaking to comply with this part of 
the proposed rule (other than for transactions involving a change of 
ownership or control of an SBA Supervised Lender).
    SBA estimates that the cost of raising capital for SBA Supervised 
Lenders is approximately 9.8% of the amount of equity capital raised 
based on the Capital Asset Pricing Model (CAPM). The CAPM is one of the 
most widely used pricing models by financial professionals and 
considered the preferred method to estimate the cost of equity capital. 
See Duff & Phelps 2019 Valuation Handbook--U.S. Industry Cost of 
Capital (data through June 30, 2019).\9\ SBA estimates that the total 
cost of raising new equity capital for the eight SBA Supervised Lenders 
based on the requirements of the proposed rule would range in amount 
from approximately $23,000 to $350,000.\10\ However, the cost is 
mitigated by the fact that under the proposed rule SBA Supervised 
Lenders would have three years to increase their capital. Thus, the 
maximum amount that it would cost an existing SBA Supervised Lender to 
reach the new minimum capital requirement would be approximately 
$117,000 per year for three consecutive years.\11\
---------------------------------------------------------------------------

    \9\ The 2019 Valuation Handbook--U.S. Industry Cost of Capital 
published by Duff & Phelps provides cost of capital estimates for 
approximately 170 industries identified by Standard Industrial 
Classification codes (SIC). For purposes of estimating the cost of 
raising equity capital for SBA Supervised Lenders, SBA used SIC code 
61--non-depository credit institutions, which includes 21 companies 
that are engaged primarily in extending credit in the form of loans 
(but are not engaged in deposit banking). SBA compared the estimated 
cost of raising capital cited above with other sources and found the 
data to be similar.
    \10\ The estimated cost to raise $240,000 or $3.58 million in 
equity capital would be as follows: $240,000 times 9.8% equals 
$23,000; $3.58 million times 9.8% equals $350,000.
    \11\ It should be noted that some existing SBA Supervised 
Lenders may decide to increase their capital by retaining earnings 
instead of raising new equity capital, which would reduce the cost 
of this proposed rule.
---------------------------------------------------------------------------

    SBA determined that a three year time frame was a sufficient amount 
of time for SBA Supervised Lenders to increase their capital. The three 
year time period is also consistent with SBA's existing requirements 
that SBA Supervised Lender applicants must have a detailed business and 
operations plan that includes three years of projected loan activity, 
secondary market activity and financial statements. See SOP 50 10. SBA 
specifically requests comments on whether SBA Supervised Lenders should 
have three years to comply with the new minimum capital requirements 
under this proposed rule or should be required to comply sooner.
    The proposed rule also seeks to limit the 7(a) lending area for 
NFRLs to the state in which their primary state regulator is located, 
except that it may include a local trade area that is contiguous to 
such state (such as a city or metropolitan statistical area bisected by 
a state line). There are currently 21 NFRLs participating in the 7(a) 
Loan Program. During the last three fiscal years, two NFRLs (each of 
which is considered a small entity) requested loan authorizations to 
make the majority of their 7(a) loans outside of the state in which 
their primary state regulator is located. With the exception of these 
two NFRLs, approximately 90% of the lending within the 7(a) Loan 
Program during the last three fiscal years was done in the state where 
the NFRL's primary state regulator is located. Approximately 79% of all 
7(a) loan approvals obtained by NFRLs during the last three fiscal 
years were for loans to be made to small businesses located within 
their own state. This part of the proposed rule would not impact a 
substantial number of small entities. It is important to note that this 
proposed rule will not impose any restrictions regarding an NFRL's non-
7(a) lending activities. Therefore, the proposed rule would not have 
any impact on an NFRL's ability to generate business by making other 
types of loans (e.g., conventional loans) outside of their own state.
    In summary, SBA estimates that the total cost to a particular SBA 
Supervised Lender associated with this proposed rule (including the 
costs related to data collection) will range from zero to $356,683, 
substantially all of which relates to the cost of raising capital and 
may be spread over a three year time period.
    4. What are the relevant Federal rules which may duplicate, overlap 
or conflict with the rule?
    We are not aware of any Federal rules that duplicate, overlap or 
conflict with this rule. SBA's SOP 50 10 will have to be amended to 
conform to portions of this rule, which will be done separately.
    5. What alternatives will allow the Agency to accomplish its 
regulatory objectives while minimizing the impact on small entities?
    The Agency originally considered imposing the new minimum capital 
requirements for SBA Supervised Lenders immediately due to the risk 
associated with their lending operations. SBA recognized, however, that 
providing a three year period of time for SBA Supervised Lenders to 
increase their capital would be less burdensome on lenders and their 
operational plans. SBA took into consideration that some lenders may 
need time to plan their capital raising efforts and negotiate favorable 
terms and conditions for increasing their capital. The proposed three 
year time period will provide SBA Supervised Lenders with a sufficient 
amount of time to raise new equity capital and an opportunity to 
increase capital by retaining earnings (which will reduce the estimated 
overall cost of raising such capital).
    SBA believes many of the proposed changes in this rule would 
benefit small entities interested in becoming an SBA Supervised Lender 
by clarifying areas in the application process where there was 
confusion and to make the process more transparent. This rule would 
also allow SBA to evaluate the qualifications of new applicants more 
efficiently and make well-informed decisions on SBA Supervised Lender 
applications. SBA believes this proposed rule encompasses best practice 
guidance that aligns with the Agency's mission to increase access to 
capital for small businesses and facilitate American job preservation 
and creation.

List of Subjects in 13 CFR Part 120

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

    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 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 (7), and 697(a) and 
(e); Pub. L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 2504.


Sec.  120.410  [Amended]

0
2. Amend Sec.  120.410(a)(1) by removing the phrase ``for SBLCs, 
meeting its SBA minimum capital requirement; and for NFRLs, meeting its 
state minimum capital requirement); and'' and adding in its place the 
phrase ``and for SBLCs and NFRLs, meeting their respective minimum 
capital requirement); and''.
0
3. Amend Sec.  120.460 by adding paragraphs (c) and (d) to read as 
follows:

[[Page 1791]]

Sec.  120.460  What are SBA's additional requirements for SBA 
Supervised Lenders?

* * * * *
    (c) An SBA Supervised Lender must have qualified full-time 
professional management including, but not limited to, a chief 
executive officer or the equivalent to manage daily operations, and a 
chief credit/risk officer. An SBA Supervised Lender must also have at 
least one other full-time professional employee qualified by training 
and experience to carry out its business plan. An SBA Supervised Lender 
is expected to sustain a sufficient level of lending activity in its 
lending area. This paragraph only applies to SBA Supervised Lenders 
that make or acquire a 7(a) loan after [EFFECTIVE DATE OF THE FINAL 
RULE], or to any SBA Supervised Lender approved after such date, 
including in the event of a change of ownership or control.
    (d) An NFRL may only make or acquire 7(a) loans in the state in 
which its primary state regulator is located, except that an NFRL's 
lending area may include a local trade area that is contiguous to such 
state (e.g., a city or metropolitan statistical area that is bisected 
by a state line) if the NFRL receives SBA's prior written approval. 
This paragraph (d) only applies to NFRLs that make or acquire a 7(a) 
loan after [EFFECTIVE DATE OF THE FINAL RULE], or to any NFRL approved 
after such date, including in the event of a change of ownership or 
control.
0
 4. Amend Sec.  120.462 by:
0
a. Removing the phrase ``by state regulators'' wherever it appears and 
adding in its place the phrase ``in Sec.  120.462(a)(1)'';
0
b. Redesignating paragraphs (a) through (e) as paragraphs (b) through 
(f); and
0
c. Adding a new paragraph (a).
    The addition to read as follows:


Sec.  120.462   What are SBA's additional requirements on capital 
maintenance for SBA Supervised Lenders?

    (a) Minimum capital requirements--(1) For NFRLs. (i) Beginning on 
or after [DATE THREE YEARS FROM THE EFFECTIVE DATE OF THE FINAL RULE], 
each NFRL that makes or acquires a 7(a) loan must maintain the minimum 
capital required by its state regulator, or $2,500,000, whichever is 
greater.
    (ii) Any NFRL approved on or after [EFFECTIVE DATE OF THE FINAL 
RULE], including in the event of a change of ownership or control, must 
maintain the minimum capital requirement set forth in paragraph 
(a)(1)(i) of this section.
    (iii) Unless subject to paragraph (a)(1)(i) or (ii) of this 
section, an NFRL must comply with the minimum capital requirements for 
NFRLs that were in effect on [DATE ONE DAY PRIOR TO THE EFFECTIVE DATE 
OF THE FINAL RULE].
    (2) For SBLCs. For information on minimum capital requirements for 
SBLCs, see Sec.  120.471.
* * * * *
0
5. Add Sec.  120.466 to read as follows:


Sec.  120.466   SBA Supervised Lender application.

    An entity seeking to participate as an SBA Supervised Lender must 
apply to SBA. SBA evaluates SBA Supervised Lender applicants through an 
initial review and final review, as follows:
    (a) Initial review. SBA Supervised Lender applicants must submit a 
written plan containing information about the organization and its 
current and proposed lending activities (``Lender Assessment Plan''). 
After SBA's review of the Lender Assessment Plan, the Office of Capital 
Access may require an interview with the applicant and its management 
team. SBA will determine, in its sole discretion, whether an applicant 
may proceed to the final review. If SBA determines that an applicant 
may not proceed to the final review, the applicant must wait at least 
nine months before it may submit a new Lender Assessment Plan. Each 
applicant must demonstrate to SBA's satisfaction that it meets the 
ethical requirements and the participation criteria set forth in 13 CFR 
120.140 and 120.410. The Lender Assessment Plan must include the 
following items:
    (1) The legal name, address, telephone number and email address of 
the applicant;
    (2) Business plan, detailing the applicant's proposed lending area 
and the volume of loan activity projected over the next three years 
(supported by current and projected balance sheets, income statements 
and statements of cash flows);
    (3) Capitalization (current and proposed), including the form of 
organization and the identification of all debt and classes of equity 
capital and proposed funding amounts, including any rights or 
preferences accorded to such interests (e.g., voting rights, redemption 
rights and rights of convertibility) and any conditions for the 
transfer, sale or assignment of such interests;
    (4) A list of all members of the applicant's management team, 
including the applicant's officers, directors, managers and key 
employees, as well as the applicant's owners, Associates (as defined in 
Sec.  120.10) and Affiliates (as defined in Sec.  121.103 of this 
chapter);
    (5) A written summary of the professional experience (including any 
prior experience with any SBA program) of the applicant's management 
team (including key employees);
    (6) In connection with any application to become an SBLC, the 
applicant must include a letter agreement signed by an authorized 
official of an existing SBLC certifying that the SBLC is seeking to 
transfer its SBA lending authority to the applicant; and
    (7) If approval of any state or Federal chartering, licensing or 
other regulatory authority is required, copies of any licenses issued 
by or documents filed with such authority.
    (b) Final review. Each applicant that receives notice from SBA in 
writing that it may proceed to the final review must submit a complete 
application to SBA within 90 calendar days. The application 
requirements for SBA Supervised Lenders are set forth in official SBA 
policy and procedures. An incomplete application submitted to SBA will 
not be processed and will be returned to the applicant. SBA may, in its 
sole discretion, approve or deny any SBA Supervised Lender application. 
The decision to approve or deny an SBA Supervised Lender application is 
a final agency decision. If an SBA Supervised Lender application is 
denied by SBA or if a complete application is not timely submitted, the 
applicant may not submit a new Lender Assessment Plan and restart the 
application process until 18 months from the date of denial or the date 
a complete application was due to SBA, as applicable.
    (c) NFRL operating and lending experience requirement. For an 
entity seeking to become an NFRL, evidence of at least one year of 
current operating and relevant commercial lending experience must be 
provided.
0
6. Add Sec.  120.467 to read as follows:


Sec.  120.467  Evaluation of SBA Supervised Lender applicants.

    (a) SBA will evaluate an SBA Supervised Lender applicant based on 
information from, among other sources, the Lender Assessment Plan, an 
interview with the applicant's management team (if required), the 
application and any other documentation submitted by the applicant, the 
results of background investigations, public record searches and due 
diligence conducted by SBA or other Federal or state agencies. SBA's 
evaluation will consider factors such as the following:
    (1) Professional qualifications of its management team (including 
key employees), including demonstrated commercial lending experience,

[[Page 1792]]

business reputation, adherence to legal and ethical standards, track 
record in making and monitoring business loans, and prior history, if 
any, working as an officer, manager, director or key employee of a 
lender involved in any SBA program or any other Federal or state 
lending program.
    (2) Historical performance measures of loans originated by the 
applicant or attributable to its management team (including key 
employees), including loan default rates, purchase rates and loss 
rates, measured in both percentage terms and in comparison to 
appropriate industry benchmarks, review/examination assessments and 
other performance measures.
    (3) The applicant's capitalization, organizational structure, 
business plan (including any risk factors), projected financial 
performance, financial strength, liquidity, the soundness of its 
financial projections and underlying assumptions, loan underwriting 
process, operations plan and the history of compliance of the applicant 
and its management team (including key employees) with SBA Loan Program 
Requirements.
    (4) Whether the NFRL's state regulator and the state statute or 
regulations governing the NFRL's operations, including but not limited 
to those pertaining to audit, examination, supervision, enforcement and 
information sharing, are satisfactory to SBA in its sole discretion.
    (5) For changes of ownership or control, in addition to the factors 
listed in paragraphs (a)(1) through (4) of this section, SBA will 
consider whether the applicant's plan for the resolution of any 
outstanding monetary liabilities to SBA, including repairs and denials 
and civil monetary penalties, is acceptable to SBA in its sole 
discretion.
    (b) SBA may prohibit any individual or entity from participating as 
an officer, director, manager, owner or key employee of the applicant 
if such individual or entity:
    (1) Has a previous record of failing to comply with SBA Loan 
Program Requirements;
    (2) Previously participated in a material way with any past or 
present SBA Lender or Intermediary that failed to maintain satisfactory 
SBA performance;
    (3) Previously defaulted on any Federal loan or Federally assisted 
financing that resulted in the Federal Government or any of its 
agencies or departments sustaining a loss in any of its programs; or
    (4) Ever failed to pay when due any debt or obligation, including 
any amounts in dispute, to the Federal Government or guaranteed by the 
Federal Government (including but not limited to taxes or business or 
student loans).
0
7. Add Sec.  120.468 to read as follows:


Sec.  120.468  Change of ownership or control requirements for SBA 
Supervised Lenders.

    (a) SBA prior approval required. Any change of ownership or control 
of an SBA Supervised Lender without SBA's prior written approval is 
prohibited. Prior to entering into any definitive agreement for a 
change of ownership or control, SBA Supervised Lenders must receive 
SBA's prior written approval from the appropriate SBA official in 
accordance with Delegations of Authority. An SBA Supervised Lender may 
not register proposed new owners on its books and records or permit 
them to participate in any manner in the conduct of the SBA Supervised 
Lender's affairs unless approved in writing by SBA. Any type of 
agreement or letter of intent regarding a prospective change of 
ownership or control must be reported to SBA within 30 calendar days as 
required by Sec.  120.464(a)(5). A change of ownership or control 
includes the following:
    (1) Any transfer(s) (direct or indirect) of 10 percent or more of 
any class of the SBA Supervised Lender's stock or ownership interests 
(or series of transfers which, in the aggregate over an 18 month 
period, equals 10 percent or more), or any agreement providing for such 
transfer;
    (2) Any transfer(s) (direct or indirect) that could result in the 
beneficial ownership by any person or group of persons acting in 
concert of 10 percent or more of any class of the SBA Supervised 
Lender's stock or ownership interests, or any agreement providing for 
such transfer(s);
    (3) Any merger, consolidation, or reorganization;
    (4) Any other transaction or agreement that transfers control of an 
SBA Supervised Lender; or
    (5) Any other transaction or event that results in any change in 
the possession (direct or indirect) of the right to control, or the 
power to direct or cause the direction of, the management or policies 
of an SBA Supervised Lender, whether through the ownership of voting 
securities, by contract or otherwise.
    (b) Approval required by other regulatory authorities. If a change 
of ownership or control of an SBA Supervised Lender is subject to the 
approval of any state or Federal chartering, licensing or other 
regulatory authority, copies of any documents filed with such authority 
must, at the same time, be transmitted to the appropriate SBA official 
in accordance with Delegations of Authority. The approval of any state 
or Federal authority will be required in addition to SBA's prior 
written approval.
    (c) Application requirements for changes of ownership or control. 
An applicant must submit a Lender Assessment Plan and a new application 
in accordance with Sec.  120.466 for any change of ownership or 
control. If a proposed change of ownership is for less than 50% of the 
ownership interests in an SBA Supervised Lender, SBA may, in its sole 
discretion, limit the requirements of the Lender Assessment Plan or the 
complete application as set forth in official SBA policy and 
procedures.
    (d) Voluntary surrender of SBA lending authority. An SBA Supervised 
Lender may voluntarily surrender its SBA lending authority (including 
its SBLC license, as applicable) and withdraw as a participating Lender 
with SBA's prior written approval. The SBA Supervised Lender must agree 
to transfer its entire 7(a) loan portfolio to one or more Lenders 
acceptable to SBA in accordance with Sec.  120.432(a), and enter into a 
withdrawal agreement to resolve any outstanding issues, including any 
outstanding monetary liabilities, to SBA's satisfaction.


Sec.  120.470  [Amended]

0
8. Amend Sec.  120.470 by removing paragraph (g) and redesignating 
paragraph (h) as paragraph (g).
0
9. Amend Sec.  120.471 by:
0
a. Revising paragraph (a);
0
b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4) 
through (6) respectively; and
0
c. Adding new paragraph (b)(3).
    The revision and addition to read as follows:


Sec.  120.471  What are the minimum capital requirements for SBLCs?

    (a) Minimum capital requirements. (1) Beginning on or after [DATE 
THREE YEARS FROM THE EFFECTIVE DATE OF THE FINAL RULE], each SBLC that 
makes or acquires a 7(a) loan must maintain, at a minimum, unencumbered 
paid-in capital and paid-in surplus of at least $5,000,000, or ten 
percent of the aggregate of its share of all outstanding loans, 
whichever is greater.
    (2) Any SBLC approved on or after [EFFECTIVE DATE OF THE FINAL 
RULE], including in the event of a change of ownership or control, must 
maintain the minimum capital requirement set forth in paragraph (a)(1) 
of this section.
    (3) Unless subject to paragraph (a)(1) or (2) of this section, an 
SBLC must

[[Page 1793]]

comply with the minimum capital requirements that were in effect on 
[DATE ONE DAY PRIOR TO THE EFFECTIVE DATE OF THE FINAL RULE].
    (b) * * *
    (3) Unrestricted net assets (for non-profit corporations);
* * * * *


Sec.  120.475  [Removed and Reserved]

0
10. Remove and reserve Sec.  120.475.

    Dated: December 31, 2019.
Christopher Pilkerton,
Acting Administrator.
[FR Doc. 2019-28500 Filed 1-10-20; 8:45 am]
 BILLING CODE 8025-01-P